ESG investment managers have applauded the significant milestones made within the oil and energy sectors this past week, after investor engagement efforts and court rulings resulted in huge steps in plans to cut their global emissions and an accelerate the transition away from fossil fuels.
On Wednesday 26 May, in a dramatic shake up, a majority of ExxonMobil shareholders voted to replace two of the US oil company’s board of directors with an alternative candidate experienced in clean energy and energy transitions.
This coincided with a landmark ruling on the same day over in Hague, Netherlands, that ordered Royal Dutch Shell to cut its global carbon emissions by 45% by the end of 2030 compared with 2019 levels, in a case brought by Friends of the Earth and more than 17,000 co-plaintiffs.
On the very same day, UK energy company SSE announced plans to spend around £2bn on low-carbon energy projects over the next year and expand its renewable energy business overseas in what it described as a “pivotal year” for the business.
Nicolette Bartlett, executive director of CDP, commented: “This is groundbreaking. Together, these developments deliver a clear message from regulators, civil society and investors: companies must step up and show they have a credible plan to decarbonise their full value chain in line with the Paris agreement’s 1.5-degree goal. There is no other option.”
“This week was nothing short of historic,” added Matt Crossman, stewardship director at Rathbones and editorial panellist for ESG Clarity. “The results at the AGMs of Exxon and Chevron, and in the courtroom in the Netherlands, prove that that climate change and ESG risk have decisively come of age.”
On 27 May, in a move that indicates energy companies are considering their social impact as well as environmental, Chevron said it backed the decision to suspend payments to shareholders in a Myanmar gas pipeline in which it holds a minority stake, as announced by its operating company Total. The firms had come under pressure to take action against the junta that seized power in Myanmar on 1 February, since when its forces have killed hundreds of civilians and detained thousands more, Reuters reports.
“Chevron condemns the violence and human rights abuses occurring in Myanmar. We stand with the people of Myanmar and the global community in urging for a peaceful resolution that respects the will of the people,” it said in a statement.
Commenting on the landmark announcements and shifts in policy, investment professionals said oil majors have realised they can longer carry on “business as usual” as investors insist on major changes surrounding their clean energy transition and humanitarian impact.
“Investors are no longer standing on the sidelines. This is a day of reckoning. The votes for change by Climate Action 100+ signatories show the sense of urgency across capital markets. Climate change is a financial risk and as fiduciaries, we need to ensure that boards are not just independent and diverse, but are climate competent,” said Anne Simpson, chair of Climate Action 100+ steering committee and managing investment director, board governance and sustainability at Calpers.
Royal Dutch Shell
Even though Shell had taken “market-leading steps” to transform its business and reduce greenhouse gas emissions, according to Harry Granqvist, senior ESG analyst at Nordea Asset Management, this was not enough in the eyes of the Hague court.
The Dutch court ruling, which ordered Shell to cut its global carbon emissions by 45% by the end of 2030 compared with 2019 levels, came after the oil giant’s sustainability policy was found to be insufficiently “concrete” and its levels of emissions reductions, as well as its suppliers and buyers, should be brought in line with the Paris Agreement.
Judge Larisa Alwin urged Shell to reduce its CO2 output “at once” or risk “curb[ing] the potential growth of the Shell group”.
“Being best-in-class in a relative sense is not sufficient for ensuring global warming is kept well below 2 degrees. As this week’s court ruling demonstrated, it is certainly not sufficient for protecting shareholders against the elevated exposure to climate transition risks that high levels of fossil fuel reliance entail,” Granqvist said.
CDP’s Bartlett added: “The tide is turning rapidly. The landmark court ruling that Shell must reduce its value chain emissions by 45% by 2030 is a watershed moment. Because the focus is on value chain emissions, it has a clear focus on their products and services – this ultimately means that their fossil fuel products need to decrease.”
She added CDP’s Carbon Majors’ report was a key source as it showed how critical corporate GHG emissions data is for driving accountability and action.
Natasha Landell-Mills, head of stewardship at Sarasin and Partners and editorial panellist for ESG Clarity, said the Dutch ruling shows Shell’s strategy is not aligned with “protecting our planet from dangerous climate change” and the ruling is “enormously consequential, and – we should all hope – life-changing”.
Meanwhile, JM Finn’s investment director Lucy Coutts highlighted the powerful language the Dutch court used to relation to Shell indicating how serious these issues are now being considered:
“[Wednesday] was undoubtedly a step change for the oil majors. It is unprecedented that courts can now dictate the corporate strategy of a major emitter of greenhouse gasses, with the court labelling Shell as ‘partly responsible’ for climate change. These are incredibly strong words.”
