By now, anyone with even a passing interest in ESG or climate issues is familiar with the recent developments at ExxonMobil, Royal Dutch Shell (RDS) and Chevron related to their climate programs. Given the unprecedented nature of those events, I looked at investors’ immediate reactions at all three companies. As demonstrated by my posts here and here, I am generally cautious when looking to the equities market as “THE” indicator of perceived ESG value. However, I was still surprised by the general “non-reaction” of the market in the day or two following the shareholder votes and court ruling.
My interpretation of investor reactions: Meh, if not a slight yawn. Remember – in theory – stock prices reflect investor views of future cash flows and economic conditions; therefore current prices reflect interpretations of the future. When surprises occur, the market typically immediately adjusts to reflect new interpretations of the future (i.e., knee jerk reactions that can be overreactions, frequently corrected the following days). See the table below.
Same-day day reaction was muted, with all three companies valued at around 90% of their 52-week highs. How this compares to other market reference points for May 25:
- Apple closed at 87% of its 52-week high
- Amazon closed at 91% of its 52-week high
- Netflix closed at 85% of its 52-week high
- Oil industry peer ConocoPhilips (which was not the subject of the day’s climate news, but its shareholders voted to support a carbon emissions proposal at the company’s May 11 Annual Meeting) closed at 90% of its 52-week high
- The Dow Jones Industrial Average closed at 97% of its 52-week high
Second day (May 27th) figures are similar to the first day numbers. I see this as a clear indicator of investor acceptance of ESG mandates. Why? Because the market’s knee-jerk reaction to the surprises was in line with other market movement. It was minimal, even in first-day intraday pricing. Some observers may argue that the the downside of such developments were already priced into the companies’ shares. That may be true to an extent, but I think the court verdict and shareholder votes were generally unexpected.
A notable development concerning RDS: the company may already be making substantial headway toward the Dutch court’s order for reducing its CO2 emissions by 45% by 2030. RDS announced divestitures of its
- 50% ownership stake in Deer Park Refining Limited Partnership in Texas to Pemex, Mexico’s national oil company who is the other partner in the operation. That deal is expected to close in the fourth quarter of 2021
- Position in the Philippines-based Malampaya Energy XP natural gas field
- Mobile Chemical LP refinery in Alabama
By selling these assets (the deals obviously were essentially complete before the court verdict), RDS can count the portfolio emissions reductions towards the 45% mandate. Yet decarbonizing corporate holdings through divestures is not equivalent to global emissions reductions, as I will cover in a future post. If these deals include off-take agreements, RDS is still on the hook for the Scope 3 emissions associated with the associated oil and gas products it sells.
What This Means for You
While nothing is certain when it comes to equities market reactions, it seems reasonable that even investors in long-established and conservative carbon intensive companies may no longer be shaken by climate-related announcements or initiatives. They may be only slightly stirred (James Bond pun fully intentional) or expecting – if not requiring – more affirmative action. Concerns about market reactions may not be an argument against stepping up action on carbon emissions.
This is the right time to review, reassess and realign corporate climate programs, especially those relying on offsets.