Sarah Miller, New York - Feb 1, 2021

What is “stakeholder capitalism,” and what does its new mainstream popularity mean for the oil industry? The phrase features prominently as business, financial and political leaders struggle to find new footing in a still-unstable post-pandemic economic and social landscape. A notable proponent is giant money manager BlackRock’s CEO Larry Fink, including most recently in the 2022 version of his now closely scrutinized annual letter to CEOs. One useful way to look at stakeholder capitalism is as a rhetorical tool for backing off from the radically free market, finance-driven economic fashions of the last 40 years without dumping globalized capitalism along with the neoliberal bathwater — as many climate activists and some right-wing populists advocate. One thing stakeholder capitalism does not promise, however, is to save or even extend the life of the fossil fuel industry. On the contrary. And thinking it does could be a fatal error for oil companies.

Way back in 2019, before the pandemic, the Business Roundtable of top US chief executives declared the purpose of a corporation to be to “serve not only their shareholders ... but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.”

Probably not coincidentally, those are very close to the words Fink used to define the stakeholder capitalism he describes as the foundation of “truly great companies” in his 2022 letter to CEOs. It is also a direct challenge to neoliberal guru Milton Friedman’s central thesis: Good companies are attentive only to their shareholders, a.k.a. shareholder capitalism.

Like that of so many others these days, Fink’s message is that the best bet for long-term corporate health is paying more attention to workers and customers, and even accepting a certain amount of regulation as a means of supporting “the communities your company relies on to prosper.”

Implicitly, this amounts to a rejection of the singular focus on short-term earnings that became the reining global economic wisdom in the 1980s. That focus was a feature of the gradual ascendance of New York-anchored finance and California-style libertarian tech and the fall from grace in the US and much of Europe — Germany being an exception — of manufacturing and, significantly, resource extraction. Wall Street over Main Street and the Oil Patch, if you will, and Silicon Valley over everyone.

Back in the 1980s, CEOs of major oil companies could still shrug off the importance of share price gyrations, and shareholders weren’t accustomed to giving out unsolicited advice in public to Exxon (before it swallowed Mobil) and Royal Dutch Shell (before it quit being Dutch royalty). Finance industry-backed corporate consolidation made that attitude untenable soon enough. Quarterly corporate and shareholder returns became something close to a be-all and end-all in the era of intense financialization, especially in the Anglophone world, but with reverberations elsewhere.

Still, it was not unusual through the 1990s and even into this century to hear senior oil industry executives bemoaning how Wall Street’s fixation on quarterly earnings undervalued the benefits to their companies of the long-term investment strategies that had typified the oil and gas industry through much of its existence — and the importance of staff retention through bad times as well as good. The battle lines on shareholder versus stakeholder considerations weren’t as rigidly and clearly drawn as it can seem from the vantage point of the 2020s.

Too Late for Oil

For Big Oil, however, there’s no point in saying “I told you so.” The turn away from shareholder toward stakeholder capitalism — even by as consummate a representative of shareholders and Big Finance as Fink — has come too late for the oil industry. Neither Fink’s emphasis on the importance of companies delivering “long-term value,” nor his declaration that stakeholder capitalism has no “social or political agenda” and is not “woke,” has changed — or is likely to change — his conviction that the economy has to get off fossil fuels as quickly as possible. Or similar convictions held by others with hands on the throttles of the world’s big economies and corporations.

Longer-term investment horizons and some degree of manufacturing may be back in fashion, but the oil patch is not, even if speculative investors are happy to pick up some short gains on oil company shares during a period of stock market volatility.

“Most stakeholders — from shareholders, to employees, to customers, to communities, and regulators — now expect companies to play a role in decarbonizing the global economy. Few things will impact capital allocation decisions — and thereby the long-term value of your company — more than how effectively you navigate the global energy transition in the years ahead,” Fink wrote in his letter this January.

In a typically hard-hitting critique of Fink’s letter, conservative economic maven and Real Clear founder Robert Duvall gives somewhat tongue-in-cheek praise to the BlackRock leader’s denial of “woke” sentiments and his advocacy of long-term corporate profitability, but accuses Fink of undermining his own prescriptions — and even stoking social unrest — by attempting to gradually reduce investment in new oil and gas supplies.

Rising Insurance Claims

In practice, though, Fink’s still-restrictive stance toward fossil fuel investment seems destined to win out over Duvall’s let-it-rip stance on investment in fossil fuels. First, because weather continues to get worse, at a higher cost to the non-energy corporations, insurers and other financial institutions that dominate Western economies — and BlackRock’s roughly $10 trillion portfolio.

Reinsurance giant Munich-Re in January estimated worldwide insured losses for 2021 at $120 billion, the second highest on record after tornado-ridden 2017. Munich-Re’s chief climate scientist was quoted as warning: “The 2021 disaster statistics are striking because some of the extreme weather events are of the kind that are likely to become more frequent or more severe as a result of climate change." Total weather- and climate-related losses for last year, uninsured as well as insured, are variously estimated at either side of $300 billion.

Following from this destructive weather, polls show a growing majority of people accept that such risks are rising and are caused, at least to some unspecified degree, by human activity — shorthand for greenhouse gas emissions and burning of fossil fuels. That’s true even in the once climate change-skeptical US.

Decarbonization isn’t going away, no matter how hard Duvall and others may argue that it is incompatible with economic growth, a point with which harder-core climate activists agree, incidentally, albeit with strikingly different judgments on whether that’s bad or good. Moreover, reduction in fossil fuel use is likely to speed up with the high oil and gas prices brought on by underinvestment.

This helps to explain why constraints on fossil fuel investments are pushed so hard by climate activists, along with money managers such as Fink, who will also demand that the heftier proceeds be returned in large part to shareholders through higher dividends and share buybacks. Whatever the longer-term results, it’s an approach that offers considerable old-fashioned short-term benefit for shareholders, as Fink and friends have probably noticed.

The question is not whether investors and governments will reverse course on climate policy. They will not. It’s how, and how hard they will push disinvestment in fossil fuels, even as they continue to hold oil company shares. They may be worried about inflation at the moment, but revving up shale investment in a quest to bring down oil and gas prices isn’t a quick solution, or a long-term answer, many on Wall Street are recommending these days.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.