Through stewardship, an engaged investor works constructively with a business to improve its products and services, workforce management, impact on society and the environment, and the integrity of its long-term strategy and leadership team.
By improving the day-to-day operations and vision of a company, stewardship also supports long-term financial performance over time. Research based on our stewardship activities shows that companies outperform by 7.1% on average when these relationships succeed. The essential role of stewardship in delivering positive outcomes for investors and the wider role is why we see it as integral to Sustainable Wealth Creation.
In the energy industry, our stewardship objectives focus on limiting environmental damage, reducing greenhouse-gas emissions and supporting companies’ transition to a low-carbon economy. Founded in 2004 on a legacy dating back to 1983, EOS at Federated Hermes (‘EOS’) takes a long-term approach to stewardship and the engagement activity underpinning it. Half of our engagements surpass eight years in duration – including our relationship with BP, which we have engaged with since 2006.
Over the past 14 years, we have engaged with BP, one of the world’s six major oil and gas companies, on a range of sustainability and strategic topics. In the early years of our relationship with the firm, these included risk management and heath-and-safety issues.
In 2010, BP’s Deepwater Horizon drill rig exploded, resulting in an historic human and environmental catastrophe. Our engagement with BP prior to the disaster found that its health and safety function was becoming excessively decentralised. Following the event, we intensified our efforts to improve BP’s risk-management processes and emergency-response plans, and also engaged across the oil and gas industry to test the strength of risk-oversight structures at other firms.
Climate change: a call to action
We have also engaged with BP on climate change issues, occasionally in collaboration with other institutional investors. As one of the world’s top-20 emitting companies, BP’s ability to limit its greenhouse gas emissions is crucial to its long-term future and the world’s prospects for achieving the goals of the 2015 Paris Agreement.
In 2015, we supported a shareholder resolution that called for BP to enhance its reporting on managing climate-change risks, before urging the company to set and publish a company-wide greenhouse-gas emissions reduction target in 2017. In our next seven engagement meetings with the company, we discussed the matter with key members of its management team.
Collaborative engagement: all together
Stewardship enables like-minded investors to collaborate to drive change. As co-leader of Climate Action 100+, a collaborative engagement of more than 370 investors seeking greenhouse-gas emissions reductions from the world’s largest emitters, we are the lead co-ordinating investor for the initiative’s work with BP.
When we undertook this role, BP had demonstrated leadership on climate change in a number of areas, such as including a scenario consistent with the Paris Agreement in its official energy outlook and establishing a range of climate-related targets, including best-in-class management of fugitive methane emissions.
However, we remained concerned that the company had not yet demonstrated that its strategy, which includes growth in oil-and-gas revenues as well as pursuing low-carbon business, is consistent with the Paris goals. In addition, we wanted the company to explain the consequences of this strategy for its future business model and long-term investment proposition, including its ambitions, goals and targets for the energy transition.
Following a lengthy period of collaborative engagement, we helped facilitate the development of a shareholder resolution calling for the company to set out a business strategy that is consistent with the goals of the Paris Agreement. It was co-filed by 9.6% of shareholders, supported by the board and subsequently passed with the support of more than 99% of shareholders.
At BP’s 2020 annual general meeting, we asked the company to reconsider its investment assumptions and accounts for operating in a world where the Paris Agreement had been achieved, and for it to review its long-term oil-and-gas price assumptions in light of the coronavirus pandemic.
Following these requests, BP reduced the long-term oil-and-gas price assumptions used in its financial statements, incurring substantial estimated impairments of $13-$17.5bn – equivalent to 13%-17% of its 2019 net assets. This move not only offers shareholders greater visibility about the firm’s climate-related risks, but also gives investors greater confidence that BP can deliver on its commitments related to the Paris Agreement.
Our engagements with BP over the years, focused on risk at the time of Deepwater Horizon and the climate concerns afterwards, are helping create a more sustainable business – for investors, for the world, and for the business itself.