Brunswick Group (BG)
You used to advise the financial industry on its oil and gas investments. Now, you’re challenging the financial industry to rethink the way it approaches those investments. What led you to this?
I spent 16 years advising clients, and I very much enjoyed the work that I was doing. Energy, as we all know, is never dull. But the time horizon for the investment community is generally short; we were looking at the next quarter or, at most, three to five years in the future. I started to want to be able to take a longer-term view for the industry because it was clear that we were on the edge of a very significant transition. And I was getting somewhat frustrated with the passivity of passive investors. I wanted to be able to write about what I felt they should be doing on the climate policy front. It is a lot easier to do that when you are part of an academic institution.
What do you mean by the passivity of fund managers?
Until this year, we didn't see the large fund managers really supporting a lot of the environmental and social proposals by activists. They were pretty much standing back and siding with the companies. That became a point of frustration for me. It felt like they could really be agents of change. We're starting to see that now. This year has brought a shift in how they are dealing with the boards.
You’ve written that when it comes to climate change, oil and gas management teams are struggling to keep up with “mixed messages” and “reporting fatigue.” What did you mean?
Companies are being asked by investors to make long-term climate commitments, yet they are also being judged by investors on their quarterly performance. Investors are asking for more disclosure targets for emission reductions, yet at the same time they want capital discipline and for money to be returned to shareholders. On reporting fatigue, we have a number of reporting standards, but the environmental, social and governance (ESG) ratings agencies all have their own questionnaires and their own interviews. Some of the international oil companies now have full-time teams dedicated just to filling those out these questionnaires, with every ratings and rankings agency weighting things differently and looking for different things. We've interviewed probably a dozen oil & gas investors, and when we asked their views on how oil & gas companies should account for their customers’ emissions, we got a dozen different answers.
So what should investors be looking at to determine whether an oil & gas company is truly leading on climate change?
Our advice is to focus their engagement and decision-making on a short list of material ESG issues backed by clear, concrete metrics. Things that all investors should be able to agree on and which companies should be disclosing. A company’s flaring reduction targets, for example. That’s an easy one. We should also be able to see a company’s total emissions; its emissions per unit of production volume; and its water usage. These are things that are not hard and which would be useful for investors.
You’ve said oil & gas investors should also judge companies by the number of trade associations they fund that obstruct government climate policy and regulatory action. How should investors decide what constitutes obstruction?
We know which groups have lobbied against methane regulations that have been proposed by the Biden administration, and which ones have lobbied against the proposal in Congress to require natural gas producers to pay a fee on their emissions of methane. These groups’ members are saying they want to reduce methane emissions and reduce flaring. If they really wanted to do those things, they shouldn’t be funding those groups. On the flip side, we know any company that's signing up for groups like the Oil and Gas Methane Partnership has really stringent targets for methane reduction. That's positive and something we want to see. Are they joining groups that are really trying to take significant action?
What do you say to companies that are reluctant to commit to net zero emissions by 2050 because they don’t know how they’d get there?
It is an ambitious goal, but the climate crisis we’re in requires everyone to be ambitious. And when you think about the innovations that have happened in technology and energy in just the past 10 years, the idea we won’t have advances in things like hydrogen and carbon capture & storage over the next three decades seems a little disingenuous. Just look at the advances in shale; if you had told people in 2010 that U.S. natural gas production would increase more than 50% percent by 2020, no one would have believed you.
Some oil & gas companies have thrown their weight behind new investor-backed guidelines to make their climate disclosures and strategies more comparable. Do you think these efforts will be sufficient?
Ultimately, I think, climate disclosures are going to be government mandated. Right now, it is up to the companies to figure out what they're supposed to report. We've analyzed the different sustainability reports of US exploration & production companies, and every one is completely unique. There is no way you can measure one against the other. I think that that is a really a strong argument for why we have to have some standardization. When the Securities & Exchange Commission solicited public comment on the idea of mandating climate risk disclosure by companies, they received something like 550 letters, of which three quarters said, ‘yes, we want mandatory climate disclosure.’ So, investors are basically telling the SEC they need more disclosure.
