CEOs of large oil companies have personal reasons to focus more on less fossil fuels

Read Time:8 Minute, 30 Second

On October 7, 2021, Shell employees walked through the company’s new Quest Carbon Capture and Storage (CCS) facility in Fort Saskatchewan, Alberta, Canada.

Todd Kroll | Reuters

As demand in the energy sector picks up, commodity market experts talk about the return of $100 oil, and some new factors have emerged in the energy sector, prompting producers to reduce extraction-shale gas from the United States has become more stringent after its bankruptcy under the pressure of ESG for a decade Financial discipline and the way shareholders pay energy executives.

In 2018, Royal Dutch Shell became the first oil giant to link ESG to executive compensation, using 10% of the long-term incentive plan (LTIP) to reduce carbon emissions. BP followed closely behind, using ESG measures in its annual bonuses and LTIP. Although the European giant is the first, American oil companies such as Chevron and Marathon Petroleum have increased greenhouse gas emission targets in their executive compensation plans.

Oil and gas companies are joining dozens of public companies across all industries—including Apple, Clorox, Pepsi, and Starbucks—to link ESG to executive compensation. Last week, Industrial Caterpillar finally established the position of Chief Sustainability and Strategy Officer, and said that it will now link some executive compensation with ESG.

According to a report by Willis Towers Watson, as of last year, 51% of S&P 500 companies have used some form of ESG indicators in their executive compensation plans. Half of companies include ESG in their annual bonus or incentive plans, while only 4% of companies use it for long-term incentive plans (LTIP). A similar report by PricewaterhouseCoopers (PwC) found that 45% of FTSE 100 companies set ESG targets in annual bonuses, LTIP, or both.

“We will continue to see the percentage of companies [linking ESG to pay] Ken Kuk, Senior Director of Talent and Rewards at Willis Towers Watson, said. Although more than 95% of the ESG indicator examples are annual bonuses, “there is more to long-term incentives,” he said.

A related survey conducted by the company last year of board members and senior executives showed that nearly four-fifths of the respondents (78%) plan to change the way they use ESG in executive incentive programs in the next three years. This reflects the current controversy in the corporate world that purpose is higher than profit, and the environment is listed as the top priority.

Put pressure on the fossil fuel industry

According to data from the U.S. Energy Information Administration, in 2020, oil accounts for about one-third of U.S. energy consumption, but 45% of total energy-related carbon dioxide emissions. Natural gas also provides about one-third of the country’s energy and generates 36% of carbon dioxide emissions. Oil and gas companies have basically given up coal, which accounts for about 10% of energy use and nearly 19% of emissions.

Investors are paying more and more attention to ESG, and more and more investors have been putting pressure on the fossil fuel industry to reduce its global carbon footprint and related operational and bottom-line risks. “The increased momentum in the investment community around ESG is driving discussions on climate [change]”PwC London partner and executive compensation expert Philippe O’Connor said, “We cannot underestimate the impact investors will continue to have in the next few years. ”

Investors’ input played a decisive role in Shell’s pioneering decision, and competitors have followed suit. Although executive compensation at the ExxonMobil shareholders meeting last spring was not high, the industry was shocked when climate activist hedge fund Engine No. 1 won three seats on its board of directors. As fully described, the coup may eventually weaken ExxonMobil’s reliance on carbon-based businesses and shift it more toward investments in solar, wind, and other renewable energy sources—and in the process lead to ESG-related compensation packages.

Darren Woods, Chairman and CEO of Exxon Mobil, said in a statement: “We look forward to working with all directors to build on the progress we have made to further increase long-term shareholder value and achieve success in a low-carbon future. “Proxy voting.

At the same time, financial regulators also regard climate change as a factor considered by investors. The US Securities and Exchange Commission stated that ESG disclosure regulation will be a core focus under the new chairman Gary Gensler, from climate to other ESG factors (such as labor conditions).

There is nothing new to incentivize business leaders to achieve predetermined goals, especially to increase revenue, profits, and shareholder returns through a certain increment. Oil and gas companies, due to their dangerous mining operations—from underground fracturing wells to offshore drilling platforms—have established incentives to improve workplace safety over the years.

