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The Shell Ruling: Are Share Price Movements and ESG out of Sync?

By January 18, 2022No Comments

In what is being viewed as a landmark victory of community activists and environmentalists, oil giant Shell had its planned exploration of South Africa’s Wild Coast halted following a scathing court ruling in the Makhanda High Court. Judge Gerald Bloem noted that Shell’s right to explore the country’s eastern coastline was awarded without due consultation of local communities.[1] This followed campaigners arguing that the seismic testing would affect marine life in the area characterized by large tracts of sandy bays and untouched beaches.

One would think, given the growing consensus among businesses and investors of the importance of sound ESG practices, that the oil giant would be penalized by the market following the ruling. However, Shell’s valuation has surged with its share price increasing by 9%, with the oil and gas sector outperforming the market if one looks at the Dow Jones Industrial Average and S&P 500.[2]

At a distance, it would beggar belief that Shell has in some perverse way benefitted from ESG malpractice. On closer inspection, one may start to question whether ESG practices continue to play second fiddle to macroeconomic factors and rigid investor doctrines around company valuation.

Governments around the world continue to ease COVID-19 restrictions with more than 50% of the world’s population receiving at least one vaccination dose.[3] Oil demand is thus steadily increasing as the need for transportation surges, and a global policy U-turn to the green energy transition continues. Despite briefly pulling back amid the spread of the Omicron variant, crude oil prices are recovering. This ultimately contributes to Shell’s share price bump with global supply lagging and the company recently announcing the commencement of up to $1,5 billion of share buybacks.[4]

While these factors would naturally strengthen Shell’s position in the market, they appear to dwarf the company’s widely covered ESG indiscretion in the eyes of investors. This is compounded by several studies suggesting that oil stock performance and crude oil prices effectively move in sync, intensifying the debate around how share prices are sensitive to ESG issues – especially those occurring in market backwaters across emerging markets.[5]

This begs the question of whether investors are incorporating ESG considerations into company valuations with the same gusto that they are when quizzing company directors on operational and risk issues. Does the market view Shell’s lack of consultation of communities in South Africa’s poorest province as financially immaterial and operationally inconvenient? Have we not yet reached the proverbial Damascus moment where non-financial performance influences financial returns? In the case of Shell, the markets show us that we may yet have a way to go in finding the answers.

References:

[1] South Africa court blocks Shell’s oil exploration – BBC News

[2] https://www.shell.com/investors/information-for-shareholders/share-prices.html

[3] https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/?utm_medium=cpc_search&utm_campaign=NB_ACQ_DSAXX_DSATESTTCPAXX_EVG_XXXX_XXX_COALL_EN_EN_X_BLOM_GO_SE_XXX_XXXXXXXXXX&gclid=EAIaIQobChMIrKLY5Jys9QIVkOvtCh1UhQ9uEAAYASAAEgKd1vD_BwE&gclsrc=aw.ds

[4] https://www.shell.com/investors/information-for-shareholders/share-buybacks.html#:~:text=Royal%20Dutch%20Shell%20plc%20(the,buybacks%20on%20December%202%2C%202021.&text=The%20form%20and%20timing%20for,be%20announced%20in%20early%202022.

[5] https://www.fool.com/investing/2016/08/14/how-do-crude-oil-prices-affect-oil-stocks.aspx