The Proof of the BPudding

It seems we have finally arrived at the point where the age-old battle of ‘divest vs. engage’ has found a real-life testing ground. BP has become an attractive target for activist head fund Elliot Management and if they win, the contender for the title of ‘greenest oil major’ will certainly lose the few sustainable sprouts it managed to grow.

Everyone who has been around the sustainable investment block knows the arguments behind divestments: if money flows out of unsustainable stocks, say ‘brown’ equities for example, then their cost of capital will increase thereby creating an incentive for the company to become more green. The counter argument offered by the opposing camp, the side of the active owners, is that if responsible shareholders leave ‘brown’ companies, there will be no one left to drive their transition. The stocks will fall into the hands of reckless mavericks who will try to milk the dirty businesses for all the money they can get, regardless of their negative environmental impact.

The ‘cost of capital’ argument always stroke me as oddly over-optimistic. For any asset, there is a price at which a buyer will be ready to step in. Also, it makes sense that transitioning or doing business in a cleaner way is typically more expensive in the short term thank squeezing out every cent out of a business for whatever you can get away with. It was only a question of time, then, until a vulture fund like Elliot Management, one of the most aggressive and successful activist hedge funds in the world with $70 billion under management, found its way into the oil business.

Why is BP such an attractive target? Compared to its peers, BP is currently the smallest with a market value of around $90 billion. Its stock performance has lagged behind other oil & gas producers, due in part to its weak earnings, declining sales but also a 2023 shady CEO departure. Mostly, critics will say that BP is stuck in a “transition trap” as it made promises to reduce its reliance on oil and gas revenue by investing in renewable energy without fully committing to it. Since 2020, the company raised its investments in energy transition from 3% of capex to as high as 40% in 2022. With the increase in interest rates in recent years, the company then suffered the consequences of a less profitable renewable energy sector. As a result, the company has now abandoned its production cut targets and halted renewable projects, a u-turn that disappoints both sustainable and short-term minded investors, as they both believe the company isn’t doing enough in either direction.

But who are these disappointed investors? Well, unsurprisingly it is the mega-passive managers who are listed at the top of the ownership list. BlackRock, Vanguard, State Street Global Advisors, UBS AM and Legal & General Investment Management together own more than 20% of the shares. Norges Bank Investment Management owned 4.4% as of the end of last year. Apparently, Elliott Management as now climbed towards the top of the cap table, with a near-5% stake worth £3.8 billion, just below BlackRock’s 9% and Vanguard’s 5%.

Next week already, at BP’s capital markets day on 26 February, CEO Murray Auchincloss is likely to unveil plans to try and satisfy the aggressive hedge fund’s wishes, among others’. Indeed, who can blame a top dog for wanting to retain his job and perhaps rebuild his bonus, of which he lost about half this year, due to poor financial performance.

Responsible investment firms, meanwhile are trying to counteract the potential advances of short-termism over BP’s strategy. In a letter to BP Chariman Helge Lund, 48 investors including Rathbones Investment Management, Phoenix Group, Robeco and Royal London Asset Management, demand that shareholders be given then possibility to vote on any plans to row back on its climate goals.

It will be thrilling to find out who will win in this clash of titans. Indeed, what happens here may either prove or invalidate the fundamentals of sustainable investment theories. How the ETF providers influence the outcome will also be determinant. As, we have witnessed an increasing number Nordic institutions moving their allocations to passive investments to diminish their costs, we’re about to see whether or not, this has de-facto scaled back their sustainability commitments. Unfortunately, if the latest ShareAction investigation has any predictive value, we won’t hold our breath.

It seems we have finally arrived at the point where the age-old battle of ‘divest vs. engage’ has found a real-life testing ground. BP has become an attractive target for activist head fund Elliot Management and if they win, the contender for the title of ‘greenest oil major’ will certainly lose the few sustainable sprouts it managed to grow.

Everyone who has been around the sustainable investment block knows the arguments behind divestments: if money flows out of unsustainable stocks, say ‘brown’ equities for example, then their cost of capital will increase thereby creating an incentive for the company to become more green. The counter argument offered by the opposing camp, the side of the active owners, is that if responsible shareholders leave ‘brown’ companies, there will be no one left to drive their transition. The stocks will fall into the hands of reckless mavericks who will try to milk the dirty businesses for all the money they can get, regardless of their negative environmental impact.

The ‘cost of capital’ argument always stroke me as oddly over-optimistic. For any asset, there is a price at which a buyer will be ready to step in. Also, it makes sense that transitioning or doing business in a cleaner way is typically more expensive in the short term thank squeezing out every cent out of a business for whatever you can get away with. It was only a question of time, then, until a vulture fund like Elliot Management, one of the most aggressive and successful activist hedge funds in the world with $70 billion under management, found its way into the oil business.

Why is BP such an attractive target? Compared to its peers, BP is currently the smallest with a market value of around $90 billion. Its stock performance has lagged behind other oil & gas producers, due in part to its weak earnings, declining sales but also a 2023 shady CEO departure. Mostly, critics will say that BP is stuck in a “transition trap” as it made promises to reduce its reliance on oil and gas revenue by investing in renewable energy without fully committing to it. Since 2020, the company raised its investments in energy transition from 3% of capex to as high as 40% in 2022. With the increase in interest rates in recent years, the company then suffered the consequences of a less profitable renewable energy sector. As a result, the company has now abandoned its production cut targets and halted renewable projects, a u-turn that disappoints both sustainable and short-term minded investors, as they both believe the company isn’t doing enough in either direction.

But who are these disappointed investors? Well, unsurprisingly it is the mega-passive managers who are listed at the top of the ownership list. BlackRock, Vanguard, State Street Global Advisors, UBS AM and Legal & General Investment Management together own more than 20% of the shares. Norges Bank Investment Management owned 4.4% as of the end of last year. Apparently, Elliott Management as now climbed towards the top of the cap table, with a near-5% stake worth £3.8 billion, just below BlackRock’s 9% and Vanguard’s 5%.

Next week already, at BP’s capital markets day on 26 February, CEO Murray Auchincloss is likely to unveil plans to try and satisfy the aggressive hedge fund’s wishes, among others’. Indeed, who can blame a top dog for wanting to retain his job and perhaps rebuild his bonus, of which he lost about half this year, due to poor financial performance.

Responsible investment firms, meanwhile are trying to counteract the potential advances of short-termism over BP’s strategy. In a letter to BP Chariman Helge Lund, 48 investors including Rathbones Investment Management, Phoenix Group, Robeco and Royal London Asset Management, demand that shareholders be given then possibility to vote on any plans to row back on its climate goals.

It will be thrilling to find out who will win in this clash of titans. Indeed, what happens here may either prove or invalidate the fundamentals of sustainable investment theories. How the ETF providers influence the outcome will also be determinant. As, we have witnessed an increasing number Nordic institutions moving their allocations to passive investments to diminish their costs, we’re about to see whether or not, this has de-facto scaled back their sustainability commitments. Unfortunately, if the latest ShareAction investigation has any predictive value, we won’t hold our breath.