Whatever your feelings about the fossil fuel question (and especially if the feelings are strong), it’s worth taking a moment to acknowledge that this is a complex issue, and it’s not necessarily helpful to approach it with either a simplistic “pro-environment” mindset or a simplistic “pro-business” mindset.
Can you be supportive of the oil industry and still believe that “unless there is a major shift in how we produce and consume energy, there is only a small chance of the world limiting warming associated with climate change to two degrees Celsius”? Yes, you can: the quote is taken from a speech by Ben van Beurden, Shell’s CEO. But, as he went on to highlight later in the same speech, “in Africa [and] in much of the world access to energy is the difference between prosperity and poverty. Sometimes between sickness and health.” Rising global energy demand is largely driven by legitimate aspirations of the emerging middle class. That demand cannot be dismissed.
These two considerations (environmental risk; rising energy demand) together add up to a much tougher set of choices than either creates on its own. And rational assessment of the choices is made more difficult by the natural tendency toward what psychologists call “belief overkill”.
Belief overkill is the inclination to hold positions that are aligned to a favored conclusion. In a 2007 paper1, Don Ezra and I summarized one academic study: “people either believe (a) that the absence of a test ban treaty harms international relations and that the value of tests is small and that there are substantial health risks attached to them and that they are unlikely to lead to major weapons improvements or (b) the opposite on all four points… it tends to be all or nothing.” Another study shows that opinions as to the moral acceptability of capital punishment are closely tied to opinions as to its effectiveness as a deterrent; yet another shows how the correlation between economic conservatism and opposition to abortion has changed over time, reflecting party political lines2. It’s no accident that the examples here are all controversial topics; it’s the emotive issues where belief overkill is most likely to arise.
While many aspects of investment are not emotive, climate change certainly can be. Hence, the oil company announcements will have provoked a reaction from many investors. Some may be at one cynical extreme: “it’s a disgrace that successful companies should cave in to the tree-huggers.” Others may be at the (also cynical) other extreme: “I’m sure this is just window-dressing; there’s no way big oil really wants more transparency.”
But these extremes are bad places to be. Polarized views may increase our enjoyment of sporting events, but they may lead to bad investment decisions. Belief overkill means opinions being based on a tribal stance rather than rational analysis.
While there may be few easy answers on the fossil fuels, better disclosure is one step that can be taken, and it is good to see the steps Shell and BP are taking on this front. That’s not the end of the story, but it is a positive development.
Meanwhile, as investors consider the wider implications of this question, they would be wise to recognize—and resist—the perils of belief overkill.