“It seems inevitable that the energy transition will spell the end of the fossil fuel industry’s traditionally growth-focused business model, which has already started to fail. The reduced usage of fossil fuels necessitated by any Paris-aligned temperature target is inherently inconsistent with increased fossil fuel production,” according to Groundhog Pay, the December 2020 Carbon Tracker report. The analysis shows “how executive incentives trap companies in a loop of fossil growth.”
(This article is sourced from the Carbon Tracker website, reports and analyses.)
Groundhog Pay is the third in the Carbon Tracker remuneration series following Paying with Fire and Fanning the Flames. The series exposes how executives are rewarded to produce more oil and gas at odds with climate ambition needed to become Paris-compliant.
A review of remuneration policies at the 30 largest listed oil and gas companies in Europe, Asia and North America shows that:
- Reforms to align oil and gas executive compensation with the realities of the energy transition are moving at a snail’s pace. We find that 90% of companies directly reward executives for production or reserves increases in some shape or form, a figure virtually unchanged since 2017. These targets encourage a focus on size over shareholder value, exacerbating stranding risks.
Remuneration policies have an important part to play in steering oil and gas companies in new directions.
- Most puzzlingly, all European companies with net zero ambitions still incentivise executives to grow oil and gas volumes to some extent, based on their disclosures to date. This includes BP, Repsol, Eni, Shell and Total. Rewarding fossil fuel growth will likely slow progress on longer-term strategic objectives around decarbonisation.
- The result is that European majors rank worse than their US counterparts in terms of using remuneration to incentivise fossil fuel growth, running counter to their stronger positioning on portfolio economics, emissions ambitions and impairment price assumptions.
- While some European companies have raised the share of pay that is determined by climate-related metrics, these targets are often inconsistent with the emissions goals set for the organisation as a whole. North American and Asia-Pacific companies have virtually no rewards for emissions reductions.
- Regardless of whether or not companies are diversifying into low-carbon industries, we encourage their shareholders to pressure management to replace direct production targets with value-focused metrics, like TSR and ROACE.
Four Asks for Shareholders
Carbon Tracker recommends four asks that company shareholders should consider ahead of the 2021 AGM season:
- Discourage direct growth metrics – Basing chunks of pay on production growth or reserves replacement, for instance, is bound to encourage growth over returns.
- Favour efficiency over raw absolutes – Return-based metrics, such as ROACE, are more likely to encourage capital discipline than, for instance, earnings or cash flow.
- Ask for specificity – Shareholders should ask for more than just a range of possible metrics that lack individual weights, which can easily conceal a heavy reliance on growth targets. Similarly, climate metrics should not be lumped into single categories with other issues like safety and governance unless weights are specified for each individual target.
- Ask for internally consistent climate measures – The incentives set for executives should reflect the goals set for the organisation as a whole. For instance, CEOs should not be rewarded simply for making emissions reductions on an intensity basis when the wider company target is for absolute reductions.
As long as oil sector executives get paid large bonuses for growing oil production and reserves, it’s unrealistic to expect that they will shift their focus to a low-carbon strategy. In a post-Covid world calling to build-back-fossil-free, fossil companies have an opportunity and a duty to realign their business practices with climate reality.
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