Exxon’s 2019 AGM: it's high time for investor "climate couch potatoes" to get into action!

In light of the overwhelming vote by BP shareholders last week in favour of a proposal to align its future plans to the terms of the Paris agreement on climate change, it is timely to look at Exxon’s forthcoming AGM (29th May). We do this, in part, through the prism of the slave trade which offers some interesting parallels.

English evangelical Protestants and the Quakers initiated the campaign to abolish the UK slave trade in the early nineteenth century. Two centuries later, the Vatican has said that climate change is a “moral and religious imperative for humanity”. Will the fate of fossil fuel companies now be defined by public, sovereign and religious investors? And can other investors simply watch from the side lines?

Our answer is “yes” and “no” respectively, but you may be surprised to know why. First let us recap on the fight to date.

In 2016, the New York State Common Retirement Fund (NYSCRF) and the Anglican Church Commissioners put forward a resolution asking Exxon to disclose its climate risk analysis. The resolution got 38% support but ExxonMobil ignored it. Undeterred, the two investors tabled the same resolution again in 2017. This time it got 62% and ExxonMobil responded.

However, investors were unhappy with the disclosure and that Exxon gave no line of sight on its transition strategy. Respected NGOs, like the Union of Concerned Scientists, were even more dismissive. Unsurprisingly in 2019, the two funds sought to table a resolution demanding emissions reduction targets consistent with the 2016 Paris climate agreement. This is far from radical. Indeed Preventable Surprises has advocated asking for transition plans aligned with Paris for all high impact companies since 2015, a call which has recently been taken up and elaborated by two leading academics.

BP, Equinor (formerly Statoil) and Shell have all responded positively to investor requests for further assurance of the consistency of their strategies with the goals of the Paris Agreement. But rather typically, ExxonMobil objected and sought assurance from the Securities and Exchange Commission (SEC) that the resolution could be omitted from its annual general meeting (AGM) ballot on the grounds that it constituted “micro- management”. Against an increasingly politicised backdrop for shareholder proposals, Trump’s SEC blocked the resolution. The two investors then escalated the engagement, deciding to vote against all directors, support the creation of a climate committee, report on lobbying and push for the separation of the chairman and CEO roles.

In response, ExxonMobil claims it is addressing “the dual challenge of meeting the world’s growing demand for energy while reducing the risks of climate change”, and says its global energy related CO2 emissions are in line with the Paris agreement. The company also asserts it has spent more than $9bn to develop and deploy lower-emission energy technology since 2000. The reality, however, is that this is a tiny percentage of what the company spends on total capex, which varies between $20-$30bn each year according to UCS (personal communication, 15th May). Given limited transparency, this is a useful stand-in for how much ExxonMobil spends to maintain is core business strategy.

Edward Mason, head of responsible investment for the Church Commissioners responded: “Exxon has not made any commitment to long-term emissions reductions across its value chain. Nor has it engaged seriously with Climate Action 100+.” The exempt solicitation from the two investors is worth a careful read.

So why is ExxonMobil set to be the litmus test for climate aware investors in 2019?

● First, there is ExxonMobil’s shameful record on climate change. It has paid lip service to the importance of tackling the climate challenge but according to respected Harvard academics, engaged in a systematic campaign of misinformation over four decades, to reduce regulatory action. More recently ExxonMobil has acted via the trade associations it funds but the aim remains the same – to block and delay any challenges to its core business model. Some might call this “climate denialism” which the company’s defenders says formally ended in 2018 when it joined the Oil & Gas Climate Initiative. But Mary Robinson, the chair of the Elders, now labels climate denialism by O&G companies and others as “malign and evil”.

● Second, investor engagement has been given every chance and as The Economist notes, ExxonMobil “is a notable laggard”. This is not news: one of us organised the first ever engagement between the company and its mainstream investors in the UK some 15 years ago! As Generation IM has recognised, “quiet diplomacy has failed” and this is especially so at a company like ExxonMobil. Just because the mega investors are late to the stewardship debate about the climate crisis does not mean that high impact companies should be given 5 years from now, as Blackrock’s Larry Fink seems to think (see comments at 34:30). The reasons that Blackrock and other mega managers give for not voting against management are superficially plausible but on more careful analysis, quite weak. And if investors retreated from escalating their engagement with Exxon, they would either need to divest fully or completely lose credibility with many of their own staff, clients and commentators, the authors included.

● Third, there is tidal wave of regulatory capture happening in many countries and especially in the USA. Nowhere is the challenge to investor rights as explicit as with Exxon, where the SEC has prevented the strategic disclosure which financial regulators (the Network for Greening the Financial Sector, NGFS) say is needed and which investors will get from non-US companies. Global investors cannot accept this laying down.

Slave owners defended their “rights” fiercely and abolitionists disagreed about how fast change should happen

In the early 19th century, slave owners objected strongly to the loss of their ‘property rights’. And there were also disagreements between those who favoured immediate abolition and ‘pragmatists’ who argued for more time. For example, in an 1823 agreement between owners and the UK government, the former agreed to “voluntary codes” to protect the core business model.

