Friday Market Insights – Big oil companies are motivated to avoid litigation and culture backlash

Sue Talbot: [00:00:05] Hi, everyone, today is Friday, May 28th, and welcome to Friday Market Insights. My name is Sue Talbot and I’m a partner and portfolio manager at Genus. And with me this week is Mike Thiessen. Mike is also a partner and he is the director of Sustainable Investments. Hi, Mike. How are you doing today?

Mike Thiessen: [00:00:23] I see you doing well. How are you?

Sue Talbot: [00:00:26] Good, good. Thanks for joining us this week. So why don’t we start off, as we always do, with a recap of the markets.

Mike Thiessen: [00:00:34] Sure, yeah, so this week, the markets were overall, overall, they did well. So the S&P 500 was up over a percent this week, TSX up over a percent and a half. Some bigger news stories this week, one of them being on Monday. Tech stocks really had a rally. So the Nasdaq was up almost two percent. So we saw companies like Amazon, Apple, Tesla, a lot of these bigger names really have good days. And part of this is just due to easing over worries about inflation and interest rates rising and kind of more confidence in the monetary policy of the Fed and other central banks. So even the 10 year Treasury yields decreased on Monday as well. And then later on this week, there was a decrease in jobless claims in the US. So the jobless claims are at an all time pandemic lows for the US. So it’s just further signs of reopening in the US.

Sue Talbot: [00:01:33] And what does this mean for our client portfolios? Did we make any changes this week?

Mike Thiessen: [00:01:38] So we didn’t make any changes. We’re continuing with the overall reopening trade, so we’re really confident that the US is continuing to reopen in Canada. We’re going to have we’re going to see more reopening later on this summer and then a lot in the fall. So we’re holding on to that overall trade. So we’re still overweight sectors like financials, materials, industrials, energy for the conventional accounts. So overall, we’re just focusing on the factor.

Sue Talbot: [00:02:06] Ok, great. So let’s talk about some recent news. And it’s not often that three big oil supermajors are in the news all at once, but that happened this week with Exxon, Chevron and Shell, and it centred around one theme, climate risk. So at Exxon, a small activist group unseated two board members. And at Chevron, shareholders voted in favour of encouraging the company to reduce emissions. And at Shell, they were ordered by a Dutch court to slash its emissions harder and faster than planned. So I want to talk a little bit more about what happened at Exxon and Shell. So at Exxon, the activist group that unseated the board member only owned about zero point two percent of the shares. And normally you would need a bigger stake really to make a difference there. So that was a bit unusual. And they also managed to rally Exxon’s second biggest shareholder, BlackRock. And of course, when they got on board, everybody else followed suit. So my question is, is shareholder engagement becoming more important or what does this mean for the future of shareholder engagement?

Mike Thiessen: [00:03:19] Yeah, I think it’s definitely becoming more important, especially around climate change, because governments are far more supportive of climate action in the courts, as we’ve seen, are much more supportive of climate action. A lot of these courts are trying to hold up the Paris agreement that most countries around the world have signed. So I think that it’s really emboldening and really empowering activists to do more of this type of work. And so I think it’s really setting a precedent. And right now there’s lawsuits all around the world related to climate change for these large oil and gas companies. So I think that we have this big precedent in the Netherlands. I think that’s going to translate to a lot of these other lawsuits that might not be. Forty five percent reductions, because that’s quite a large reduction. And I think that it is setting that precedent and it’s really just empowering activists. And so I do think shareholder engagement is is becoming a bigger deal and more powerful when it comes to oil and gas.

Sue Talbot: [00:04:18] Right, and at Genus, we also use shareholder engagement as well. Is that correct?

Mike Thiessen: [00:04:23] Yeah, Genus we believe that shareholder engagement is a big part of investing and a big part of sustainable investing as well. So within our within our sustainable accounts, we’re only investing in companies that we agree with in terms of their overall business model and the products that they’re selling. But all of these companies still can improve. No company is perfect. And so there’s areas where we can encourage those companies to get even better, whether it’s a retail company or a mining company or a tech company. So so we partner with an organization called Share and they have an excellent team that really focuses on shareholder engagement and works with us on that to improve these companies.

Sue Talbot: [00:05:06] And let’s talk more about Shell, so you mentioned the courts and they have already agreed to reduce their emissions by 20 percent, but the court says that’s not enough. They need to do more. And so they were ordered to reduce by 45 percent within the decade. So what consequences does this ruling have for the rest of the global fossil fuel industry?

Mike Thiessen: [00:05:30] Yes, it means that a lot of these companies are going to have to transition faster than they thought they were going to have to. Forty five percent reduction, as I was saying, is very is a very significant reduction by 2030. So they’re going to have to do a lot of investment in renewable energy, in carbon capture, in carbon credits, probably as well to really get those get the overall emissions down. And so other large oil and gas companies are going to look at this and realize that they are they’re open to this same risk. There could be a court order against them at some point. So they need to start making moves ahead of time. So I think that it’s just really give you the oil and gas sector, kind of a push in that direction, knowing that they have to start making a transition.

Sue Talbot: [00:06:20] And would you say this investors’ sudden enthusiasm for energy companies transition to cleaner energy, is that is this just out of the goodness of their heart or do you think there’s a financial incentive here as well? And maybe you can comment a little bit more on that?

Mike Thiessen: [00:06:36] Mm hmm. Yeah, I would guess that it’s not out of the goodness of their heart for these oil and gas companies. I think that they’re looking at their risks as a company and they see this as one of the biggest risks that they have is, is the potential litigation in courts, but then also the cultural backlash against their companies. So in order to reduce these risks as a company, they need to start transitioning their their overall portfolio to do more renewables, to be your sources and invest in more technologies like carbon capture.

Sue Talbot: [00:07:10] Ok, thanks, Mike. We’ll end it here again. Thank you for your comments and your insight. And to our viewers, if you have any questions, please reach out to your portfolio manager or if you’re new to Genus. There’s contact information on our Web site. So thanks again, everybody. Have a great weekend and we’ll see you here next week. Thanks, Mike.

Mike Thiessen: [00:07:32] Thank you. Bye.

Sue Talbot: [00:07:33] Bye.