Is Shareholder Activism Boosting Climate Accountability of Oil Companies?

Fossil fuels, for all their role in spearheading industrial revolution and development, will perhaps end up on the wrong side of history for their calamitous climate consequences.

It’s therefore no surprise that oil, petroleum and fossil fuel companies are often made the targets of climate campaigns. But securing massive changes in their business models to phase out emissions is easier said than done. Much like an endangered species fighting its extinction, oil companies have resisted serious commitments towards climate action by putting their fortunes, influence and power to use.

But the tides are turning. Yesterday, two things happened at once.

First, a court in the Netherlands ordered the Royal Dutch Shell to increase its emissions reduction target to 45% by 2030 (which was 20% earlier) compared to 2019 levels.

Second, two seats on the Board of Exxon Mobil (out of 12) were passed under the control of climate activist investors, a major optical setback for the oil company which will, perhaps, now face more scrutiny on its fossil-fuel strategy.

Some are calling it a “watershed day”, marking a game-changing moment for climate activism. It makes some sense seeing as it reflects a growing push for the energy sector to phase out fossil fuels. It also represents a rising shift towards shareholder-led climate campaigns inside the administration of oil companies to drive changes from within instead of driving it through protests or policies.

Is this new climate tonic working? Are we watching activists leveraging their climate capital to fight against the capitalist resistance of Big Oil?

Let’s find out!

Size Matters — In Climate Targets

Many among the “Big Oil” companies — world’s biggest publicly-owned gas and oil corporations — have acknowledged climate risks and fixed voluntary targets to combat climate change. Chevron, Exxon Mobil, Shell, ConocoPhillips, BP etc. Have all set ambitious carbon-cutting targets for their operations.

But targets aren’t very helpful unless they are backed by plans and strategies to govern action. Absence of concrete plans have forced the hands of environmental groups like Greenpeace and Friends of the Earth to file suits against oil companies for not committing seriously, like the one filed against Shell in the Dutch court.

But there are limitations to this forced-hand tactic. For one thing, the companies can always appeal the verdicts. Plus, the application of the verdict only applies in the country it was pronounced in, severely styming its effectiveness against multinational oil corporations. They may help in increasing local-level compliance though, like a federal court’s order to shut down the Dakota Access Pipeline last year.

The next option is to call for executive action through macro-level policy changes and international consensus. But ultimately, increased legislative and government lobbying by Big Oil over the years has ensured that you can lead the horse to water but you can’t make it drink it.

Exceptions do exist, however. Within nine days of his presidency, Joe Biden rescinded the permit to construct the controversial Keystone XL pipeline. He also plans on ending fossil fuel subsidies for drillers and miners soon, which could be a landmark success in state-sponsored climate change goals.

But then again, it is hard to deny that oil companies have grown too big to be easily bullied into climate action by the government. And on top of that, they have A LOT at stake. To stop global temperature increasing beyond 1.5°C above pre-industrial levels, oil companies will have to leave a tremendous amount of already-explored reserves in the ground.

When you think about it, the investment costs involved in the exploration and potential values are too high to give up. This is, of course, in addition to headwinds on future business growth to the extent that major business pivoting may also be warranted. This explains why they would rather limp than march on to fulfill climate targets.

Climate Executive Decisions

Exxon Mobil’s recent board reshuffle in favour of a climate-oriented direction (possibly) is important because it shows the rising guerrilla approach that climate activists have adopted to tame the bull, so to speak.

It starts at the grassroots. Engine No.1, the hedge fund which played a major role in backing the two appointed board nominees, owns less than 1% of Exxon’s stock. So if you’re wondering how this David and Goliath success story came into being, you would have to credit David’s sling which in this case is Engine №1’s ally on the board, BlackRock, the world’s largest asset management company.

BlackRock is Exxon’s second biggest shareholder and it supported the nomination of Engine No.1’s candidates. BlackRock’s commitment towards supporting cleaner energy businesses is reportedly on the rise “with an ambition to have net zero emissions across all its assets under management by 2050”.

In any case, the culture of shareholder-driven climate action isn’t new. In 2017, Occidental Petroleum’s shareholders passed a resolution requiring the company to review and report on its exposure to climate change. Interestingly, BlackRock used its weight to tip the scales here too.

Representation with Resolution

Normally, if shareholders disagree with a company’s management, they take the exit option by selling their stock. But activism lies at the opposite side of divestment. They want to change things instead of bailing.

Climate advocates are beginning to enlist financial backing from investors with similar goals and shareholding interests in oil and gas companies. This way they gain access and influence inside oil companies which empowers them to ask questions at the annual general meetings. It also allows them to submit resolutions.

But there are a number of regulatory hurdles in achieving decisive policy changes within the board. Shareholder resolutions aren’t always legally binding but mostly advisory. However, the gains achieved aren’t entirely devoid of impact either. Change may be slow, but meaningful.

They mostly help in seeking compliance measures like disclosure of climate targets, disclosure of the carbon-intensity of products, etc. More radical measures like reducing emissions require larger consensus (75% and above) and even larger stakes.

A Daring but Dilute Approach?

Some may see it as a weak response to the climate crisis. But it makes sense to look at it as a positive sum game. Big Oil knows that its business prospects for the future are limited. As they see a creeping takeover of their business mandates, they realise that falling in line with shareholders demands is the only way to go.

It may be a slow process, but it’s an upward path.

There’s another (more hideous) way to look at it from the oil companies’ perspective. Allowing activist shareholders a representation only brings them closer in public association. Big Oil executives aren’t exactly above stealing opportunities when it comes to giving joint statements or climate goals in association with climate groups, using them as token idols to hide their inaction on emissions.

Meanwhile, the shareholders’ patience also runs thin. According to Bloomberg, LGIM, one of Exxon’s top 20 shareholders, divested around $300m of shares last year.

Reason: It grew tired of trying to engage with the company which seemed uninterested in reform.

The need for pressing larger climate action from corporations has increased and will only continue to increase further in the coming decades. Since majoritarian reform is the key to policy change, maybe shareholder activism will keep gathering greater momentum and yield results through persuasive struggle instead of power politics.

(Originally published May 28th 2021 in transfin.in)