Climate Shifts Forcefully Against Big Oil

The relationship between Big Oil and society is fundamentally changing. Public companies on both sides of the Atlantic are coming under a level of pressure to decarbonize their operations that was unthinkable just a year or two ago (PIW Aug.7'20). This pressure is being wielded by investors as well as by court systems in some jurisdictions. The impact to corporate strategies could be enormous if companies feel they must respond to the heat by unwinding oil and gas operations earlier than planned. In one pivotal day this week, Exxon Mobil saw the tiny Engine No. 1 hedge fund unseat two -- and possibly three -- of its directors by harnessing the voting power of major pension and index funds. Chevron became the latest US company asked to set Scope 3 emissions reduction targets, following similar votes at ConocoPhillips and Phillips 66. And Royal Dutch Shell lost a Dutch court case that could force it to slash emissions by 45% by 2030, and redefine the obligations of oil companies to decarbonize the world. "No matter what the outcome of today's vote, change is coming," Engine No. 1 founder Charlie Penner said, calling Exxon “a company that has been determined to fight off the future for as long as possible.” Shareholders are asking for more aggressive climate plans and demanding greater influence on company strategies. Major index funds are making good on promises to push companies to align their investments with the goals of the Paris climate accord. The pressure has not been limited to companies seen as laggards. Even those with more advanced energy transition strategies, such as European majors, are hearing investors ask for more. Big Oil made itself vulnerable to such demands not only because it was late to adopt new strategies for a low-carbon future, but also because it has delivered poor returns from its core oil and gas operations for the last decade (PIW May7'21). The Climate Action 100+ consortium with over $54 trillion under management asked Total to expand its emissions goals and commit to absolute reductions, saying its plans fall short of the Paris goals, and some investors say they will vote against Total’s transition plan at its May 28 shareholders meeting. “We continue to be concerned about Exxon’s strategic direction and the anticipated impact on its long-term financial performance and competitiveness,” investment giant BlackRock said even after its vote in favor of three Engine No. 1 directors. “Investors in oil companies are saying now: we want you to act by decreasing emissions now, not in the distant future,” said Mark van Baal, whose Follow This group filed the successful initiatives at Chevron, Conoco and Phillips 66. The focus on emissions strategies has the potential to grow in strength, evolve and further complicate decarbonization strategies. Efforts like carbon capture and nature-based offsets are a key component of almost every emissions reduction scheme but could be challenged if they are used to offset ongoing emissions, rather than take carbon out of the atmosphere (PIW May21'21). Oil companies have started to allow shareholders to vote on their energy transition plans but some major pension funds are abstaining, saying they would rather vote out directors who fail to take aggressive action. Meeting absolute emissions reduction goals could mean selling assets and dramatically lowering production, oil executives warn. “The only sensible way you can do this fast is to just retreat from the business,” said Shell CEO Ben van Beurden of rapid absolute emissions cuts. “Now would that help society? No, because, of course, the demand wouldn't go away.” In the 2015 Urgenda ruling, which is seen as the legal basis for the recent Shell decision, the Supreme Court of the Netherlands called efficacy of things like carbon capture “highly uncertain” and warned that “climate scenarios based on such technologies are not very realistic considering the current state of affairs.” Shell will appeal its case but it could open the door to similar lawsuits against oil companies in various jurisdictions. Anne Simpson, managing investment director at the largest US pension fund Calpers, which supported the Engine No. 1 slate, characterized the votes at Chevron and Exxon as “investors acting like owners,” and predicted the trend would grow.