ESG and Energy Transition Balancing Value and Values in a Post-Pandemic World
Authors: Feder Judy 
Published: June 2020

When Shell slashed its dividend by 66% on 30 April, it not only sent shock waves through financial and business communities throughout the world, it “tore up the industry’s financial playbook,” according to Laura Hurst at Bloomberg. Amid the chaos and damage churned up by the pandemic, what had long been unthinkable - the world’s largest supermajors ceasing to defend their dividends at almost any cost, given the importance of payouts to North American investors - suddenly became fact. The last time Shell had slashed its dividend coincided with World War II, nearly 80 years ago. Equinor also cut its dividend, and Exxon Mobil froze its dividend for the first time in 13 years.

Asked whether the long-held strategy of sacred payouts to shareholders was sustainable in the current situation, Shell Chief Executive Officer Ben van Beurden said, “I would say, no.”

“I think a crisis like this has the potential to catalyze society into a different way of thinking,” van Beurden said.

Total has now joined Shell and other European counterparts, BP and Repsol, in setting ambitious climate targets. Despite a drop in profits as the coronavirus has decimated fuel demand, the French company committed to eliminating most of its carbon emissions by 2050 and to investing more in clean energy. Its shares rose 6%, to $34.90, immediately following its announcement - almost three times the gain in France’s benchmark index.

Announcements like these from Shell and Total reflect the ongoing pressure on oil giants from investors and society to tackle long-term environmental challenges.

“I think we’re in the midst of a paradigm shift in terms of how we think about the scope of investing, which in turn is related to a shift in thinking about the purpose of the public company from one of shareholder primacy and short-term profit maximization to one that focuses on delivering what is often referred to as long-term sustainable value to all stakeholders,” said Jon Hale, head of sustainability research at the Morningstar global financial services firm. Stakeholders include customers, employees, and communities up and down the supply chain in which the company operates, and the planet itself, as well as shareholders.

For many years, it was universally understood that institutional investors’ main objective, and the investee company’s main obligation, was to maximize short-term returns for shareholders, and that factors such as social and environmental impacts required a tradeoff on the investor’s part. More recently, with the rise of the “responsible investment” movement, ESG criteria not only allow investors to put their money where their values are, but also play a practical role in evaluating a company’s ability to manage risk.

One thing that has moved the needle in the direction of what Hale refers to as “sustainability thinking” is the development and collection of sophisticated and large amounts of data about companies’ performance, including ESG performance. “So, it’s really gotten more focused on materiality,” Hale said. “And it’s not so much based on values any-more for investors as it is on really wanting to drive the long-term value of an investment.”

“The bigger your base of sustainable investors, the more leeway corporate management has to shift in this direction,” Hale said.