Latest news: Chevron announces decision to lower long-term price assumptions
We believe that long-term price assumptions made by fossil-fuel-extractive companies in their reports and accounts need to be carefully scrutinised to ensure that they give consideration to a decarbonising world.
We therefore welcome the news that oil and gas company Chevron has announced its decision to lower the long-term commodity price assumptions used in its accounts, in a press release about its capital and exploratory budget for 2020. It reported that this reduction resulted in a $10-11bn impairment on gas and other assets. Chevron further stated that it would be applying increased capital discipline going forward.
This announcement comes just a few days after the Spanish oil and gas company Repsol set out its decision to cut the long-term commodity price assumptions used in its accounts, resulting in a EUR4.8bn impairment.
These announcements are significant. They reflect oil and gas companies’ growing realisation that they face structural reductions in long-term oil and gas prices, rather than merely cyclical lows. Repsol explicitly linked its accounting adjustment to the need to align with the Paris goals and the new economic reality of decarbonisation.
We have been calling on oil and gas companies to review these long-term commodity price assumptions used in financial statements for the past two years, and believe that these announcements are just the beginning of what is to come. Based on our analysis, oil and gas companies have generally used between $70-85 per barrel for impairment testing. And yet Carbon Tracker, a climate research firm, and Aurora, a market intelligence firm, have both suggested Paris-aligned commodity prices closer to $30-40 per barrel.
It is vitally important that audit committees and audit firms act sooner rather than later to ensure prudent assumptions are used, despite the risk of impairments. Overstatement may encourage excessive investment into new fossil fuels. This will not only increase the risk of assets being stranded in the future but work against efforts to combat climate change.
At Sarasin & Partners, we consider ourselves stewards of our clients’ assets.
- We are long-term in our approach to investment; we look for businesses that will create enduring value for our clients; and we aim to own - as opposed to trade - these companies
- We seek out and support exceptional executive teams, but hold them to account where we have concerns
- We are not preoccupied with short-term market movements, but look at underlying financial performance and its sustainability
Taking a long-term view in our investment process
As long-term investors we believe it is critical to take a holistic view of the underlying financial performance of a company and its sustainability: as we look a decade ahead, the impact of a company on the environment and society matters in our evaluation of its investment prospects. We also consider very carefully the potential impact of a wide variety of trends ranging from climate change to labour conditions and resource scarcity as an integral part of our thematic investment approach.
Active engagement with companies
Investors in companies have an important shared responsibility in holding the board and company executives to account for the performance of the business. On behalf of our clients we closely monitor investee companies and engage with management on issues of concern relating to corporate governance, capital structure and strategy. We carefully vote on matters put to shareholders. Poor governance can adversely affect the returns for investors and – equally – good stewardship can lead to better returns.
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Responsible stewardship does not stop with our stock selection and engagement activities. Where we believe we can play a positive role in shaping markets and regulation in a way that contributes to boosting sustainable economic growth, we will engage in policy outreach. We undertake much of our policy work in collaboration with other investors.
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UN Principles for Responsible Investment
We are signatories to the United Nations' Principles for Responsible Investment, and are pleased to report that we have been graded A for our stewardship approach.
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