May 26 2021 will be remembered as the historic day when the oil majors learnt the hard way that proper shareholder engagement is crucial if they want to survive the climate-change movement and successfully transition to becoming renewable energy businesses.
In the past, the oil majors have had a history of arrogantly brushing off unwanted reforms proposed by activist shareholders, particularly those related to environmental, social, and governance (ESG). But this this time, the activist shareholders are teaming with with institutional investors who are also focused on reducing the carbon footprint of their portfolios. This is something that the oil majors did not foresee.
In the case of Exxon, the well-documented story of how it embarrassingly lost a bid by Engine No.1, an activist hedge fund representing minority shareholders, to install three to four pro-climate-change members on its 12-member board clearly shows that traditional corporate strategies for resisting unwanted reforms no longer work in the face of stronger shareholder awareness of the impacts of their businesses on global warming.
In the case of Royal Dutch Shell, the landmark ruling by Judge Larisa Alwin of the district court in The Hague – ordering the company to cut its absolute carbon emissions by 45% by 2030 compared with 2019 levels – sets a global precedent, showing corporates that they may no longer be able to use the justice system to resist unwanted reforms, particularly on climate change. The court-ordered target, resulting from a case filed by Friends of the Earth on behalf of a wide group of stakeholders in 2019, is much higher than Shell’s stated target of reducing the carbon intensity of the products it sells by 20% over the same period from a 2016 baseline.
On the same day that Exxon and Shell lost, Chevron Corp investors also voted in favor of a shareholder proposal led by Follow This, another pro-climate change investor activist group, asking the oil major to cut its “Scope 3”, or customer carbon emissions. Shareholders voted 61% in favor of the proposal, according to a preliminary count announced by Chevron at its annual general meeting.
At Shell’s AGM on May 18 and BP’s on May 13, both oil majors had to fend off separate resolutions also presented by FollowThis who were demanding that the companies set tougher emission standards to address climate change.
These developments are still just initial steps in the long process of pushing the recalcitrant oil and gas (O&G) majors to seriously implement reforms related to climate change. But for the boards and top management of other global corporates, these developments show how important it is to engage properly with shareholders if they want to survive the world’s transition to renewable energy.
The oil majors have had more than enough warning as the pro-climate-change shareholder activism trend has been increasing for a few years. The difference now is that it has become too big and strong for them to ignore.
Investors are engaging with companies as never before by pairing behind-the-scenes stakeholder dialogue with the one-two punch of filing and supporting public shareholder proposals, according to Rob Berridge, director of shareholder engagement at Ceres, a non-profit sustainability-focused organization. “The goal of such engagement is to encourage companies to disclose risks and align their business strategies with a net-zero emissions future, in line with keeping the global temperature rise to no more than 1.5 degrees Celsius.”
While this engagement strategy is not new, some corporates still have not learnt how to deal with it, particularly in the context of disclosing climate-change risks and planned reforms.
In the case of Exxon, reports indicate that the oil major spent millions in a high-profile PR campaign that did not effectively address the demands by shareholders for more specific carbon-reduction targets.
The fact that more and more institutional shareholders are demanding greater transparency and reforms focused on climate change and carbon-reduction targets means that corporates have to be prepared to engaged positively and cooperate with shareholders with a view to achieving common objectives.
“In 2020, Climate Action 100+, the world’s largest investor engagement initiative on climate change, grew to include 545 institutional investors with a combined US$52 trillion in assets under management, nearly half of all managed assets in the world,” Berridge points out. “Notably, the world's largest and third-largest asset managers, BlackRock and State Street Global Advisors — both joined the initiative this year.”
And it is not only institutional shareholders and climate-change activists with whom the corporates have to be prepared to engage. Other stakeholders include employees, customers, suppliers and the communities in which the corporates operate.
Other corporates have realized the value of shareholder/stakeholder engagement and been responsive to the changing requirements and trends with regard to climate change.
For example, HSBC, following pressure from shareholders, announced on March 10 that it would end its financing of coal mining and coal-fired power plants in the European Union and the countries of the Organization for Economic Cooperation and Development by 2030 — and elsewhere a decade later.
The sooner corporates learn the value of proper shareholder engagement with regard to climate-change reforms, the better the chances they will have of achieving their own carbon-reduction targets.