Investors' petition to Shell to improve oil sands disclosure is a sign of a broader trend

A coalition of over 140 investors wants the opportunity to scrutinize Royal Dutch Shell plc's decision to invest in Alberta's oil sands. The investors succeeded in having a motion added to the agenda for Shell's 2010 annual general meeting that, if passed, will require the company's Audit Committee or Risk Committee to report on the relevant investment analysis in time for the 2011 AGM. While this initiative is uniquely focused on Shell, it is part of a larger trend whereby progressive investors are calling upon large emitters to improve their climate change disclosure. Canadian reporting issuers should consider preparing today for the disclosure requirements of the future.

The Shell motion

The initiative is being co-ordinated by FairPensions, campaigning organisation founded in 2005 to promote responsible investment in the pensions and investment industry. The coaltions 142 supporters include fund managers, pension funds, foundations and faith groups. Major financial players in the coalition include The Co-operative Asset Management (which is also funding legal action by the Creen Nation alleging that Shell's oil sands development infringes their Constitutionally protected rights), the UNISON Staff Pension Scheme and a significant contribution from Rathbone Greenbank Investments clients.

The following is the full text of the proposed resolution:

That in order to address our concerns for the long term success of the Company arising from the risks associated with oil sands, we as shareholders of the Company direct that the Audit Committee or a Risk Committee of the Board commissions and reviews a report setting out the assumptions made by the Company in deciding to proceed with oil sands projects regarding future carbon prices, oil price volatility, demand for oil, anticipated regulation of greenhouse gas emissions and legal and reputational risks arising from local environmental damage and impairment of traditional livelihoods. The findings of the report and review should be reported to investors in the Business Review section of the Company's Annual Report presented to the Annual General Meeting in 2011.

The motion was informed by a general concern about the environmental impacts of the development of the oil sands and specifically by concerns regarding:

• the carbon intensity of the oil sands projects at a time of anticipated regulation and pricing of greenhouse gas emissions;
• forecasted carbon prices;
• the limitations and cost of emissions mitigation; and
• local environmental and livelihoods issues.

In its response, Shell noted that the oil sands account for only 2.5% of its production. "The resolution is basically a request for further information around the economics and other aspects of our oil sands operations. The resolution is submitted by shareholders representing some 0.15% of our total outstanding shares," said the company.

The investor's acknowledged that Shell has provided some disclosure, but believe that more is required. The Co-operative Asset Management's Niall O'Shea said, "given Shell's level of commitment to oil sands there is a greater obligation to shareholders to reassure how it would cope under a number of scenarios. We acknowledge Shell has already done some work in this area but it does not go anywhere near far enough to allay our concerns."

Shell's AGM will be held in the Hague on May 18, 2010.

Broader trend

Shell is not the only entity under pressure to improve environmental disclosure in the public markets. A variety of investor-backed initiatives are calling for more thorough financial reporting and discussion of climate change issues by public companies. Some recent examples include the following:

• The Climate Disclosure Project, which calls upon companies to disclose climate change risk voluntarily, entered its 9th year last year. CDP's 2009 request for information was sent on behalf of 475 global investors with assets under management of US$55-trillion, including 47 of Canada's largest investment organizations.
• In October 2009, the Ontario Securities Commission received a submission from a coalition of investors and environmentalists calling on it to address the poor rates of climate change disclosure in the annual reports of Canadian reporting issuers. The submission was prepared by the Climate Change Lawyers Network and endorsed by British Columbia Investment Management Corporation (bcIMC), Ceres and Climate Action Network Canada. It was based on a review of 35 reporting issuers with market capitalizations of more than $1 billion who operate in sectors that are particularly exposed to climate change risk. Finding disclosure to be wanting, the submission calls upon the OSC to issue guidance that could be informed in part by the Global Framework for Climate Risk Disclosure.
• Last November, a coalition of investors submitted a supplemental petition to the U.S. Securities and Exchange Commission asking for improved disclosure guidance. The 20 signatories to the petition include leading U.S. and Canadian institutional investors managing more than $1 trillion in assets, including the California Public Employees' Retirement System (CalPERS), British Columbia Investment Management Corporation of Canada, Pax World Management Corporation, state treasurers from Oregon, North Carolina, Connecticut, Maryland and Vermont and Florida's Chief Financial Officer. In an accompanying press release, Ceres notes that the "simple truth" behind the petition is that "it's impossible for investors to adequately assess the risk to their investment money if companies don't tell them how much climate change and its impacts might affect their financial performance."
• As we reported previously, New York's Attorney General Andrew Cuomo dusted off an obscure piece of legislation called the Martin Act and relied upon it to subpoena five large energy companies in 2007 to demand information about the companies' analysis of the risk posed by climate change and the disclosure of that risk to investors. The Financial Post reported on December 5, 2009 that three of the companies, AES Corp., Xcel Energy Inc. and Dynergy Inc., had all agreed to provide disclosure as part of settlements with the Attorney General.

Despite the lacklustre outcome of Copenhagen, the glacial progress of the Waxman-Markey bill through the U.S. Senate, and Canada's lack of emissions policy at the federal level, we expect that the investment community will continue to call for improved climate change disclosure through 2010. This trend will be facilitated by the introduction of mandatory emissions reporting requirements in many jurisdictions and by the credible threat that the U.S. EPA will regulate greenhouse gases if Congress fails to do so.

Companies may be wary of being the first to provide comprehensive climate change disclosure, as doing so may (fairly or unfairly) cause the market to devalue the stocks of such companies relative to their more tight-lipped peers. However, companies should nevertheless expect that more disclosure will be required in the foreseeable future. Such companies will not be able to understand their climate change risk exposure overnight. They should therefore consider developing systems today to enable them to meet the disclosure requirements of tomorrow.