Church of England’s wishful thinking spells trouble for Shell
Adam Matthews regrets, but he is going to vote against the appointment of the chairman and chief executive of Shell at the forthcoming annual meeting. The Chief Responsible Investment Officer at the Church of England Pensions Board announced his decision, more in sorrow than anger, because he and his colleagues would like Shell to go greener quicker. He would also like other shareholders to join in, otherwise the Church’s £1.2m of Shell shares hardly make up a rounding error for the oil giant.
Nevertheless, his wishful thinking is shared by a significant slice of the UK population, extending well beyond the usual suspects in the activists industry, so the Shell board can expect a rough ride. Mr Matthews feels that “the lure of short-term profit maximisation is trumping the long-term sustainability of these companies and of our planet.” By bracketing the sustainability of the company with that of the planet he can argue that it would be in Shell’s best interests to try and stop being an oil company, and embrace the windmills and sunshine of the future.
Unfortunately, it is the worry among investors it might do just that have opened up a huge valuation gap, of around 50 per cent, against Exxon, Shell’s nearest rival. Closing this £80billion shortfall is the most important task facing Shell’s new CEO Wael Sawan, and it is painfully clear that greenery will not provide the answer.
Shell says it is unable to identify enough projects which are financially worth doing, even with its current capital allocation. Throwing more at marginal or unprofitable investments destroys wealth rather than creating it. There is a perfectly respectable case for the oil companies giving more back to their shareholders, some of whom may have better ideas of how to invest it.
This is what Mr Matthews calls “the pursuit of maximising short-term returns.” Others might call it running the business responsibly (and avoiding law suits from disaffected US shareholders) and might also quarrel with “short-term”. The uncomfortable truth is that the world is going to need hydrocarbons in at least today’s quantities for decades ahead, and the really tricky question is where they come from. Western companies like Shell will try and ensure that they are extracted as cleanly as possible, which may not be the case elsewhere. Turkmenistan hardly shows on the world hydrocarbon map, but research has shown that its extraction process is wasting vast quantities of methane, a worse greenhouse gas than CO2. The release last year was equivalent to 366m tonnes of CO2, more than the UK’s entire emissions.
Mr Matthews is in favour of electric cars, of course. They are so obviously cleaner than those horrible internal combustion engines. Well, maybe. Lots of studies have been done on their full-life CO2 price, starting with the misery of extracting exotic metals in hostile or unspoilt locations and ending with the higher road maintenance costs from extra weight. An exhaustive attempt by City Journal in the US concludes that there is no obvious answer, that over their lifetime EVs are just as likely to generate more greenhouse gases as less.
Internal combustion engines do indeed produce more pollution than EVs, but until the manufacturers were told the future was electric, emissions had been steadily coming down. Now further development which would have continued that trend has effectively stopped. Even the biggest carmakers do not have the resources to develop both types of engine at once.
Mr Matthews and the other activists doubtless mean well. Some of them are genuinely fearful of some vague “tipping point” which will be catastrophic for the climate. But the price of their activity, whether effective or not, is extremely hard to measure, and may end up doing more harm than good. The only certainty is that the transition will be expensive, and there’s nobody else to pay the bill.
Listen to A Long Time In Finance, a free Podcast every Friday on Spotify or Apple apps, with Neil Collins and Jonathan Ford.