This proxy season, shareholder proposals on climate risk are being propelled by a powerful set of tailwinds: an historic climate accord, rapidly changing market forces, and unprecedented shareholder collaboration.
Some of the most powerful voices in the fossil fuel industry, including the Saudi Oil Minister Ali Al-Naimi, are convinced the sector is facing an existential threat. The Secretary General of OPEC is advising its members to look for opportunities to diversify their economies and move away from reliance on oil revenues. In this context, one would assume that western oil companies would be taking aggressive steps to ensure their economic viability in a rapidly decarbonizing world. Now is the time for their boards and executives to chart a path forward for resilience to a future where temperature rise is limited to well below 2 degrees Celsius, as the rest of the world envisions. Yet with a few key exceptions this isn’t happening, leading investors to raise their concerns about the shareholder value and governance of these companies.
As the largest western oil company and one of the least willing to acknowledge the urgency of climate change, ExxonMobil’s practices are a key concern for this investor effort. While peers like BP, Shell, Total, Eni and Suncor have chosen to work with investors and support shareholder proposals on portfolio resilience, Exxon has chosen repeatedly to fight to silence investors by asking the Securities and Exchange Commission to let it keep climate resolutions off the proxy statement. In years past, Exxon has had some success with that strategy, but times have changed.
First, the Paris Agreement reached by 195 countries in December not only re-affirmed the global commitment to keep climate change “well below 2 degrees Celsius,” but it also began the process of achieving that target by securing policies and regulations from 188 parties in the form of “nationally determined contributions.” And that’s just the beginning. Those national plans for greenhouse gas reductions will be ratcheted upward in ambition every five years to ensure that the 2-degree target is met. In the meantime, new policies and regulations are being announced by countries like China, India and the United States almost daily in their quest to accelerate the energy transition to a lower carbon economy. Importantly, these policy choices are being driven just as much by efforts to meet concerns over smog and air pollution by a rising middle class in emerging economies like China and India as by the need to reduce greenhouse gas emissions.Second, market forces are also revealing just how vulnerable many fossil fuel companies are to even small shifts in demand. While the current oil rout has been primarily fueled by oversupply and OPEC ‘s unwillingness to cede market share, the dynamics that have led to it show just how exposed publicly traded oil companies are when forced to compete with their state-owned counterparts. Saudi Arabia may not enjoy living with $20 barrel oil, but Al-Naimi has said that it is willing to if that’s what is necessary to remove the uneconomic producers from the field. That should send a strong signal to markets and investors about how OPEC will respond when climate policies and continued technological advances start to affect demand and price. Yet, Exxon continues to invest, even now, in projects that are at the high end of the cost curve like the Midzaghe oil sands projects and deepwater exploration.
Finally, investors are making unprecedented strides in engaging with the fossil fuel industry. In 2013 a coalition of 75 investors with $3.5 trillion in assets called on 45 of the world’s largest fossil fuel companies to stress test their portfolios for “Carbon Asset Risk”—the real threat that capital invested in high cost, carbon intensive reserves and resources could be wasted due to changes in demand resulting from climate policies, technological advances, or other risks posed by climate change. Last year, European and United States investors joined together to file resolutions at BP and Shell asking the companies to plan for “strategic resilience for 2035 and beyond.” Not only did the boards of these oil majors recognize the importance of this request, but they chose to endorse these resolutions leading to almost unanimous shareholder votes in favor of a comprehensive set of strategies to address climate risk.
Now, in the wake of the Paris Agreement, an international coalition of investors is filing and supporting climate risk resolutions that ask U.S. companies to adopt one key strand of that comprehensive request—stress testing their portfolios for resilience to achieving the globally agreed upon 2 degree target. This kind of stress testing is critical to assure that capital planning and strategy decisions being made today don’t result in multi-billion dollar losses a decade from now, and it is also critical to inform investors about which energy companies are preparing to create long-term value rather than simply survive the current downturn.
Already, major shareowners are publicly declaring their support for these common sense shareholder proposals.
Exxon and Chevron are the most well-known of the companies where investors’ voices will be heard this spring, but investors are also calling on AES, Anadarko, Devon, First Energy, Noble Energy, Occidental Petroleum and Southern Company to act on climate risk.
In addition to these 2-degree stress testing resolutions, there is an array of resolutions geared towards advancing other components of a comprehensive strategy to address climate risk.These include recognition of the moral imperative to act on climate and disclosure of lobbying activities as well as changes to how reserves are reported to better incent executives to orient their companies toward a low-carbon future.
It is time for fossil fuel companies to acknowledge that Paris marked a turning point. Add your voice to the strong and growing call for these companies to demonstrate their resilience.
Mindy Lubber is President of Ceres.