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Not-So-Silent Spring: Exxon and the Vote Heard Round the World

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Gwen Le Berre

Director, Responsible Investing

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An unexpected shareholder vote, followed by a watershed court ruling: Suddenly oil and gas companies face a reckoning over their approach to climate risk.



A mere 10 years ago, most market observers (us included) would never have believed that a small activist investor would be able to convince a majority of fellow shareholders to replace three directors of a large oil company in large part due to the company’s lack of climate transition planning. Yet this is exactly what happened at Exxon Mobil a few weeks ago. Let’s dig into the events surrounding not just Exxon but also Shell in a separate significant event and what both may mean going forward.



What made the Exxon shakeup such a historic vote?


Let’s begin with a bit of context: First, Exxon’s stock price had been underperforming that of its peers in recent years and has lost $200 billion in market capitalization since its 2013 peak. Second, Exxon has until very recently not put much emphasis on what many investors see as a material and potentially existential risk—the transition to a low-carbon economy. The company’s resistance to further diversifying into renewable energy has been a key point of contention. And third, Exxon has been talking to shareholders about these issues for several years, but many have felt the company hasn’t been particularly receptive to investor concerns.


That’s not to say that Exxon has been completely deaf to climate transition risks. The company has argued that it already has a climate transition strategy that includes $3 billion in carbon capture research investment. Yet it continues to invest most of its annual cash flow—$26 billion on average for the past five years—into traditional fossil fuel extraction. Given this, many investors felt more needed to be done. However, the board didn’t appear to have directors who could press for, much less help oversee, a transition toward a less carbon-intensive energy business.


Then Engine No. 1, a newly minted activist investment firm, came knocking at the door of Exxon’s board. The historical lack of meaningful engagement with shareholders allowed Engine No. 1 to make some powerful allies in its campaign: public pension funds in California and New York State as well as other institutional investors publicly came out in support of dissident board members prior to the vote deadline. 


In the end at least three of the 12 Exxon directors lost their seats in favor of Engine No. 1 nominees. Shareholders replaced the former CEOs of IBM, MetLife, and Petronas with an investor in energy infrastructure and clean-tech start-ups, the former CEO of a petroleum refining and marketing company, and a former executive credited with boosting her oil-refining company’s renewable diesel and jet-fuel offerings. This is a watershed moment: It’s the first time a director has lost a board seat as a result of investors’ climate concerns.



What happened at Shell? 


Royal Dutch Shell hasn’t really been in the crosshairs of investors concerned with climate risks. After all, of its own volition, it had already committed to becoming a net-zero emissions business by 2050. It also received almost 89% support from investors for its energy transition strategy, announced in February and developed after multiple shareholder engagements.


But according to a May 26 court ruling in the Netherlands, Shell’s climate transition plan went neither far enough nor fast enough. While the company had set its sights on reducing its emissions by 20% (compared to 2016 levels) by 2030, the Dutch court ordered Shell to stretch further and ensure it reduced its net carbon emissions by 45% (compared to 2019 levels) by 2030. 


Even more interesting was that the judge highlighted that Shell had a human rights obligation to accelerate its emission-reduction plans. In the past, climate litigations tended to look at polluters’ past missteps. Now, after the success at Shell, we may see lawsuits looking to future emissions and highlighting polluters’ human rights obligation to do more to curb them. This is also a watershed moment: It sets a new precedent for the world’s largest carbon emitters facing climate litigation.



What might we expect going forward?


There are a few key takeaways from the Exxon and Shell stories:


  • Corporate directors with no track record of working to mitigate climate risk may face the prospect of losing their seats.
  • Oil and gas companies may face real litigation risks that could force them to become more aggressive in their transition plans.
  • Large institutional investors are becoming less reluctant to use their votes when they have environmental concerns.
  • Activists may be emboldened in the wake of these two significant victories.

Above all, it seems that the pressures on large oil companies to transition away from fossil-fuel-centric business models are intensifying.

The bottom line


It feels like 2021 is a time of reckoning. We’re seeing a shift in the way institutional investors vote and in the way activists approach public companies. Climate activists have found new court allies, and investors have become more emboldened to use their votes to exact corporate change. We wouldn’t be surprised by continued pressure on even more companies to speed up their climate transition plans.



References to specific securities and their issuers are for illustrative purposes only and are not intended to be and should not be interpreted as a recommendation to purchase or sell such securities. It should not be assumed that any of the securities referenced will be profitable in the future or will equal their past performance. All investments are subject to risks, including the risk of loss.

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