Oil firm bosses’ pay ‘incentivises them to undermine climate action’
Lucrative pay and share options have created an incentive for oil company executives to resist climate action, according to a study that casts doubt on recent net-zero commitments by BP and Shell.
Compensation packages for CEOs, often in excess of $10m (£7.2m), are linked to continued extraction of fossil fuels, exploration of new fields and the promotion of strong market demand through advertising, lobbying and government subsidies, the report says.
The setup with executives runs counter to efforts around the world to keep global heating to 1.5-2C (2.7-3.6F) above pre-industrial levels.
Boardroom rewards also underpin a skewed corporate logic that is slowing the world’s path to decarbonisation, according to the study, which was exclusively shared with the Guardian before publication in the Energy Research and Social Science journal.
Richard Heede, of the Climate Accountability Institute in the US, a coauthor of the paper, said the discovery showed that the need for changes in corporate structures was more urgent than consumer behaviour changes.
“We show that executives have personal ownership of tens or hundreds of thousands of shares, which creates an unacknowledged personal desire to explore, extract and sell fossil fuels,” Heede said. “That carbon mindset needs to be revised by realigning compensation towards success in lowering absolute emissions.”
The study tracks ExxonMobil, Chevron, Shell and BP – four of the biggest “carbon major” oil companies – since 1990. This was around the time the global public heard the first high-profile warning about the dangers of burning fossil fuels.
Executives had been told of the threat many years earlier, but instead of working on a transition to cleaner, safer forms of energy, they ramped up production, played down risks and adopted public relations campaigns that misleadingly presented oil companies as part of the solution rather than the source of the problem.
Between 1990 and 2019 the four companies made a combined profit of about $2tn. A minuscule fraction of these funds has been invested in lowcarbon energy.
ExxonMobil allocated 0.22% of its capital expenditure to low-carbon energy in the eight years until 2018. The share at Chevron was almost identical.
Shell managed 1.3% and BP 2.3%. None were aligned with a 1.5C pathway, the report says.
Instead, the overwhelming bulk of the profits was either ploughed back into oil and gas extraction, invested in buying back shares, paid out in dividends to shareholders or used to lobby politicians, undermine climate science and pay for greenwashing advertisements.
In the US, lobbying expenditures for the four companies totalled $731m between 1998 and 2019. Their corporate political donations in the US, stretching back to 1990, were worth $59m.
As public pressure and scientific evidence strengthened, the big four moved through the gears, the study asserts. “Business as usual” (pretending no problem existed) in the 1980s became “incremental adaptation” (casting doubt on the science as an excuse to move slowly) in the 1990s and early 2000s, and has today turned into “partial diversification” (accepting the science, but moving gradually towards long-term goals).
Despite the change in tactics and public rhetoric, the long-term strategy was always the same: securing a social licence to extract oil and gas. All four companies plan to continue extracting fossil fuels after 2050.
The co-author of the paper, Dario Kenner of the University of Sussex, said Shell’s and BP’s recent announcement of a net-zero goal by 2050, and Exxon’s and Chevron’s endorsement of carbon pricing, should be seen as similar tactics.
Kenner said: “When BP, Shell and others talk of net zero, they are trying to stay part of the decision-making process. They want to be in charge of the transition as much as possible so they can slow it down – that is the whole point of trying to convince society to trust them.”
He added that comparisons of the targets set by individual companies were a distraction from the more important role the government should play.
“It can’t be just about what Shell is doing or BP. It must be industry-wide. And should be about acting on climate science and phasing out oil and gas in line with a 1.5C target.” He said executive fortunes depended, however, on continuing production and sales.
The study examines the high levels of boardroom pay that motivate individuals to continue corporate practices that are destabilising the climate.
At least seven executives received more than $10m in 2018, the most recent year covered by the study. Shell’s CEO, Ben van Beurden, was the top earner with $23,069,040.
Stock options make up a growing share of that compensation, which the study authors say encourages executives to use profits for share buybacks rather than investment in renewable energy.
Another dataset ranks the carbon weight of each senior executive’s shareholdings, based on the amount of oil and gas the company has pumped out of the ground in a given year. In 2018, John Watson, the CEO of Chevron, topped this list with a personal emissions share of more than 600,000 tonnes, which is more than 100,000 times that of the average UK citizen.
“This paper shines a light on incentives in corporations that may not align with their public commitments to get to net zero by 2050,” Heede said. “Companies need to review compensation and align it with low-carbon reinvestment targets.”
He acknowledged that recent announcements by Shell and BP go further than US companies in investment in renewables and pay structures, but said transition plans across the industry needed to give detail on absolute emissions reduction targets, and reinvestment plans, and firms should be more transparent and less reliant on tree-planting offsets.
Corporate lobbying and advertising should switch, Heede said, from greenwashing to frank recognition of the dangers of fossil fuels and promotion of clean alternatives.
The paper suggests they will need a push from outside. It concludes that oil and gas companies are ill-structured for decarbonisation at the speed and scale demanded by climate science. “This raises the need for further external pressure, in particular by governments.”
In the past two years, there have been some changes, though the pace varies from company to company. Shell told the Guardian it had introduced an energy transition performance metric that was now worth 20% of its longterm incentive plan. “We were the first major energy company to connect executive pay to the energy transition in this way,” a spokesperson said. This February, Shell said the pay of more than 16,500 staff was now linked to a set of short- and long-term decarbonisation targets. The company said there was no longer a link between production volumes and executive renumeration.
Chevron said the conclusions of the study were inaccurate and misleading. “Executive compensation is determined by the independent directors of the board, advised by an independent compensation consultant. Our programme design aligns with shareholder interests and supports the company’s focus on ‘higher returns, lower carbon’. Energy transition performance measures are directly tied to the compensation of our executives and most of our employees in the company’s annual bonus programme,” a spokesperson said. The company said it was working to help the world achieve lower-carbon energy by increasing the use of renewable sand offset sand investing in low carbon technologies. Exxon Mobil said its compensation programme was designed to incentivise actions that create sustainable shareholder value based on careful consideration of current and future risks, such as those related to climate change. In a statement, it said executive pay was aligned with the results of their decisions and the returns of shareholders over the long term.The authors of the new report said Shell, and to a lesser degree BP, had increased low-carbon investments, but its measures were still insufficient to meet the 1.5C target without significant emissions overshoot. The US firms, they said, were much further behind in responding to the risks. The key was an industry-wide approach in line with global climate governance rather than voluntary commitments that could be rolled back later, as has happened in the past, the authors of the report said. “Our study clearly shows why it is time to stop spending so much time being distracted by what these companies promise,” Kenner said. “We should instead be discussing more the role of policymakers.”
BP said its remuneration policy supports the company’s goal of reducing greenhouse gas emissions to net zero by 2050 of earlier in line with Paris targets. A spokesman said this will involve the most extensive transformation in BP’s history. “By 2030, the strategy aims to increase our investment in low carbon energy to $5 billion a year, to have developed 50GW of renewable generating capacity, and to have reduced BP’s upstream oil and gas production by 40%.”