It’s tough setting pay incentives for the boss. You want him to have an eye on the big prize — more profits, more dividends. But you also want him to invest well, to run a tight ship and not sacrifice the long-term in pursuit of a quick buck. But what incentive is right when you worry that the core business might be banned within several decades?
Big oil companies wrestle with this. Investors adore the cash dividend from crude. But many want to know what the oil majors will do if petroleum-based fuels are phased out in order to reduce carbon emissions. Shell has been playing cat and mouse with some saintly shareholders who want their dividends free of soot and CO2. In order to achieve that, these investors want carbon-reduction targets embedded in the bosses’ bonus plans.
That’s tough; how do you make more money selling stuff that emits carbon while trying to cut back on carbon emissions? It’s a bit like telling a camembert cheese-maker to cut back on dairy fat.
Shell is sophisticated; it has, for years, been working on strategies that will marry business expansion with compliance with climate change treaties. The oil major plans to reduce its “net carbon footprint” by half by 2050 and by a fifth by 2035. Until now Ben van Beurden, Shell’s chief executive, has insisted that short-term targets are inappropriate.
This week, Shell submitted to targets. Executive pay will be linked to Shell’s transition to a low-carbon business model, with long-term bonuses linked to reductions in Shell’s net carbon footprint over three- to five-year periods.
The linkage of carbon reduction targets to bonuses will not just apply to the top team but to a thousand or more senior Shell managers. If you were an old-school, stetson-wearing oil industry hand you might think Tom had finally caught Jerry and was squeezing the fat little mouse in its paws.
Of course it’s not that simple, and it’s not even entirely agreed. The details will be debated and approved at the 2020 annual general meeting. The linkage between bonuses and carbon will be a measure of energy intensity, expressed as the grams of carbon emitted by Shell’s business activity per megajoule of energy consumed.
The idea is not to target an absolute number but to make the business more carbon-efficient, so Shell’s business can grow but emit less carbon for each unit of energy produced and, ultimately, for each dollar of profit. Moreover, in the early years, when Shell is finding its way, the metrics will include other measures, probably low-carbon investment targets to incentivise Shell’s transition to new energy businesses.
Still, this is brave, and Shell is putting its neck out on several fronts. Old-school ExxonMobil is mostly sticking to its oil and gas, apart from a venture in algae-based biofuels. BP abandoned a lot of its greenery several years ago.
Having promoted itself as “Beyond Petroleum” at the turn of the millennium, it was badly burned when it made large investments in the manufacture of solar panels only to suffer big losses when Chinese rivals dumped cheap panels on the market.
However, Total, the French oil major, is embracing the new energy economy, buying Saft, the battery manufacturer. Shell is investing in wind farms in the North Sea; it recently bought First Utility, a UK domestic electricity supplier, and New Motion, a Dutch network of charging points for cars. It is also developing biofuels in Brazil and liquefied natural gas for shipping.
But all these new ventures are dwarfed by investments in petroleum-based fuels, chemicals and lubricants, without which our world would come to a standstill. The oil industry is a process-driven business. It’s about creating networks of logistics handling hazardous materials and running factories at high levels of precision. Despite what oil companies may say, innovation is not their forte. Shell is not Tesla; it cannot bet the farm on an idea. At the very least, Shell must produce a regular dividend.
There is another option for big oil — steady as she goes. It’s the model that big tobacco chose in order to cope with regulatory squeeze and public opprobrium. For years, tobacco hunkered down, enduring taxes and crippling regulation. Tobacco thrived with bigger profits and dividends, selling fags to a dwindling population of smokers. But last year, investors took fright. Tobacco stocks are plummeting.
Shell cannot afford to do that. It has to get this transition right, not just for investors but for everyone.