Investors influence where energy windfall profits are pumped

May 19, 2022
Shareholders can ‘tip the balance’ of investment between fossil-fuel dependence and renewable financing, says MSCI

A ‘bump’ in global greenhouse gas emissions within 12 months is likely if western countries replace Russian gas supplies with coal and Russia continues to sell fossil fuels elsewhere, warns MSCI, adding that investors can influence where windfall profits of energy companies are reinvested.

The global equity index firm says if, in an ‘extreme worst-case scenario’, Europe replaced all Russian gas imports with coal, emissions could rise by as much as 0.8 gigatons of carbon dioxide equivalent in the first year.

The carbon budget calculus remains inescapable, MSCI says in its new analysis of the potential impact of the war on the world’s carbon emissions and decarbonization efforts to reach net-zero emissions by 2050. ‘A bump in emissions today means either exceeding the 1.5ºC limit or cutting emissions faster and more sharply tomorrow to stay within the budget,’ it notes.

MSCI’s climate value-at-risk model reveals the ‘ultimate intergenerational trade-off’: exceeding the carbon budget would mean higher costs for future generations. Yet staying within the budget would require people today to bear higher costs related to a clean-energy transition.

Investors or governments may direct profits

The report says investors have a key role to play in determining the path forward. ‘As shareholders, they can influence where windfall profits of energy companies are reinvested,’ it notes. ‘If fully reinvested in clean energy, it could nearly double the recent rate of renewable investments and tip the balance decisively away from prolonged fossil-fuel dependence. Without a purposeful plan for reinvestment, governments may step in to tax the windfall profits to finance renewables and provide financial relief for households suffering from higher energy costs.’

Governments are under increasing pressure from opposition parties and campaigners to impose a windfall tax on energy companies to help offset rocketing energy prices. Earlier this month, Shell reported an adjusted profit of $9.1 bn – $1 bn ahead of forecasts and up from $3.2 bn for the same period last year. UK Prime Minister Boris Johnson has, so far, rebuffed calls for a windfall tax, believing the measure would discourage energy companies from making green investments that would eventually keep energy prices down.

The Shell board is asking shareholders to support the company’s energy transition strategy, implemented last year, by submitting its progress report to a shareholder advisory vote during its hybrid annual meeting in London on May 24.

Last week, former Bank of England governor Mark Carney and US climate envoy John Kerry both warned against deferring emissions reduction targets in reaction to the energy crisis triggered by the war in Ukraine.

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