Tomorrow is the annual shareholder meeting of the world’s largest oil and gas company, ExxonMobil, a firm that has repeatedly set its face against its own shareholders’ entirely reasonable demand for disclosure about the resilience of the company’s portfolio and strategy in a scenario where the goals of the Paris Agreement are achieved. As we know, any other scenario presents grave risks and dangers to people and portfolios worldwide.
No prudent fiduciary investor holding ExxonMobil stock should do anything other than support proxy item no 12, the climate change resolution co-filed again this year by the New York State Common Retirement Fund and the Church Commissioners.
Indeed, it seems likely this year that the assiduous efforts of the co-filers to solicit support will finally be rewarded. If all goes well tomorrow, and the resolution passes, the filers and all involved deserve hearty congratulations.
But what comes next? Forcing a company to disclose information about what could happen to its carbon assets and its business model in a 2-degrees world is not the same thing as getting the company’s board to commit to repositioning the firm for commercial success in such a world.
We must acknowledge that the disclosures demanded by investors are but a first step towards meaningful action to protect individual company valuations and investors’ overall portfolios in the context of an accelerating but fragile energy transition. The recalcitrance displayed by ExxonMobil’s board is a warning that the task of stewarding fossil fuel companies to comply with the challenges of the Paris Agreement will be a demanding one.
Those investors who have chosen to divest their fossil fuel holdings have taken the easy road, and who can blame them? They have made their own portfolios safe from the valuation risk associated with fossil fuel asset stranding.
However, by selling their holdings in fossil fuel companies to others in the market, they have shuffled off responsibility for the daunting task faced by the investment community as a whole of ensuring fossil fuel companies comply with the logic of the Paris Agreement.At stake is far more than the safety of investors’ portfolios; our very way of life depends on keeping in the ground carbon reserves and resources that hydrocarbon companies still hope to bring to market.
Exxon is far from being alone is defying the unpalatable logic of Paris. Indeed, an alarming recent phenomenon is the growing bravado of directors of high carbon companies around the world who openly defy the odds of limiting temperatures to 2 degrees of warming and unapologetically proclaim their commitment to business strategies and capital expenditure that make commercial sense in a world on its way to 3 and 4 degrees of warming.
Here in Europe, our oil and gas majors have for some time offered a more conciliatory tone in discussing climate change and the Paris Agreement than their peers in other regions. Nevertheless, we must look beyond the soothing rhetoric and examine the facts. At BP and Shell’s AGMs earlier this month, shareholders were invited by the boards to vote for new 3-year remuneration policies that incentivise company management to focus on getting the maximum volume of hydrocarbons onto global markets.
Those newly endorsed pay policies take us through to 2020, the year when scientists tell us global emissions must peak to keep our planet inside 1.5 degrees of warming. There is literally no time for complacency, which is why it was so disappointing that such a meagre number of institutional investors in Shell and BP made the link between their concern about climate change and the need to reward executives for charting a new low carbon course into the future.
Certain leaders in the investment community did step up by withholding their consent for Shell and BP’s new pay policies, amongst them NEST, the Environment Agency Pension Fund and the Church Commissioners. These investors should be applauded; and the weeks ahead will reveal who else was willing to use their votes to signal “enough” to the business-as-usual implications of these unhelpful remuneration policies.
Shell and BP matter not only because of their size but because they were the companies, back in 2015, where the first disclosure-focused climate change resolutions were passed.
It was a heady moment and the shareholders who co-filed, including ourselves at ShareAction, felt something important had been achieved. Those resolutions went on to be the model for dozens more, including the resolution which goes to the vote tomorrow at Exxon Mobil.
In watching Shell and BP’s response over the last two years to those 2015 climate change resolutions, it’s difficult not to feel a little queasy. Were we perhaps a trifle hasty in congratulating ourselves? The fact is neither company has as yet proposed or even seriously worked up a convincing strategy for commercial resilience in a low carbon global economy.
For those investors who have chosen engagement over divestment, low carbon business models is what they must now openly demand of their fossil fuel holdings. That doesn’t imply micro-management: different fossil fuel companies can and should be free to propose and pursue quite different looking strategies.
Nevertheless, any and all strategies should be Paris compliant; anything less presents too much investment risk. Institutions responsible for the retirement assets of anyone younger than 45 years of age face a clear fiduciary imperative either to escalate engagement efforts with their fossil fuel holdings, or admit defeat and choose some element of safely through divestment.
But not everyone even has the option of divestment. In the UK, over the last four years, 7m people on low and modest incomes have become pension savers for the first time.The vast majority are in passive global equities funds, almost invariably market cap weighted with significant exposure to high carbon companies whose current business models are incompatible with the goals of the Paris Agreement.
For these passive funds, divestment is not on the cards by definition. This places a heightened responsibility on the asset managers of those funds, and the pension trustees who appoint them, to adopt far more muscular engagement strategies aimed at properly reducing the growing financial risks of climate change. It’s a daunting task but not an impossible one. Working together with networks like IIGCC and Ceres, the big passive managers of global pension assets have more than enough clout to force the directors of listed fossil fuel companies to switch onto a safer path.
In the year ahead, climate stewardship efforts must be stepped up considerably. Time is no longer on our side, but what needs to be done is becoming so much clearer.
Tomorrow’s vote at Exxon Mobil could indeed be a watershed, with those major passive managers clambering aboard the climate stewardship express. The train is about to start moving faster; and it surely needs to.
Catherine Howarth is Chief Executive of ShareAction.