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Energy Investing

Big Oil Is Under Fire for Lackluster Climate Plans

The world’s major oil and gas companies are entering the age of climate change and vehicle electrification, but they’re doing so kicking and screaming.

As my dear, departed mother would say, they’re acting like spoiled brats.

But their shareholders and the courts of law are having none of that lackluster attitude. They’re putting their collective foot down and punishing these companies.

Today, let’s look at two examples of the tail wagging the dog.

Big Oil Under Fire

Royal Dutch Shell (NYSE: RDS-A) is one of the largest oil and gas producers in the world. It has exploration and production operations for crude oil, natural gas liquids and natural gas.

Back in April 2019, seven climate groups, including Friends of the Earth Netherlands and Greenpeace, sued the company on behalf of thousands of Dutch citizens. The lawsuit alleged that Shell is a major threat to human rights.

The lawsuit further stated that Shell continues to invest billions of dollars in fossil fuel production and refining in an era that’s seeing a rapid move away from fossil fuels.

Dutch courts heard the lawsuit this past May. And the court’s decision was heard around the world by every oil and gas company.

In short, the court ordered Shell to reduce its carbon dioxide emissions by 45% by 2030.

Although Shell previously set targets to cut the carbon intensity of its operations by 20% by 2030, the courts said that this wasn’t good enough.

Besides, the courts remarked, Shell’s climate policy was “not concrete and [was] full of conditions.”

Shell is planning to appeal the court’s order. Its CEO is rejecting what he calls “absolute reduction targets.”

He believes that reducing emissions at this point in time can be made possible only by shrinking the company’s business. And from Shell’s point of view, reducing the size of its operations isn’t a great business plan.

I can see the CEO’s point. But oil and gas companies are late to the climate change party.

In Shell’s case, shareholder activists convinced Dutch courts that the company wasn’t taking climate change seriously enough. It’s the first time that environmental groups have successfully forced an oil major to change its climate strategy and cut its emissions.

Shell is facing other climate lawsuits too, including several here in the U.S. The decision by Dutch courts could provide plenty of ammunition for them.

But Shell isn’t the only company being scolded…

Hedge Fund Taking Charge

Exxon Mobil’s (NYSE: XOM) lack of movement on climate change is quickly gaining shareholder attention. One of those shareholders is a tiny, little-known hedge fund called Engine No. 1.

It owns just 0.02% of Exxon’s outstanding shares. And prior to its action against Exxon, it hadn’t been an activist on oil and gas issues.

Up until now, Exxon has largely ignored investor demands for the company to change its stance on climate change. Frankly, its lethargic movement and lackluster views on environmental issues were a recipe for drastic change.

And that’s exactly what it got.

This past December, Engine No.1 started agitating for the oil and gas giant to change. It wanted Exxon to diversify its business interests, and it wanted the company to come up with a comprehensive plan to tackle climate change.

It all came to a head in late May at Exxon’s annual shareholder meeting. That’s where Engine No. 1 captured two seats on Exxon’s board.

It was an unprecedented outcome, especially in the world of Big Oil. And it was certainly a big embarrassment for Exxon.

The Engine No. 1 representatives criticized Exxon’s financial performance. But they had even more to say on the oil giant’s stance on climate change.

They argued at the meeting that the current Exxon board has little or no expertise in managing the company’s role in the energy transformation taking place today.

With its two board seats, Engine No. 1 can now try to steer the fumbling oil giant in the right direction.

Fossil Fuels Losing Steam

The actions at Exxon and Shell are just the beginning. Investors who continue to invest in fossil fuel companies are at an increasingly high risk of losing capital.

More importantly, many of the fat dividends these companies currently pay are going to be severely cut. Besides, there are plenty of profitable renewable energy companies to invest in.

Good investing,

Dave

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