“Low-carbon” business strategies conceal plans to promote gas
LONDON/NEW YORK, 4 November – Oil and gas companies are rewarding executives for increasing production, even when this conflicts with their climate policies, warns a report from the financial think tank Carbon Tracker released today.
Companies with some of the most ambitious policies are among the worst offenders. BP has pledged to cut emissions from production and use of its products by 35-40% by 2030, yet 30% of executives’ total pay package is determined by remuneration targets that directly or indirectly incentivise production growth. Eni, TotalEnergies and Repsol have pledged cuts of 30-35% by 2030, but growth targets determine 18%, 15% and 12%, of management pay respectively.
The analysis of 35 of the largest listed oil and gas companies reveals that many have increased executives’ incentives to grow production including BP, TotalEnergies, and Repsol as well as Chevron, where they determine 10% of total target pay. Despite a small reduction, ExxonMobil still has 41% of pay linked to production growth metrics. They have also fallen at Shell, but still determine 20% of pay.
The report also finds that while growing numbers of companies reward executives for preparing for the energy transition, remuneration metrics often conceal incentives to increase fossil fuel production. Shell, BP, Chevron and TotalEnergies all champion “low-carbon” business strategies which include the use of gas, which the report says is increasingly being promoted across the industry as a “low-carbon” or “transition” fuel.
Carbon Tracker analyst and report author Maeve O’Connor said: “The transition to clean energy is gathering pace and it is inevitable that demand for fossil fuels will fall as markets and governments increasingly shift investment from oil and gas to cheaper, cleaner renewables. Fossil fuel companies need to rethink their business models fast, yet executives are being encouraged to pursue risky projects to boost production.”
Even with no changes in national energy policies worldwide, demand for gas will be flat from 2030 and oil will plateau a few years later, according to the International Energy Agency’s latest World Energy Outlook.[1] Governments have responded to Russia’s invasion of Ukraine by accelerating the deployment of renewables supported by nuclear power, which IEA Executive Director Fatih Birol called “a historic and definitive turning point towards a cleaner, more affordable and more secure energy system.”
Carbon Tracker Head of Oil, Gas and Mining Mike Coffin said: “Investors should not be deceived by the recent rise in fossil fuel prices – oil and gas assets are likely to generate lower than expected returns as the transition accelerates. They must engage with companies on appropriate governance and use their annual vote on remuneration packages to ensure that executive bonuses are aligned with the realities of the energy transition to focus on shareholder value rather than production growth.”
Remuneration packages are designed to reward executives for achieving companies’ strategic objectives. Variable pay – such as annual bonuses and long-term incentive plans – makes up around 71% of an average executive’s total package in Europe, and 73% in North America, so targets can have a significant influence on management priorities.
Companies ranked by ambition of oil and gas emissions targets, see Carbon Tracker’s latest Absolute Impact report for full details. Total pay = base salary + restricted stock + variable pay with conditions (annual bonus + long-term incentive plans).
‘Crude Intentions – how oil and gas executives are still rewarded to chase fossil growth, despite the urgent need to transition’ analyses the remuneration policies of 35 of the largest listed oil and gas companies and finds that all but one still incentivise fossil fuel production growth, either directly, through metrics like reserve replacement ratios, or indirectly through metrics which encourage increased volumes of oil and gas such as EBITDA, free cash flow and net income.
The report finds that 27 companies include remuneration targets designed to incentivise prudent planning for the energy transition, but warns that they are often thinly veiled incentives to grow fossil fuel production “repackaged in climate friendly marketing”.
Shell rewards its executives for “progress towards the energy transition” which determines 15% of their bonus package. However, this includes “selling low-carbon products”, including “shifting to natural gas”, “pursuing operational efficiency in its assets” and “transforming refineries into energy and chemicals plants.” The report says: “None of these ventures are credible methods to reduce CO2 emissions. Instead they are effectively a means of artificially lowering the company’s carbon intensity footprint.”
The report also warns that where companies set remuneration targets related to progress on emissions, they are often watered-down versions of the company’s overarching corporate emissions targets. Although Eni has committed to a 35% absolute cut in emissions from its production by 2030 and 80% by 2040, it rewards executives for merely reducing the intensity of emissions from its own (Scopes 1 & 2) operations.
Maeve O’Connor said: “For claims of energy transition leadership to be credible, company strategies must pursue a shift away from fossil fuel production, backed up by remuneration policies that incentivise executives to deliver. Given the increasing urgency of the climate crisis, coupled with the fact that many company targets are set for short time horizons, aligning incentives and emissions reduction plans is a matter of urgency.”
Carbon Tracker’s analysis is based on company disclosures and uses the methodology developed in its last remuneration report Groundhog Pay (December 2020). It captures every metric that determines each type of remuneration (annual bonus, long-term incentive plans etc.) and assigns it to one of four categories: direct growth; indirect growth; growth neutral; and transition positive. Where metric weightings are disclosed by the company it uses those figures. Otherwise, metrics are weighed on a pro-rata basis based on available disclosures.
Once the embargo lifts the report can be downloaded here: https://carbontracker.org/reports/crude-intentions/
ENDS
To arrange interviews please contact:
Joel Benjamin Jbenjamin@carbontracker.org +44 7429 637423
David Mason david.mason@greenhousepr.co.uk +44 7799 072320
About Carbon Tracker
The Carbon Tracker Initiative is a not-for-profit financial think tank that seeks to promote a climate-secure global energy market by aligning capital markets with climate reality. Our research to date on the carbon bubble, unburnable carbon and stranded assets has begun a new debate on how to align the financial system with the energy transition to a low carbon future. www.carbontracker.org
