Today, the global climate treaty negotiated by 197 countries — The Paris Agreement — comes into force under international law, well ahead of expectations. The agreement commits governments to keep the global temperature rise to well below two degrees Celsius above pre-industrial levels — and preferably 1.5 degrees. This goal requires the phase-out of fossil fuels and a reduction in global greenhouse gas emissions.
In response to the shift away from fossil fuels, the world’s largest companies are switching their energy procurement to clean sources, and investors are questioning the business models of fossil fuel companies. The global shift away from hydrocarbons has profound business implications across all sectors, but particularly for companies whose core business relies on ever increasing fossil fuel demand.
Business and legal risks linked to climate policy and the energy transition are real
This point was emphasized by Simon Henry, chief financial officer of Royal Dutch Shell, who told analysts on a quarterly financial results conference call that he believes “oil demand will peak before supply and that peak may be between five and 15 years hence.” Henry explained that flat-lining demand “will be driven by efficiency and substitution, more than offsetting the new demand for transport.” A peak in demand may turn out to be a plateau rather than a sharp decline, but for people whose business is based on carbon-intensive oil, the business risks are very real.
According to a legal opinion published last month by Australian lawyer Noel Hutley, “it is only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk that can be demonstrated to have caused harm to a company.” He added that the law would not protect directors “who are uninformed, who make no conscious decision, or who exercise no judgment.” Given the legal parallels in Canadian company directors’ duties, Hutley’s message should perk the ears of Canadian corporate leaders, and their shareholders.
Shareholders should be questioning Kinder Morgan president's statements and strategy
Speaking in Vancouver on Thursday, Kinder Morgan Canada president Ian Anderson suggested that he may not understand the science behind climate change and associated business implications of a transition away from the bitumen that he pumps. According to Andersen, "We won't all agree on the science or the degree to which man influences greenhouse gases and climate change." Anderson told a Vancouver Board of Trade audience: "I’ve read the science on both sides and don’t pretend to be smart enough to know which is right." Kinder Morgan shareholders should be questioning the competency of Mr. Anderson to lead the company through a disruptive energy transition.
Alongside the policy risks of Canada and other G7 members' decision to phase out fossil fuel subsidies and then fossil fuel use itself, the technological transition away from fossil fuels poses acute risks to Kinder Morgan’s business model. These are risks that must be reported and that Mr. Anderson should be articulating.
Market transition away from hydrocarbons challenges directors’ competency
The market share of electric vehicles (EVs) is tiny when compared to the global automotive market. But the percentage is increasing rapidly. In power generation, the share of renewable energy is similarly modest but growing at pace. In both arenas the technology is improving, reducing costs and expanding deployment in every country in the world, particularly in China and the US. The next big step will be a regulatory push by both national and municipal governments to make EVs the default choice for motorists in growing cities. Germany, Norway and Holland have all proposed ending the sale of new internal combustion engine vehicles within the next decade. If China follows their example, the disruption to fossil fuel demand would be significant. For companies whose core product is hydrocarbons, scenario planning for the already-agreed phase out of fossil fuels is precisely what shareholders should expect from professional managers.
Corporate reporting, climate change and directors’ liability
For corporate directors like Ian Anderson who seek to deny the material business implications of climate science and associated industrial and technological shifts, the risk of shareholder lawsuits seems almost inevitable. Canadian law requires company directors to act “honestly and in good faith with a view to the best interests of the corporation.” In discharging their duties, directors must “exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.” What would a reasonable person who runs a pipeline company do if they knew that 197 governments have made a legal commitment to phase out their business model? At the bare minimum, they would communicate a plan to shareholders on how capital would be distributed through the wind-down process.
Dear Mr. Andersen, where is your “2-degree business plan”?
In response to the legal reality of Paris Agreement ratification and technological progress in clean energy, there have already been disruptive changes in European and US energy markets. In the U.S., this has been led by rapid technological advances and state action to decarbonize the power grids and transport sector in California and New York. In Canada, the management team at Suncor Energy, one of the largest oil sands operators, last year agreed to communicate to shareholders how the company plans to generate value in a world that sticks to the Paris Agreement emissions targets. Management support for this process at Suncor indicates that their management team recognises that the low-carbon energy transition is underway and that responsible company directors must indicate to their shareholders a clear path forward. Indeed, Canadian company directors have legal duties to provide this type of information to their shareholders. This applies, whether or not they personally believe in the science of climate change.
Comments
Great article. Now let's see if we can get Trudeau's attention. His current policy direction seems to suggest a similar disregard for the perils of over commitment to hydro carbons.