The pressure on fossil fuel companies to decarbonise has just reached new heights after a milestone week of major court rulings and investor action around the world. Matt Sprague, Associate Director for Climate Strategies (Australia), breaks down the headlines and discusses the ramifications for the industry.
In the past 48 hours, the fossil fuel industry has been rocked by exciting developments in Europe, Australia and the United States that will have major ramifications for the sector. It is clear that stakeholders - including shareholders who are traditionally risk averse and not particularly pro-environment - are increasingly seeing the writing on the wall and recognising that fossil fuel companies need to accept climate change as a definitive business risk to have a profitable future. Some may also be openly recognising the responsibility that oil and gas companies have towards our people and planet. It is also fascinating to see how a small hedge fund played a major role in the Exxon matter - more on that below.
So, let's look in detail at this week's four announcements and the (huge) ramifications they could have across the industry.
Courts in the Netherlands found that Shell must reduce its emissions - including scope 3 emissions - from the use of its products by 45% by 2030. Such emissions include burning the oil and gas it extracts, both at drilling sites but also in combustion engines, boilers and other end uses. 45% is roughly in line with the Paris Agreement objectives of achieving net zero emissions by 2050 with an aim to limit global warming to 1.5 degrees celsius.
The action was brought by local environmental groups aiming to demonstrate that fossil fuel companies are responsible for the use of their products, and should be required to reduce these emissions. Shell already has a 2050 net zero emissions target including their scope 3 emissions which targets a 20% reduction by 2030, but this decision re-enforces the need for Shell to take bigger, bolder action before the end of the decade.
In a piece of good news for Shell, they were recently awarded a 1.8TWh contract to supply renewable energy to schools, libraries and other government buildings across New South Wales, Australia, from a solar and battery project being developed. The $2.5B USD contract includes the construction of a 100MWh battery alongside a 333MW solar farm, constructed in 2020 by Edify. This sits alongside Shell's push into electricity markets such as it's 100% renewable retail arm in the UK and investments in solar and wind projects in the EU and Australia.
Shell's potential emissions trajectory including scope 3 - Source
In the same period, Chevron and Exxon had influential activists successfully challenge their past climate approaches. Around 61% of Chevron's investors backed a motion by Follow This to substantially reduce emissions including scope 3 by selling less fossil fuel products. This followed two other recent successful investor votes proposed by Follow This at ConocoPhillips and Phillips66 over the past month. The Chevron resolution argued that it is the Board's fiduciary duty to consider the impacts of climate change on the profitability of the organisation and the economy.
Exxon faced something similar when a small, brand-new activist hedge fund called Engine 1 forced them to consider four climate-friendly shareholders at their shareholder's meeting and - through persistent lobbying through slideshows, letters and public statements, were able to get two of them voted on to their Board of Directors. It probably helps that BlackRock, an investor in Exxon (6.7%), has a major focus on climate change and backed the candidates. Engine 1 has been pushing Exxon since December to consider its role in a net zero economy.
Meanwhile, the Australian Federal Court found that the Minister for the Environment has a duty of care to young and vulnerable Australians to protect them from the climate crisis. This comes in the face of a challenge to an application by Whitehaven to extend their Vickery mine in New South Wales, releasing approximately 100m tonnes of CO2e (or 20% of Australia's national footprint). The judge ruled that there is a duty of care to not cause future harm from climate change, but stopped short of passing an injunction on the application process. With this ruling, a world first, the application may need to be reconsidered by the Australian Government.
All of this comes on the heels of the International Energy Agency's headline report outlining the very narrow path we need to follow to achieve net zero emissions by 2050. It points out that this demands that no new fossil fuel projects be sanctioned from this year onwards, and no extensions for existing projects be approved.
Fossil fuel companies, and the Governments that approve them, need to take responsibility for their emissions, including scope 3, and take significant steps to reduce them. Otherwise we stand no chance of avoiding the worst impacts of climate change.
IEA's roadmap to net zero by 2050 - Source
Clearly, the road ahead for fossil fuel companies is becoming increasingly challenging and the recommended actions are not straightforward. They will require a strategic combination of new and innovative technology, transformative changes in business models, and the use of carbon removal projects to realistically achieve these 2030 and 2050 targets. As these cases now set precedent, we would expect more action across the sector as the headwinds for fossil fuels gets stronger.
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