Looking ahead, Nordea’s Granqvist said as investors in the company it expects Shell to align its strategy with the objectives of the Paris Agreement. As is underlined by both the International Energy Agency’s recently published net-zero scenario, as well as the Climate Action 100+ assessment of Shell, the company’s current ambition of a 20% carbon intensity reduction by 2030 is “demonstrably deficient compared with what will be needed”.
Nordea recently voted for a shareholder resolution asking the company to close the outstanding gaps, and to demonstrate in a concrete and unconditional fashion it will align its transition strategy with the Paris Agreement’s central climate objectives.
“The resolution did not pass but gathered more than 30% support, sending a clear signal to the company it needs to continue improving. The Dutch courts echoed this signal,” said Granqvist.
“It remains to be seen whether this ruling survives the appeals process, but it should have already removed any doubt that an unfinished climate transition plan is a highly material source of legal, regulatory and reputational risk for shareholders.”
The board members being slotted in at ExxonMobil is the “even bigger story”, JM Finn’s Coutts said, as she highlighted it had the backing of one of the largest asset managers in the world BlackRock.
“Once the world’s most valuable company, ExxonMobil now has been forced to give up two board seats to a small activist hedge fund investor with the potential for a third once all votes are counted,” she said.
“Engine No. 1 has made its intention clear; to push the company to look beyond oil and gas development, claiming that it is an existential risk. The investor owns a minuscule percentage of the company, but it is backed by Blackrock, which owns a higher percentage, who supported having the activist members on board.
“It was notable that Darren Woods, the CEO of ExxonMobil, last week told shareholders not to vote for the activist investor for fear it would derail the company’s progress, and dividend. Given the company is laden with debt to pay dividends, he should probably listen to his shareholders a little bit more.
“To echo Larry Fink, climate risk is definitely investment risk, and [Wednesday] was a very, very big day for this. “
Exxon’s position was unique among the oil majors as it effectively stated business as usual from a climate perspective, highlighted Rathbone’s Crossman, but its investors – aware of the climate science and the global will to limit warming to well below two degrees – clearly disagreed.
“Such success seems astounding and sudden, yet it has its roots in concerted and consistent engagement over several years by investors in the IIGCC and CA100+. The world’s biggest investors and regulators have sent a clear message – there is no ‘business as usual’ in the energy transition. Society and investors expect action on climate change, and companies are expected to deliver.”
Fiona Reynolds, PRI CEO, said: “In one of the most powerful examples of the value of active ownership we’ve seen in recent years, investors stepped up and demanded action on the transition to net-zero from ExxonMobil this week – and they succeeded. In voting to replace two ExxonMobil Board members with candidates experienced in clean energy and energy transitions, investors voiced their power and influence through engagement – rather than divestment – on the importance of an increased focus on climate at the oil major. This is an important win highlighting the value of stewardship to investors and our planet.”
Last year, amid the pandemic, SSE pushed ahead with plans to triple its renewable energy capacity by spending about £7.5bn on UK clean energy projects in the UK over the coming decade, and has this week committed further with a further £2bn earmarked for low-carbon energy projects over the next year and expansion of its renewable energy business overseas.
Crossman said Rathbones has been leading engagement on climate issues with SSE since 2013, first attending the AGM in 2014.
“Since then, we have operated a supportive but stretching engagement which has seen the company make notable leading steps on the climate agenda, including meeting its planned 2020 emissions reduction targets ahead of time, and setting new, ambitious science-based targets covering activities to 2030. In the past two years, this has been under the banner of IIGCC and Carbon Action 100+.”
He added over the past year, the firm has been in close contact with the SSE, encouraging the group to take a further leading step and submit their climate change strategy to an advisory vote each year.
“We believe such a move will bring added transparency and trust and enable a greater degree of investor scrutiny on the group’s climate strategy. Great disclosure and accountability around climate targets is to be welcomed by investors as it helps us manage climate risks in our portfolios.”
In a post on LinkedIn, PRI CEO Reynolds said Wednesday had been a “good day for the planet with investors stepping up and demanding action on the transition to net zero”. But she also highlighted it would be better if companies themselves were “taking the necessary action” rather than facing court and investor pressure.
After such a “historic” week, it is clear that oil majors have nowhere to hide if they are not stepping up in terms of addressing and mitigating their “dangerous” climate impact.
As Landell-Mills said, the moves this week have set a “powerful precedent”.
“No longer is it good enough for boards to shrug and throw up their hands helplessly claiming the company is bound to supply goods and services, without regard to the harm inflicted on society. The Dutch judgment establishes clear accountability. All boards in all sectors must act.”