It's Ridiculous To Expect Shell And BP To Invest In Green Energy

There's a shareholder resolution being presented to BP and Shell in the current round of annual meetings, one that asks them to invest more in renewable energy. The problem with this is that it betrays a horrible confusion about what it is that companies do and how technological change comes about. BP and Shell, and Exxon which was presented with a very similar demand last year, simply wouldn't be any good at renewable energy. They're just not the right organisations to be leading the charge into the technology. To think that they are grossly misunderstands what they do, what they're good at and how they are organised. Technological change comes from companies entering and exiting the market, not from specialised producers trying to change what they specialise in.

Here's one report of the resolution:

The Environment Agency’s pension fund has urged BP and Royal Dutch Shell to invest in renewable energy and do more to tackle climate change.

The government-backed agency’s £2.5bn fund has teamed up with more than 150 other investors, including the Church of England and several large local authority pension funds. They have filed shareholder resolutions urging both oil companies to take more action on global warming.

My criticism of this is nothing at all to do with whether climate change is happening, nor even whether we ought to do something about it or what that should be if we should (for the avoidance of doubt I advocate a carbon tax as does just about every economist who has studied the problem). Rather, it's that companies specialised in the production of fossil fuels are not the right people to be asking to roll out renewables or low carbon technologies:

“Climate change is a major business risk,” said James Thornton, chief executive of the environmental law organisation ClientEarth, which helped coordinate the resolutions. “BP and Shell hold our financial and environmental future in their hands. They must do more to face the risks of climate change. Investors can help them by voting for these shareholder resolutions.”

The thinking here seems to be that Shell, BP (and Exxon) are in the energy business. We need or want to change our energy system. Therefore it should be the extant companies in the energy system that lead that change. This is simply not so. Horse drawn carriage makers were in the transport business and the automobile industry didn't in fact grow from carriage manufacturers switching business lines. Train manufacturers are also in the transport business but the car industry didn't grow from them either. So it is with fossil fuel companies. They are collections of specialised knowledge and equipment. What they know how to do is extract, refine, distribute and sell fossil fuels. They have absolutely no specialist knowledge in how to build windmills, install solar panels (BP used to be the largest global manufacturer in fact but realised that it didn't know what it was doing and sold the business), distribute electricity or run a hydro-electric dam. To do all of those things you need a different set of specialties and those will be best found or housed in a different organisation.

The basic fact about technological change is that it is the firms doing it the old way that expire and the new firms doing it the new way which expand. There are exceptions, Nokia (or was it Ericsson ?) moved from making rubber boots into mobile telephones but we all point to that example because it is so rare. Far from shareholders urging the companies in which they have stakes to change their ways they should be doing exactly the opposite. Selling their stakes and using the capital to set up new organisations doing things in the new manner that they approve of.

Much the same point is encapsulated in the folk wisdom that you can't teach an old dog new tricks. The same is true of economic organisations. If they're specialised in one thing then that's great. And if we no longer need that thing done in that manner then close down the organisation. For that's actually how technological change happens, old firms exit the market with their old ways of doing things and new entrants move in to replace them. There's just not point in asking people specialised in fossil fuels to go play in renewables. They don't know how to do it.