Page 11 - DIY Investor Magazine | Issue 30

At that time, combining these commitments with the significant required investments in renewable energy sources did not seem to us to add up. As a result, we began to take a negative stance on the sector in the second half of 2019, moving to
an ‘underweight’ position (holding a lower weighting than our benchmark index has).
ALWAYS OPEN TO CHANGING OUR MINDS
We constantly review the investment case for companies and are always open to changing our minds. This is often on the basis of valuations, which, for Shell and BP, were not as appealing prior to the pandemic.
‘THIS IS A WELL THOUGHT OUT, RESPONSIBLE AND ACHIEVABLE STRATEGY’
Meanwhile, dividends were rebased to more sustainable levels in 2020, and improved disclosures give us a sense of what is required to implement their transition strategies.
The oil price has recovered well from the lows of early 2020, which is helping with cash flows and with managing the indebtedness. High debt levels can impede their ability to invest in renewable energy sources and technologies but they are not an insurmountable challenge.
We had made clear to Shell we would support the company in actions it took to move faster and further towards a lower GHG emissions. We first engaged with the company on its climate ambitions 19 years ago (see Schroders’ Sustainable Investment Report Q2 2021).
It was great therefore to see the company put its energy transition strategy to a shareholder vote at the AGM in May. This is a well thought out, responsible and achievable strategy. A few days later the Dutch court made its ruling. The speed at which the company subsequently communicated an intention to accelerate plans only formally adopted a few weeks prior is telling.
SENSIBLE APPROACH IS KEY
We continue to support Shell in transitioning at a pace right for the company, and which is likely to have a best result for the world.
We all want net zero GHG emissions by 2050, but it will take time, much investment and new technologies. A sensible approach is key.
Shell could react to the court case – brought by Milieudefensie (Friends of the Earth Netherlands) and other non-governmental organisations before Shell had chance to set out its strategy – by disposing some of its fossil fuel assets and reinvesting the proceeds into renewables.
Whether that would help the world shift from a system based on fossil fuels to clean, renewable energy, however, depends on who ends up buying these assets.
The sale of a fossil fuel asset does not mean that it will suddenly stop emitting GHGs, it is simply a transfer of ownership. In many cases, publicly listed companies with transparent reporting and shareholders to answer to are the most responsible stewards of these assets.
It could well be in the world’s interests for Shell to manage
the decline of its fossil fuel portfolio and reinvest the cash generated each year into renewables. There are clearly issues with trying to solve a global problem by targeting a single company through one country’s courts. Shell is appealing against the ruling. We have some sympathy with its position.
RISK OF UNINTENDED CONSEQUENCES
There are parallels to be drawn with how we approach
such challenges as long-term investors. Yes, we could have a blanket policy to exclude energy companies from our investments, but blunt approaches to complex challenges are not the best way to speed up change. In fact, they can be counterproductive.
‘NOW IS THE TIME FOR A CALM AND SENSIBLE APPROACH TO A COMPLEX CHALLENGE’
The Dutch court decision could open the door to all EU companies, including other heavy GHG emitters, being subject to similar rulings.
11 DIY Investor Magazine | Sept 2021