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Is a New Day Dawning at Exxon?

Climate change campaign by activist shareholder elicits Board shakeup

June 2021

The votes are in. Exxon shareholders elected three directors backed by an activist shareholder who called for a stronger approach in the oil giant’s response to climate change. It’s the first proxy campaign at a major US company where directors were the target and climate change was the issue.

Anne Simpson of the California Public Employees Retirement System (CalPERS), which backed the rival directors, said the vote was a “day of reckoning” for Exxon and a warning to other oil companies.

But what are the effects of the vote? Is it a turning point in the fight against climate change? We see a few lessons here, but while the vote will bring substantive changes, its impact may be more limited than activists expect.

The tangible impact

First, the Exxon fight shows that voting for directors matters more than voting for climate resolutions. Director elections have real consequences. This was a binding shareholder vote, and its impact on governance will be immediate and tangible.

Compare that to the many climate resolutions put forward at Exxon and other oil companies over the years. Even if they get substantial shareholder support, the company can ignore, defer or water them down. A 2017 resolution to require a climate impact report at Occidental Petroleum won majority support and was hailed by climate activists as an important victory, but it was soon forgotten.

Another lesson here is that a proxy battle is often a referendum on the CEO. Having lost the vote, there’s a good chance CEO Darren Woods will soon lose his job, too. That will certainly get the attention of other CEOs who’ve been reluctant to move on climate programs.

Of course, implementing a strategy shift at Exxon will be a challenge no matter who sits in the CEO seat. Ramping up carbon capture and other climate-friendly technologies won’t happen quickly, and there is no certainty they will pay off.

Lesson three: Economics is more powerful than activism. Exxon lost $22 billion last year and was forced to take charges for asset write-downs and a restructuring. Against that performance, the case for a change in strategy was easy to make.

The irony at the moment, of course, is that Exxon shares are up 42% this year, riding a rally in oil prices. That performance is doubly pleasing for climate investors, burnishing their ESG credentials and fattening their portfolio returns at the same time.

The Exxon vote was a convenient way for big investors to get on the right side of climate-minded activists, investors and regulators. After years of making all the right noises about climate change, they really had no choice but to finally match their rhetoric with a vote. The activist directors wouldn’t have won without them.

But the fight at Exxon also reinforced the idea that only energy companies need to respond to climate risks. In fact, every company does, and most are not getting the pressure Exxon did, either from investors or the media. Investors should focus on other sectors where climate change is likely to have a material impact, like real estate, travel, food, and insurance, and encourage those boards to disclose their climate risks. The TCFD can show them how.

For Exxon, the vote was a defeat years in the making. Even as other oil majors dipped a toe into alternative energy and started to talk about climate change, Exxon didn’t budge. Despite all the changes in the industry, its strategy changed very little. And the company’s legal woes, especially allegations that it misled investors over climate risks, gave it little room to maneuver in its public stance on climate issues.

More to come

Last, the Exxon proxy fight might create fresh momentum at the SEC about a universal proxy ballot. The Exxon battle was one of the most expensive ever, and the cost of proxy contests is a deterrent for activists. If the SEC were to require a universal proxy – essentially one ballot for all directors instead of the competing separate ballots used today – costs would drop. The Council of Institutional Investors, which represents large shareholders, has supported it for years.

Even without ballot reforms, we could see more proxy fights over climate. Activist fund Engine No.1 succeeded at Exxon with a small ownership stake, high quality director nominees, and strong communication. It’s a formula others can follow.

The vote was significant, but it’s unlikely to be the last time company directors are on the line over their strategic response to climate change.

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