After the Enron accounting and fraud scandals in 2001, meeting new governance requirements (Sarbanes-Oxley Act) was the basis for rewards. Then there are additional rewards for achieving the internal goals set for quality, health and wellness, recycling, energy conservation, and community services-these are all included in corporate social responsibility. Sustainability then became the collective term for establishing executive performance indicators around environmental management, diversity, equity and inclusiveness (DEI) and ethical business practices in the workplace-all of which are now under the ESG umbrella.

ESG is tricky, existing carbon targets are criticized

Although this trend is expected to continue, experts warn that the process can be tricky, and the goals that oil and gas companies have designed to deal with the climate have been criticized.

Incorporating emission reduction targets into executive compensation plans may force oil and gas companies to talk about being good corporate citizens in public relations. However, this method can be challenging. Christian Malek, an industry analyst at JPMorgan Chase, said: “What matters is not what you do, but how you do it.” For example, a company can indicate how much global carbon emissions have been reduced in a given year. “But it is very limited,” he said, “because they did not disclose their emissions by region,” the emissions from one region to another can vary greatly. “When it comes to carbon strength, it’s [overall] folder. ”

Or, a company can use carbon offsets to make greenwashing. “I have a lot of emissions, so I will [plant] A pile of forest, so I neutralized myself,” Malik said-while the company is still producing the same amount of emissions. “You disclose in an optical way that is better than reality. Disclosure must go hand in hand with compensation. ”

Oil and gas companies paying a high price for doing good may help improve the image of the industry among the public. They are increasingly concerned about the catastrophic effects of man-made climate change, the latest and most terrifying United Nations report and a series of related The report exacerbated this impact. Deadly floods, hurricanes, heat waves and wildfires. However, experts focusing on the climate and energy sectors pointed out that the sectoral goals are often not done enough and involve reducing the intensity of fossil fuel operations, rather than the basic production of fossil fuels, and only dealing with Scope 1 and Scope 2 emissions, not Scope 3 emissions. Is the largest share of climate issues.

O’Connor said companies should be cautious when aligning ESG metrics with incentives. “ESG is a broad and complex set of indicators and expectations,” she said. “This is one of the reasons why we see many companies using multiple indicators instead of a single measurement to better balance considerations and opinions across the ESG forum. There is no one-size-fits-all policy in this area, and attempts are too fast It’s dangerous to act quickly and return to a certain standard.”

The pandemic has set an unexpected hard cap on compensation incentives in 2020. Following the global economic downturn last year, Shell’s compensation committee decided to abandon the challenge of CEO Ben Van Berden and CFO Jessica Ull. And other executives’ bonuses, and there is no direct connection between the two. LTIP to achieve energy transition goals.

The energy industry has rebounded this year in the context of strong growth in the global economy and a sharp increase in demand for oil and natural gas due to reduced supply. This may incentivize oil and gas companies to produce more products, but at the same time, compensation for energy transition goals will rise. In Shell, the annual bonus target for 2021 is 120% of the basic salary of the CEO and CFO, which is the same as the 2020 setting, which is US$1,842,530 and US$1,200,900, respectively. However, within this range, the progress of the energy transition has now increased from 10% to 15% of the total amount that can be granted. In addition, according to Shell’s 2020 annual report, the energy transition is part of LTIP, and the plan will be vested in the next three years.

Due to limited supply and demand growth during the worst period of the pandemic, oil prices rebounded sharply, but more and more oil and gas companies are linking short-term and long-term executive compensation to the energy transition goals led by Royal Dutch Shell.

According to a 2019 McKinsey study, more and more evidence shows that adopting ESG is not only a fashion that feels good, but also creates value if done right. Kuk said this may be enough to persuade more oil and gas companies to associate it with compensation, especially since it is one of the few industries where ESG exists. “Sometimes we think about ESG in the context of doing good things. It does a good job. But I still believe that everything must have a business reason. ESG will prevail only when you have a business reason.”

The harmful effects of carbon emissions in climate change will continue to put pressure on oil and gas companies to accept the International Energy Agency’s goal of achieving net zero emissions by 2050. However, in addition to complying with regulatory requirements, linking emission reduction targets to executive compensation may be a key driver of change.

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