Read the initial letter to Legal & General from our CEO, Romi, here.
Legal & General’s response
1. Statistics should come before company names
As climate change becomes ever more important, and more people want to understand why certain companies are included in a fund, we think it is important to make sure that statistics are not lost.
Perhaps it is not clear, but the index tracked by the fund actually reduces fossil fuel intensity by 57%, and emissions intensity by 22% (as at 30/09/19).
This fossil fuel reduction estimate is commensurate with analysis by reputable independent bodies (such as the International Energy Agency) around the amount of total fossil fuels that must still be left in the ground, if the world is to meet the targets of the Paris Agreement.
2. Companies are not included because they are ‘sufficiently contributing to our future’
That is a personal judgment upon which people can disagree and is not something considered for every one of the thousands of companies in the fund.
Companies are included (or more precisely not excluded) because they conform to certain transparent rules for index construction – not all of which are climate-related.
The fund has already significantly reduced exposure to hundreds of carbon-intensive stocks. Further exclusions might have unintended financial impacts.
For example, Shell is one of the largest payers of dividends in the UK. The Future World fund aims to balance these concerns between environmental sustainability and financial sustainability, by including three environmental factors as well as four investment factors.
3. Is Shell ‘doing enough’?
As you suggest, it is widely agreed that the oil and gas industry as a whole cannot continue to grow oil & gas expansion unabated if the world is to meet climate targets. However, there is no widespread agreement on what individual companies need to do. For example, you reference a study by Carbon Tracker that suggests Shell be required to cut emissions by 35%. However, this suggested cut depends on a number of assumptions about the behaviour of government-owned companies and competitors, the speed at which clean technologies scale up, the strength of future government policies, as well as the behaviour of consumers. Even under stringent measures to reach net zero emissions in 2050 – compatible with 1.5°C of global warming, the more ambitious interpretation of the Paris Agreement – this will take decades.
There are many potential pathways for the evolution of the energy system and still many uncertainties about which technologies (green hydrogen, carbon capture and storage) will get us there faster. (Incidentally, the ‘green revenues’ tilt gives investors positive upside on this).
Most pathways will still have a role (if gradually shrinking) for oil and gas companies. But there is the possibility that a few oil and gas companies end up with a consolidated share in the market ( producing more, even if everyone else is producing less), while still meeting climate change targets. This is not to downplay the seriousness of the challenge ahead – in some of our more ambitious modelling, climate policies could see demand for oil peaking globally in the next decade. Companies absolutely need to start planning now. And through our engagements we are demanding that they do this. Without this being an endorsement of Shell’s business model, we have seen some positive signs:
Shell has gone further than the majority of oil & gas companies by setting a carbon reduction target that also includes emissions from its customers (when they burn Shell’s fuel in cars and power plants). They are showing more responsibility – including by linking targets to pay - at a time when other oil majors refuse to even disclose total emissions.
Shell has also gone further than many of its peers by substantially investing in low-carbon technologies (including renewable energy). We do not, as a rule, expect oil and gas companies to turn into renewable companies – preferring that they gradually ‘wind down’ their business in line with climate goals, returning more money to shareholders. However, there may be individual companies that are successful at this, and Shell has outlined a serious ambition to become the world’s largest electricity company.
They have taken positive steps in quitting some trade bodies over differences in climate policy. Also, many people might not appreciate that ‘integrated’ companies like Shell don’t just provide oil and gas to burn. They also provide key components to make the plastics in our phones, along with other gadgets, latex gloves and MRIs in hospitals, chemicals, detergents and many others.
4. We agree that the company can do more
In our meetings with them are pushing for further transparency on how their upcoming production plans are aligned with the Paris Agreement. We will be monitoring how the company meets its emissions targets (as well as the profitability of its low-carbon, New Energies division).
We are also ramping up our data and analytics capacities, working in partnership with a leading energy consultancy, to be able to assess individual company or portfolio alignment to the targets of the Paris Agreement. Were the modelling or our engagement with the company to result in us having significant concerns around Shell’s strategy, we will take action either by voting against the chair of the board across all our assets, or by removing Shell from the Future World range.
If you have any more questions or concerns you would like us to raise with Legal & General directly, please reach out to us at [email protected].
