ShareAction, the campaigning organisation, recommends shareholders reject the remuneration policy that goes to a vote at Shell’s AGM this May on the grounds that it incentivises further extraction and burning of fossil fuels, activities which are clearly misaligned with the company’s strategy to reach the goals of the Paris Agreement. ShareAction also recommends shareholders abstain from voting on BP’s remuneration policy as there is a lack of transparency about the specific metrics used to measure performance. This year, both votes will be legally binding.
Despite having an ambition to reduce the carbon footprint of the energy products it sells in line with the Paris Agreement, Shell is proposing to base 55% of the annual bonus and nearly half of the long-term incentive plan (LTIP) on measures which, directly or indirectly, encourage executives to chase higher levels of fossil fuel output in order to secure pay-outs. This emphasis on growth comes at a time when oil companies must reduce their output by 35% within 20 years in order to limit warming to 1.5C.
These metrics greatly outweigh the climate measures in the pay package which are tied to tackling greenhouse gas emissions and navigating the energy transition, which make up just 10% of the annual bonus and LTIP respectively. The climate metrics lack in substance as well as weighting, with the emissions metric excluding scope 3 emissions which make up 88% of Shell’s carbon footprint.
ShareAction finds that Shell’s executive directors will be rewarded far more substantially for drilling and selling more oil and gas than they are for considering the impact of such activities on the environment and on the long-term resilience of its business model. Although the urgency of climate change is widely recognised, including by investors, the incentives in Shell’s policy remain largely unchanged from the previous policy in 2017, casting doubt over the sincerity of its public commitments to address its own role in the climate crisis.
In its net-zero ambition released in February of this year, BP agreed to increase the percentage of remuneration linked to emissions reductions. Rightly, the company is attempting to make climate change a priority for management by integrating an ‘energy transition metric’ into the performance-linked pay and an emissions reduction target into the bonus. However, the latter is unlikely to address scope 3 – accounting for 87% of BP’s emissions last year – and therefore will have negligible impact on supporting executives to achieve the net-zero ambition.
Although BP’s pay policy shows signs of progress in scaling back the focus on fossil fuel growth compared to its Anglo-Dutch counterpart, ShareAction finds the policy lacks sufficient detail to assess how performance will be measured in the context of the energy transition. It is concerning that the company is asking shareholders to approve the binding policy having failed to disclose a breakdown in the annual bonus of what executives will be paid to deliver, or how the energy transition metric will be assessed. This directly contravenes UK Corporate Governance Code, which requests a ‘formal and transparent procedure for developing a policy on executive remuneration’.
An investigation by the Guardian last year revealed that BP and Shell were the sixth and seventh biggest contributors to climate change globally. The companies’ recent announcements of their long-term climate ambitions represent progress, but they must be supported by robust and transparent remuneration policies that hold executives accountable to deliver them.
Natasha Landell-Mills, Partner, Head of Stewardship at Sarasin & Partners, says: “How companies reward their executives impacts behaviours. It is, therefore, a problem if senior managers are being awarded bonuses even where their activities harm the planet, and thus their shareholders. While it is positive to see oil and gas companies include metrics that reflect sustainability performance, these tend to be vastly outweighed by performance indicators that reward activities that are contributing to global warming. A deeper rethink is needed. Investors should insist on a ‘Paris-underpin’ such that performance pay cannot be released unless it is clear the company is operating in alignment with the Paris Climate Agreement.”
Joe Brooks, Project Officer at ShareAction and author of the report, says: “BP and Shell have both missed a critical opportunity to convince shareholders that they are effectively managing climate risk at the executive level. Shareholders should be concerned by the lack of detail in BP’s new policy about how performance will be measured, which precludes a fair assessment ahead of the AGM vote next month. Shareholders should be doubly concerned by Shell’s policy, which pays its executives to tear up the Paris Agreement by chasing fuel expansion at a time when this could prove uneconomical in the low-carbon transition.”
Notes to editors:
- For more information, please contact Beau O’Sullivan at firstname.lastname@example.org or +447950 299 491
- The full report can be found here
- Shell’s pay policy can be found here
- BP’s pay policy can be found here
- ShareAction analyses only the variable pay (annual bonus and long-term incentive plan) of the companies. It makes no assessment of the quantum of pay awarded.
- In the case of Shell, direct growth metrics in remuneration include production and LNG liquefaction volumes. The production metric measures the sum of the average daily volumes of unrefined oil and natural gas produced for sale, while LNG liquefaction volumes is a measure of the operational performance of Shell’s Integrated Gas business and LNG market demand.
- Shell’s annual bonus also includes cash flow from operating activities as an incentive – an indirect growth measure. This refers to the total of all the cash receipts and payments associated with sales of oil, gas, chemicals and other products. This is likely to encourage capital expenditure commitments to increase production volumes from Shell’s oil and gas businesses.
- ShareAction is a campaign group pushing the global investment system to take responsibility for its impacts on people and planet, and use its power to create a green, fair, and healthy society. We want a future where all finance powers social progress. For 15 years, ShareAction has driven responsibility into the heart of mainstream investment through research, campaigning, policy advocacy and public mobilisation. Using our tools and expertise, we influence major investors and the companies they invest in to improve labour standards, tackle the climate crisis and address inequality and public health issues.