UPDATE: Due to a technical error experienced between Sarasin’s third-party proxy voting service provider and ballot issuer, Sarasin’s votes in respect of certain resolutions put forward at Equinor ASA’s 2023 AGM were invalidated. The affected votes and Sarasin’s actual intention in respect of the votes are set out in the Statement appearing below. The technical error was outside of Sarasin’s control and is being investigated.
Equinor’s is failing to pivot quickly enough away from harmful fossil fuels. In part, this stems from its failure to reflect the economic reality of decarbonisation in its financial statements, leaving climate risks out of sight and, thus, out of mind. We will therefore vote against Equinor’s financial statements and other resolutions at their upcoming AGM, as outlined below. These votes build on our ongoing engagement also our votes last year.
Why should Equinor lead?
While every fossil fuel company needs to accelerate their transition to net zero, Equinor has a unique opportunity and responsibility to lead. The Norwegian government, a signatory to the Paris Climate Agreement, owns two-thirds of the company. The clarity of its majority shareholder’s commitment to deliver a 1.5°C cap on global warming should empower the Board and executive to act decisively. This is why Sarasin & Partners, alongside other CA100+ signatories, wrote to Norway’s Prime Minister in January to highlight our shared interest in pressing Equinor to deliver a more urgent transition plan.
Carbon today, transition tomorrow
Despite strong shareholder support for 1.5°C alignment, Equinor reiterated its commitment to stick with its current transition plan in its latest Annual Report. The CA100+ initiative and other research have assessed this plan as falling short of a 1.5°C-pathway.
The central problem with Equinor’s proposed plan is that it envisages investment in new oil and gas reserves. This contravenes the International Energy Agency’s (IEA’s) guidance that no new reserves can be developed if we are to deliver a 1.5C outcome1. Moreover, the company intends to maintain production at close to current levels until at least 2030. Added to this, for 2022, Equinor reported that its additions to its oil and gas exploration and production assets (specifically “plants property and equipment, intangibles and equity accounted investments”) rose 11% on 2021 levels; the equivalent for renewables actually fell 35%. Equinor’s proposal amounts to ‘carbon today, transition tomorrow’.
Head-in-the-sand accounting will result in risks to investor capital and the planet
The failure to pivot capital away from fossil fuels stems from Equinor not recognising the realities of decarbonisation in its accounts. As we explained elsewhere, a company’s financial statements are highly influential for capital allocation. The numbers tell management and investors how profitable the business is. Where the accounts leave out likely losses and/ or liabilities linked to accelerating decarbonisation, they will overstate the returns associated with fossil fuel activities. This drives excessive reinvestment.
Questionable assumptions in Equinor’s accounts
We welcome improved disclosures describing how decarbonisation and Equinor’s own climate commitments are accounted for in its 2022 financial statements. However, like last year, management and the auditor have concluded there is no reason to change any forward-looking assumptions; there are consequently no write-downs linked to climate change. This conclusion appears to rest on questionable assumptions, most notably:
- Decarbonisation will be gradual and consistent with warming likely well above 1.5C;
- The use of carbon capture and storage (CCS) will enable existing and new fossil fuel assets to continue in use;
- CCS costs associated with the transition plan do not need to be accounted for (as these seem to have been left out of asset impairment testing);
- Asset retirement obligations (i.e. clean-up costs that are borne when assets are closed down) remain a distant concern, as asset lives remain unchanged; and
- The cost of capital for carbon-intensive activities will not rise.
Each of these assumptions can be challenged. What if the use of renewables and other zero carbon technology continues to accelerate, undermining demand for fossil fuels more quickly than anticipated? What if governments decide that CCS is not as effective as renewables and other clean technology, and introduce fossil fuel production limits instead? What if banks and capital markets price in a premium to cover the rising risks of financing carbon-intensive activities? These are not far-fetched ideas – many are already playing out.
Equinor’s 1.5°C sensitivity seems overly optimistic
Equinor’s 1.5°C sensitivity analysis helpfully explores the exposure of upstream assets to lower oil and gas prices, as well as rising carbon prices. Management concludes they face a relatively low $4 billion impairment risk – just 7% of reported equity (31st December 2022). However, this assessment does not consider potential limits to production or increased costs of capital. It also excludes potential impacts for their largest business segment by sales: Marketing Midstream & Processing, which encompasses marketing, trading, processing and transporting oil and gas products.
This seems optimistic. Especially when, in a separate discussion of portfolio resilience to the IEA’s 1.5C pathway in the Annual Report, Equinor calculates that its existing portfolio could see 22% of its Net Present Value written down. It also states in the Notes to its accounts that that an immediate 30% reduction in commodity prices would see impairments of $14bn, around a quarter of reported equity.
While the recent surge in oil and gas prices linked to Russia’s invasion of Ukraine have provided temporary cover for all oil and gas companies, the long-term structural challenges remain unchanged. If anything, the IEA has underlined that higher energy prices are driving faster decarbonisation, not slower. Those oil and gas companies that double down on fossil fuels today will be more exposed tomorrow.
Auditor increases focus on climate in new Key Audit Matter
We are pleased to see EY added a new Key Audit Matter on climate change in its latest audit report on Equinor’s 2022 financial statements, reflecting its heightened scrutiny of this matter. It has also increased its commentary on how climate factors have been considered in its other Key Audit Matters, including on asset retirement obligations.
Notwithstanding these advances, EY provides no commentary on the gaps we identified. Specifically, it appears to approve of Equinor’s assumption that production will be unaffected by accelerating decarbonisation, with the cost of capital remaining unchanged. There is also no comment on how other business segments beyond the upstream assets might be exposed to climate risks.
Our votes at Equinor’s 2023 AGM
As there is no vote on the Audit Committee or Auditor at Equinor’s AGM, we have focused on the most relevant alternatives, as follows:
- Annual Report & Accounts (Resolution 6) – Against. While we welcome increased disclosures in the financial statements, key assumptions on asset lives, production forecasts and cost of capital remain optimistic. Planned carbon capture and storage seems to be unaccounted for, while asset retirement obligations are presumed to be a distant concern. We believe Equinor’s accounts fail to provide a reliable view of the climate risks embedded in the business, providing cover for continued climate harm.
- Remuneration policy & report (Resolutions 16.1 and 16.2) – Against. We cannot be certain that bonuses or other long-term incentives will only be awarded for performance that is aligned with the Paris Agreement. With the current non-aligned transition plan, we believe executives are being rewarded for non-aligned performance. We favour the introduction of a net-zero underpin that would provide a safeguard against such awards.
- Approval of remuneration for the company’s external auditor (Resolution 17) – Abstain. We welcome the climate-focused key audit matter and commentary on climate under other key audit matters. However, we remain concerned over the lack of commentary on how CCS costs are accounted for; how production forecasts are consistent with decarbonisation and the lack of adjustment to the cost of capital. We expect all of these would have a bearing on its assessment of the veracity of the accounts. We would also welcome more clarity on how EY determined the 1.5˚C sensitivity provided a reliable view of Equinor’s exposure to this accelerated decarbonisation pathway.
 Equinor, 2022 Integrated Annual Report, p. 4.
 Equinor 2022 Integrated annual report, p. 75.