The analogy with O&G companies is clear. And NYSCRF and the Church Commissioners are also under pressure both from those who think they are going too far, but also from those who think they are being too accommodating.

● Criticism 1: These funds should divest because they and the company fundamentally disagree. This argument comes from advocates like the Californian Democrat Ted Lieu, who in 2016 said: “There is a fierce urgency to address climate change, and the pension funds are fooling themselves if they think engagement is working”. The investors respond that they may be indexed and cannot sell and as long-term owners of Exxon, consider it has a responsibility to its members and wider society to act as catalysts for change on this critical systemic risk.

● Criticism 2: ExxonMobil is moving so now is not the time to be disruptive. Yes there are some changes but these changes are far from being fit for purpose. Exxon’s Outlook for Energy report assumes no peak in oil demand by 2040 and the company plans to increase production by more than 25% on 2018 levels to over 5m barrels per day by 2025. To build bridges with all those investors – especially the mega fund managers who routinely support management – the two investors argue that by focusing on the election of the next board chair, there is no disruption to the business and no personal criticism should be assumed.

● Criticism 3: This is tokenism. If investors really wanted board renewal, some argue that they should have targeted two or three of the worst directors, deselected them and proposed a slate of three directors – having a token climate aware director is pointless, as is also the case with gender diversity or risk. Moreover, because the resolution focuses on the next appointment of the chair, this means that any new blood is at least two years away, making this a rather symbolic victory in the short term. Investors respond that they want to send the strongest viable signal of discontent, but have encouraged others to vote firmly in line with their own policies if they support targeted voting. They also argue that proposing new directors was impossible in the short time frame following the SEC decision. This means it should definitely be possible next year. Finally they say that picking on the oil company that has the largest greenhouse gas (GHG) and political footprint sends a signal to the market that investor patience has hardened.

As New York State Comptroller Thomas DiNapoli told us: “Our pension fund, and other institutional investors, are engaged with numerous companies in the fossil fuel and energy sectors in an effort to help the transition to a lower carbon global economy. Companies across these sectors need to take steps to address climate risk or they put themselves and their investors in harm’s way. Exxon’s refusal to adequately address climate risk or properly respond to investors’ concerns stands out among its peers. It’s a red flag that it has a larger governance problem and needs a thorough reform of its board.”

On balance we consider that NYSCRF and the Church Commissions have the stronger argument and as they being attacked by both sides, this indicates they have struck the necessary compromises.

Context is key: human civilisation faces a climate emergency which is systemic and existential yet even NGFS regulators have not highlighted how fossil fuel companies are likely to affect market stability.

This is why, today, an independent chair and appropriate stewardship of fossil fuel companies is so important. Both to prevent the climate emergency but also to make the transition as orderly as possible, governments will soon have to deliver a managed decline of this entire industry.

If we miss this chance, the costs will be huge. To revert to our historical analogy, we should remember that rather than abolishing slavery as the UK did, the US delayed action for many years. Whilst no one can prove (or disprove) cause and effect, what we can all agree is that the US Civil War had significant human and financial costs, and the tensions still reverberate today. As one of us have documented (see this TEDx presentation) comparing climate change and slavery offers some useful but challenging insights into what may be needed to sterilise fossil fuel assets. In particular, in addition to the substantial grassroots and parliamentary pressure to end the slave trade, there was also the need for a substantial bailout. Distasteful as this now feels, financial incentives were used to bring owners to the negotiating table and also to accept their share of the costs. Compared with the USA, this approach would seem to have been a wise one.

It is clear that there will need to be “a forceful inevitable policy response” [our italics] to reduce emissions towards a 2°C trajectory, as PRI states. If fossil fuel companies want to benefit from meaningful government and investor support, truly independent chairs who can genuinely reflect wider stakeholder interests and who are not captured by group think so prevalent in the sector, and especially amongst US companies, are essential pre-requisites. This was, after all, how EU governments dealt with banks after 2008.

Now is the right time to start shifting the culture of energy majors – indeed it should have started 1-2 decades ago. Without this, investors simply cannot have confidence that the necessary physical, financial and cultural transformation will be made while ensuring greenhouse gas emissions are indeed Paris compliant. An independent Chair is also a prerequisite to adaptive action on corporate lobbying, executive pay (aligned to the Paris agreement) and board renewal. For reasons outlined above, this resolution – with its delayed action – doesn’t go far enough in our opinion but for the same reason, there is absolutely no reason for investors to vote with management – it is the softest possible formulation. Of course, sector wide or industrial scale stewardship is needed and since engagement teams are so small, investors need to be ready in 2020 to table resolutions at all the 24 biggest listed oil firms who invested (according to the Economist) “just 1.3% of capital expenditure last year in renewable technologies—a baby step.” Voting against ExxonMobil management in 2019 is also a baby step for investors as they gear up to manage the climate crisis and their exposure to stranded and damaging assets. From couch potato to fit athlete takes determination and action.

Raj Thamotheram is the founder and chair of Preventable Surprises, a responsible investing think-tank. Richard Barker has been a climate advocate for 15 years and is currently adviser to Iona Capital, a UK sustainable investor. A shorter version of this piece will appear in IPE (“Long Term Matters”) on June 1st.