Oil majors forced to reckon with climate impacts

Activist shareholders had a field day 26 May when they were able to force two oil majors—Chevron and ExxonMobil—to accept climate-friendly outcomes.

Activist investor Engine No. 1 won seats for two of its four nominees to the board of ExxonMobil in a rebuke for the company's management and its policies. The same day, some 61% of Chevron shareholders voted to force the company to reduce "Scope 3" GHG emissions generated by the use of its carbon-intensive products.

And if that wasn't enough, a district court in the Netherlands ordered Royal Dutch Shell to reduce its GHG emissions by 45% by 2030 compared with 2019 levels, marking a first-of-its-kind ruling that adds pressure to oil and natural gas companies to do more.

Kaisa Hietala, a former executive vice president of renewable products at Neste -- a Finnish refiner and marketer -- was elected to the ExxonMobil board, as was Gregory Goff, former chief executive of Andeavor, a US refiner now part of Marathon Petroleum, according to a preliminary count announced at the company's annual general meeting.

In December, Engine No. 1 nominated Hietala and Goff, along with Alexander Karsner, senior strategist at X (formerly known as Google X) and Anders Runevad, former chief executive of Vestas Wind Systems, a turbine manufacturer. After vote certification, ExxonMobil said it would report later on the outcomes of the remaining votes, including those cast for Karsner and Runevad.

No credible strategy

Since forming in November 2020, Engine No. 1 has been leading a proxy campaign against ExxonMobil, contending the company has "no credible strategy to create value in a decarbonizing world."

Prior to Engine No. 1's campaign, ExxonMobil's market capitalization halved and "ExxonMobil had been kicked out of the [Dow Jones Industrial Average]," the investment group said, adding this "historical underperformance occurred with growing oil and gas demand."

Engine No. 1, which holds a $54-million stake in a company with a $248 billion market capitalization, wants ExxonMobil to slash its capital spending and focus on the energy transition.

Shareholders didn't just vote for adding new directors to ExxonMobil's board. They also voted to support two other climate-related proposals on the proxy, including one asking ExxonMobil to report on how its climate lobbying aligns with the goals of the Paris Agreement and the other seeking disclosure of the climate change risks the oil major faces.

Rebuilding the balance sheet

The results of the votes were announced after the company took an unusual hour-long intermission and an equally prolonged question-and-answer session with CEO Darren Woods, who also was reelected to the board, as he welcomed the two new directors on board.

Woods maintained the company in the coming days would remain focused on "rebuilding its balance sheets" and would not divert any capital to new projects.

At the same time, Woods reiterated that ExxonMobil would continue to invest in low-carbon solutions, notably hydrogen, biofuels, and carbon capture, utilization and storage (CCUS).

During the same question-and-answer session, Woods also dismissed the notion that the recently issued International Energy Agency (IEA) report detailing a net-zero carbon emissions roadmap would cause the company to change its course.

Calling the IEA report "helpful," Woods took a swipe at critics who "are only reading the headlines. It is important to read the full report."

Half of the emission cuts identified in the report are dependent on technologies "that are not yet commercial," Woods said.

He also said the IEA understands that oil and gas companies will have a role to play in the net-zero future. What Woods did not say was that the IEA's net-zero carbon scenario envisions no new oil and gas field exploration, but it does see a role for them in promoting and developing CCUS technologies as well as hydrogen and offshore wind.

Woods said ExxonMobil has not yet found an opportunity to deliver "unique value" to the company's shareholders in the wind and solar space, though it remains the world leader in purchases of these energy sources.

Energy portfolio assumptions upended

Meanwhile, clean technology analysts, climate proponents and scholars, thrilled at the ExxonMobil vote, said they expect a change in the company's direction with the inclusion of the new board members.

"Wow. Engine No. 1 beat Exxon management. Times are changing. Faster and faster," Michael Wara, climate and energy program director and a senior research scholar at the Stanford Woods Institute for the Environment, tweeted 26 May following the vote.

IHS Markit CleanTech Executive Director Peter Gardett said the ExxonMobil shareholder vote has changed the assumptions of every energy investor's portfolio.

"What was previously theoretical or low-probability about a fast-moving energy transition is now being reflected in today's corporate governance and strategy," Gardett said. "Investors will need to model a new future operating environment, and we can expect a broad reappraisal of asset values."

In a 21 May blog, Environmental Defense Fund President Fred Krupp wrote that a "financial reckoning has arrived" for companies like ExxonMobil that he said had refused to align their strategies to a decarbonizing economy.

Krupp noted that 20% of ExxonMobil's stock is held by asset managers BlackRock, Vanguard, State Street, and Fidelity. BlackRock, Vanguard, and State Street are among the companies that have joined the Net Zero Asset Managers Initiative, an international effort to limit investments to projects and companies aiming for net-zero carbon footprints.

Ahead of the vote, Krupp said three major proxy advisory firms -- Glass Lewis, ISS, and Pensions and Investments Research Consultants -- had come out in support of some or all of Engine No. 1's board nominees. Legal & General, the UK's largest asset manager, also pledged its backing.

In addition, CalPERS, CalSTRS, and New York State Common Retirement Fund — three of the largest public pensions in the US and responsible for providing retirement security to millions of people — also backed Engine No. 1 candidates.

"How they vote will be evidence of whether these shareholders are willing to act now to address the serious emerging risks to the US financial system and to transition the firm toward cost-competitive and rapidly innovating clean energy technologies," Krupp wrote.

Change is coming

Following the ExxonMobil shareholder vote, Aeisha Mastagni, portfolio manager for CalSTRS' sustainable investment and stewardship strategies unit, said: "We called for change at ExxonMobil, and change is coming."

"While the ExxonMobil board election is the first of a large US company to focus on the global energy transition," Mastagni cautioned, "it will not be the last."

Shareholder proposals revolving around environment, social and governance concerns are increasingly being offered as climate impacts make themselves felt.

In April 2020, the Harvard Law School Forum on Corporate Governance reported that the number of environment and sustainability proposals and support for them "hit an all-time high in 2019, a trend that has continued for three consecutive years."

"The votes at ExxonMobil and Chevron were the capstone to a stunning proxy season for investor action within the oil and gas industry," Ceres, a sustainable investor network, said in a 26 May statement.

Earlier in the proxy season, Ceres said, three climate-related proposals received majority votes at ConocoPhillips and Phillips 66, while a majority of non-Exxon shareholders at Imperial Oil voted for a proposal requesting that the company set net-zero targets.

With the votes, "the center of power at ExxonMobil and Chevron has shifted and oil and gas companies can no longer afford to ignore outside pressure. Policy takes time to create change, but an election is instantaneous," Andrew Long, Ceres senior director for oil and gas, said in a statement.

Posted 26 May 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst