After the shareholder rebellion, what’s next for big oil?

Climate activist shareholders and board members have their work cut out to make fossil fuel majors environmentally responsible
<p>Ten years ago divesting from fossil fuel companies could be dismissed as a niche activist concern. Now, it’s mainstream. (Image © Nick Cobbing / Greenpeace)</p>

Ten years ago divesting from fossil fuel companies could be dismissed as a niche activist concern. Now, it’s mainstream. (Image © Nick Cobbing / Greenpeace)

A bad day for big oil is a good day for the climate. On 26 May, activist investors and activists achieved results far beyond their expectations, adding three directors to the board of Exxon-Mobil, an oil company with a long history of funding climate change, denial and obstructing clean energy policies. The same day, shareholders won victories at Chevron, and a court battle with Shell. In 2021, we’ve already seen a record number of environmental and social shareholder proposals pass at big companies. 

Investor opinion is shifting. While there may be genuine altruism in their concern about a warming world, the bigger fear here is that an unfolding energy transition and violent climate impacts will hit investors where it really hurts, in their wallets. 

Engine No.1, a small activist hedge fund that led the campaign to replace Exxon board members, made the case that bad management was shrinking the company, driving its share price ever downward, in large part because it had “no credible strategy to create value in a decarbonizing world.” As recently as 2013, Exxon was the most valuable company on the planet. Wild swings in the oil price and poor management have seen it drop out of the Dow Jones Industrial Average – an index composed of 30 of the largest US companies. 

In the past, when shareholders have tried to hold oil and gas companies to account for how climate change impacts their business, the oil companies generally issued reports saying everything will be fine, demand for oil and gas would remain steady, perhaps even grow. Despite climate concerns, they said, it remained hard to predict whether governments would really limit carbon emissions. Now, with investors starting to require change at the board level, things are a lot more serious, with the way companies operate set to be impacted.

Exxon spent tens of millions of dollars trying to keep Engine No.1 at bay. They also tried settling with rebel investors, appointing a director with clean energy experience, and even a last-minute delay to the vote count, seemingly to give them more time on the phones to persuade investors to keep the current board. All of their efforts failed. 

If BlackRock takes climate change seriously, much of the economy will be forced to do the same

Markets, when they work well, price in people’s expectations. And it’s clear that people expect tougher climate policy now and in the future. The International Energy Agency, an august body formed to look after oil and gas interests, said this year that investment in new fossil fuel projects would need to end immediately to avoid dangerous climate change. Joe Biden and Xi Jinping are strengthening climate targets and incentivising investment in renewable energy. New fossil fuel infrastructure – the oil rigs, pipelines and refineries that dot our landscapes – have to be in operation for a number of years to be economic. The risk that new assets are “stranded” and abandoned well before they pay investors back is growing. Against this backdrop, business plans that amount to “drill, baby drill” look suspect. 

A coalition of investors with over US$50 trillion in assets under management is demanding change at more than 150 of the world’s largest polluting companies. Among them is BlackRock, the world’s largest asset manager which alone has US$9 trillion under management, and controls huge stakes in most major companies. If it takes climate change seriously, much of the economy will be forced to do the same. CEO Larry Fink said earlier this year that climate change would be “a defining factor in companies’ long-term prospects” and that “no issue ranks higher… on our clients’ lists of priorities. They ask us about it nearly every day.”

At Exxon, BlackRock’s votes, and those of other major asset managers, were decisive. BlackRock backed all three of the directors who were added to the Exxon board. Engine No. 1 had put forward four, but BlackRock chose to exclude Anders Runevad, former CEO of Danish wind energy company Vestas. Other major asset managers, State Street and Vanguard, backed two nominees each, and neither backed Runevad.

Big investors still have a long way to go before becoming environmentally responsible. Despite Larry Fink’s claims, BlackRock’s record on climate is mixed, at best. In 2020, they voted against climate change resolutions more than 80% of the time. If they chose to, they could push most public companies to do more. But they haven’t, yet. Immediately prior to the vote, activists blockaded their headquarters, highlighting how BlackRock itself is still the “world’s top investor in climate destruction.” 

The risk for fossil fuel companies, and indeed major asset managers, is not just that feisty shareholders demand change to their boards and business plans. It’s that they stop playing ball and take their money elsewhere entirely. Ten years ago divesting money from fossil fuel companies could be dismissed as a niche activist concern. Now, divestment is mainstream, and investors have more clean energy alternatives, with better growth prospects. 

Before the vote at Exxon’s AGM, CEO Darren Woods said the company does not see an advantage in shifting to clean energy. And last week activists from Greenpeace tricked Exxon lobbyists into revealing their latest attempts to thwart clean energy policy in Joe Biden’s American Jobs Plan. Just as a supertanker takes a long time to turn around, new board members will have their work cut out trying to redirect major oil and gas companies. But, as the world moves away from fossil fuels, these companies must change, or they’ll die. At the height of Exxon’s power, former chief executive Lee Raymond said: “I’m not a US company and I don’t make decisions based on what’s good for the US”. It’s high time the US stopped making decisions based on what’s good for Exxon and other fossil fuel companies.