By Joe Brooks, Project Officer - Climate Change, ShareAction

The 2020 AGM season presents investors in Shell and BP with an opportunity to stand their ground on climate change and executive pay. Shareholders should not support pay policies which undermine the energy transition by limiting executive accountability and perpetuating fossil fuel expansion.

With the world in lockdown from Covid-19, the market is braced for the lowest oil demand in 25 years.

There are clear parallels to be drawn between the current crisis and the (not-so) sleeping giant on the horizon: climate change. In a world of uncertain future demand for fossil fuels, oil and gas companies must adapt their business models for resilience in the climate crisis.

This year, both Shell and BP announced plans to become net-zero by 2050. But these long-term ambitions are meaningless if they are not supported by credible, near-term transition plans and remuneration policies that motivate executives to deliver them.

Money talks in the oil and gas sector

The main aim of a remuneration policy is to attract talented management. It encourages them to direct their companies in line with corporate strategy.

So what does this mean for oil and gas companies?

Traditionally, this has meant rewarding executives for chasing higher levels of fossil fuel output. That means more production and reserves, and more hydrocarbons entering the energy mix.

This approach has pushed our planet to the brink of ecological collapse.

Oil and gas companies are at the root of the climate crisis. The top 20 fossil fuel companies have been responsible for 35 per cent of all energy-related greenhouse gas emissions since 1965.

Investor pressure on the oil and gas sector has ramped up in recent years. Shareholder resolutions are now commonplace on the AGM ballot. Yet despite the glossy sustainability reports and public commitments to the energy transition, companies are still reluctant to put their money with their mouth is.

Only one per cent of executive pay was directly linked to climate change metrics at the top oil and gas companies in 2019. Even where remuneration policies hint at climate action, their impact on executive behaviour is limited when compared to the full suite of measures perpetuating fossil fuel growth.

Shell’s and BP’s pay policies 2020

In May 2020, Shell and BP both face a binding vote on their new remuneration policies at their AGM.

ShareAction’s latest briefing analyses the proposed pay policies in the context of the low-carbon energy transition and provides voting recommendations for investors.

Shell – Investors are encouraged to vote AGAINST Shell’s proposed remuneration policy.

• The policy is weighted too heavily towards measures that encourage executives to scale up fossil fuel production, with 55 per cent of the annual bonus and nearly half of the long-term incentive plan (LTIP) geared towards growth of its oil and gas activities;
• Although the annual bonus and LTIP both include a 10 per cent climate measure, they are not afforded sufficient weighting to drive change in executive decision-making at the speed and seriousness needed for the energy transition.

BP – Investors are encouraged to ABSTAIN from voting on BP’s proposed remuneration policy unless more detail is provided prior to the AGM.

• Compared to Shell, BP’s pay policy appears more progressive with a focus on value and shareholder returns over fossil fuel expansion, and a new energy transition metric;
• However, BP’s pay policy lacks the level of transparency required for effective shareholder engagement on this issue as it does not disclose a breakdown of the metrics and weightings attached to the annual bonus, nor how the new energy transition metric will be measured.

The 2020 vote – an opportunity for investors

If they received over 50% of the vote, Shell’s and BP’s new remuneration policies will be locked in for the next three years. This is a critical period for climate action.

In 2018, the Intergovernmental Panel on Climate Change (IPCC) warned we have just 12 years to limit global warming to 1.5°C and avoid the most catastrophic impacts of climate change. With just a decade left on the clock, investors can no longer accept incremental step-changes in policy from oil majors such as Shell and BP.

The vote on pay in the 2020 AGM season provides investors in both companies with an opportunity to exercise their voting rights and signal that they expect executive pay to reflect the realities of climate change and safeguard their long-term interests as shareholders.

Remuneration policies must be robust and transparent enough to hold executives accountable and ensure the energy transition is a priority on the board’s agenda.

Read our investor briefing on Shell & BP remuneration policies >>