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Oil majors reluctant to adopt Paris-aligned GHG cuts despite shareholder push

11 May 2022 Amena Saiyid

Oil majors are taking a stand against shareholder resolutions that call for GHG reduction target setting in alignment with the 2015 Paris Agreement goal to limit global warming to "well below" 2 degrees Celsius.

Indeed, shareholders are heeding the advice of boards and institutional investors like BlackRock which say annual general meeting (AGM) climate resolutions in 2022 are "unduly prescriptive" and are seeking to interfere with the decision-making process of the board or management.

Activist shareholders that are pushing for greater climate disclosure and accountability from oil companies remain unfazed though and instead are focused on the support each of their resolutions are receiving each year.

They were in fact energized by last November's legal guidance from the US Securities and Exchange Commission. The guidance said it would no longer exclude proposed resolutions from consideration by company shareholders that bring up social issues, such as reporting on GHG emissions.

A majority of ConocoPhillips shareholders (61%), heeding the advice of its board, rejected a resolution on 10 May requiring the company to set and publish short-, medium- and long-term GHG reduction targets from its operations and energy products (Scope 1, 2, and 3). The proposal called for targets to be "consistent with the goal of the Paris Climate Agreement: to limit global warming to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C."

Scope 3 emissions are GHGs generated across the entire value chain of creating an end product, beginning with sourcing the raw materials, and continuing through manufacturing, transporting, and use. Scope 1 refers to direct releases from production activity, while Scope 2 refers to the emissions released through purchases of heat and power for its operations.

Amsterdam-based Follow This, which represents more than 8,000 shareholders in oil and natural gas companies across Europe and US, had proposed the resolution.

Shying away from Paris-aligned cuts

Follow This offered the same resolution for shareholders of Occidental to consider at its 6 May meeting, and more than 80% of shareholders at Occidental Petroleum rejected the resolution. This came despite Occidental CEO Vicki Hollub's declaration in March 2021 that the company is shifting from oil production to becoming "a carbon management company."

The next votes will take place at Chevron and at ExxonMobil on 25 May. Both companies will consider the same resolution by Follow This. ExxonMobil's board—like its counterpart at ConocoPhillips—has recommended voting against the Follow This measure. Chevron's board also has advised against voting for the resolution, while drawing attention to the oil and gas supplies needed to power through the transition to a net-zero economy.

"We are also mindful that the journey to a lower carbon future will still require oil and gas, particularly in areas where there are currently no effective substitutes, such as shipping and transportation," Chevron's Board wrote in its proxy statement.

In late March, ConocoPhillips' board said the company has already developed a Paris-aligned climate risk framework that includes targets for Scope 1 and 2 emissions that received the support from its stockholders.

While acknowledging requests to speed up its efforts to reduce methane emissions and flaring, the board said "we do not believe that Scope 3 targets are appropriate for an upstream-only [exploration, development and production] company like ConocoPhillips."

Elaborating on its recommendation, the board said "ConocoPhillips does not control how the commodities we sell are converted into different products or ultimately used, creating a limited scope of actions available to the company."

Not unlike ExxonMobil's board, the ConocoPhillips board also raised the specter of multiple counting of end-use emissions along the oil and natural gas value chain that it said "makes accurate accounting and credible target-setting extremely problematic."

ConocoPhillips said it would prefer to tackle Scope 3 emissions through pricing carbon.

In a statement following the ConocoPhillips vote, Follow This took a glass halffull approach, viewing the 39% support for its proposal as one representing a "significant minority."

The 39% support for the Follow This resolution was lower than the 59% backing it received a year ago, but the activist group noted that last year's resolution was for unspecified emissions reductions, rather than on Paris-aligned cuts.

BlackRock pushes back with oil firms

BlackRock, the world's largest money manager with nearly $10 trillion in assets, is ConocoPhillips' largest institutional shareholder. While BlackRock Investment Stewardship, the firm's asset management arm, supported 47% of environment and climate-related resolutions in 2021, it made it clear in a commentary released in May that it would not support climate resolutions in 2022 that hamstring the decision-making ability of the board or management, call for changes to a company's strategy or business model, or address matters that are immaterial to how a company delivers long-term shareholder value.

BlackRock said it would welcome voluntary Scope 3 emissions disclosures from companies, but would not hold their feet to the fire as the methodologies for reporting are not yet evolved.

The war with Ukraine has led to a concerted global effort to reduce reliance on Russian oil, creating what BlackRock described as "unique challenges" for oil companies in Europe and the US.

BlackRock acknowledged that increased production would impact the net-zero transition as net exporters, such as oil producers in the US, look to increase production, while net importers look to increase their reliance on renewables.

As US Secretary of Treasury Janet Yellen noted in her remarks to the US Senate Banking Committee in a 10 May hearing, oil companies will have to produce more crude in the short term to make up for the supply shortage that they did not anticipate as they came out of the COVID-induced economic slump in 2020.

Yellen did not comment on whether President Joe Biden's goal of 100% clean electricity generation by 2035 or his net-zero goal of 2050 is at risk from near-term needs for more oil and gas. But she said companies and governments should consider shifting to increased renewables, as the existential climate crisis can only be averted through weaning consumers off fossil fuels.

Posted 11 May 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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