How do you standardize companies’ climate disclosures while taking into account the differences between their expertise, strategies and resources?
I don't think we should expect that every single company should have the same transition plan. Every company’s plan will depend on its own skill set; which skills they can easily apply; and where they are located. If you're in the United States, where there’s a lot of natural gas production, it makes a lot of sense to look at producing hydrogen with natural gas. That doesn't make as much sense if you're in Europe where there isn’t as much natural gas production.
What the SEC has indicated it has in mind is something along the lines of the Task Force on Climate Disclosure: a framework that establishes clear definitions for terms - like what does “net zero” mean, what does “green” mean, what is low-carbon energy - and what companies have to do if they want to use those labels.
What are the best arguments against requiring public companies to disclose standard information about their climate-related risks?
One argument is that a lot of what's called ESG is really in the eye of the beholder. I think that's absolutely right. The SEC needs to be focused on materiality. Another good argument is that when it comes to the environment and technology, what’s negative for one group of people can be positive for another. Natural gas is a good example. A new natural gas power plant in a poor nation where people burn biomass in their homes might increase emissions of carbon dioxide in the atmosphere but help that community improve public health and local air quality.
How is the SEC going to deal with that?
It’s a conundrum, and it may narrow the scope of what we see coming from the SEC. The SEC has to avoid weighing in on what is good and what is not good and what is environmental harm and what is not environmental harm.
You've written that Wall Street’s leaders have provided “little more than a trickle of support for the public policies needed to accelerate dramatic market shifts and make net zero a reality.” What’s an example of that?
One example is methane regulation. In April, investors managing $37 trillion committed to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner. A month later, an investor statement in support of federal regulation of methane emissions garnered investor support of just $5.35 trillion in assets. You cannot get to net zero unless you're addressing methane, and regulation is a key tool for doing so. Especially in the United States, where we have so many private oil & gas companies. Some of them are the worst performers, certainly on methane emissions. You need to have government policy. Wall Street could have a really active role in pushing for policies to regulate methane.
Why doesn’t it?
Part of it comes from a discomfort with being seen as getting into the political fray. They don't necessarily think that they have a lot of credibility when it comes to climate policy. And they're legitimately worried that it could hurt their business. I don't think that those arguments really hold up anymore, but those are the things we hear. Another issue is that for a lot of these investment firms, ESG issues haven’t really been integrated into their investment process. Firms might have an ESG team, but they aren’t actually integrated into the firm’s day-to- day investment decisions. The ESG teams often report to marketing. We would like to see an ESG team reporting to the CFO or to a compliance officer or having a direct board report.
We're starting to get more questions from clients about how to define the “S” in ESG. What would you tell them?
A really good proxy for “S” is your COVID response: what are you doing for your workforce? What are you doing for the community around you on COVID safety practices? One oil & gas company actually had a very specific plan for increasing healthcare in the pandemic. That seems like a solid “S.”
For an oil & gas company, it’s also important to show what you are doing both for your own workforce – in terms of improving safety and ensuring upward promotion and representation of different groups – and for the community. Particularly when you’re building infrastructure. What are you doing to engage with the community? How many public hearings did you participate in to solicit input? Which groups did you speak with? What were the mitigating measures you took to address the community’s concerns? Something that lays out a really clear path for how you worked with the community. It sounds a little bit liquid, but it's much more concrete than saying how much money you gave to a food bank.
As proxy season approaches, what should oil & gas corporate leaders expect and be ready for in the way of shareholder activism?
Targeting of specific board members is only going to heat up. This is the new frontier and where we're going to see a lot of action from shareholders. Not just in terms of votes on ESG issues but activists targeting specific board seats and holding individual board members accountable for the company.
Who should be nervous?
I would say, get nervous if you are like everybody else on your board and have exactly the same background and you're bringing the same skill set. This industry needs people who have backgrounds in how to handle a transition.