Impact Brief: Changing Big Oil’s Game Plan

How socially responsible investors create impact in public markets

Zevin Asset Management’s commitment to social and environmental responsibility shapes our investment process. As a result, we generally don’t buy stock in the big oil companies whose business models are driving global climate change. However, when our clients inherit shares in major energy companies, we take the opportunity to press management for climate action. As in the rest of our work, we seek to change company behavior to create positive impact and manage risk in our clients’ portfolios. The oil and gas sector is notoriously stubborn, but aggressive shareholder advocacy can wrestle more information from companies with opaque and harmful business practices and contribute to long-term change.

Pumpjacks in California. (Creative Commons, Arne Hückelheim)

Recently, I wrote about some of the hard-fought progress that impact investors are making to push major energy companies toward climate accountability. At ExxonMobil’s annual meeting in May, an unprecedented majority of investors voted for a shareholder proposal demanding a new report on how global policy action to cut carbon will hurt the energy giant’s business. That proposal — which Zevin co-sponsored on behalf of clients who hold legacy shares in the company — challenges ExxonMobil’s executives on climate risk and intensifies pressure on the entire energy sector.

So what…? How can a non-binding proposal on climate risk reporting presented at the annual shareholder meeting help disrupt ExxonMobil and the wider energy sector? And where do investors stand after winning majority votes on climate proposals this year at ExxonMobil and Occidental Petroleum, winning high votes at other fossil fuel companies, and negotiating for an interim victory at Chevron? To answer those questions, it’s worth taking a closer look at how impact investors like Zevin work, what we’re pressing companies to do, and where we want the energy sector to go next.

To use ExxonMobil as an example, this year’s win is an interim milestone in a (long) fight against business as usual. Socially conscious investors led by groups like the Tri-State Coalition for Responsible Investment have put greenhouse gas reductions and climate risk on ExxonMobil’s agenda for decades running. After years of confrontation but little action, shareholder advocacy on climate change is starting to bear fruit. Earlier this year ExxonMobil finally responded to several shareholder proposals, negotiated with faith-based investors, and named a prominent climate scientist to its board.

Exxon sign. (Creative Commons, Minale Tattersfield)

This year’s victorious climate risk proposal called ExxonMobil out for essentially telling the markets that its business model is less risky than it actually is — that fossil fuel prices won’t be affected by future climate legislation. In the view of many investors, ExxonMobil’s prior “carbon risk reports” may be too bullish about fossil fuel demand in the long term. And we’re concerned that faulty assumptions are leading to a false sense of security in the oil and gas sector.

That’s the crux of the dispute. ExxonMobil defends its own analyses as accurate and based on good-faith assumptions. Concerned investors argue that the company is hiding the ball and its public carbon price analyses are inadequate — especially after the landmark Paris Accord, which (although it was recently spurned by President Trump) demonstrates overwhelming global political will to cut emissions in the near future.

This majority vote (62 percent of investors supported the measure) was a very public statement that the investment community rejects ExxonMobil’s claim. Investor response was likely so large because of increasing concern over how the energy sector will respond to regulation aligned with the Paris commitment to hold global warming within two degrees of pre-industrial levels. The vote also reflected recent work by Zevin and our peers to lobby large investment managers such as BlackRock, Vanguard, and State Street to vote responsibly on climate risk proposals. First-time votes from these big firms swayed the outcome at ExxonMobil and added momentum to our movement. Although shareholder proposals are non-binding, ExxonMobil now faces pressure to respond to a wide coalition of investors with a better climate risk analysis.

Why? Because investors have now formally warned ExxonMobil, and if the company doesn’t comply with this proposal, many will begin voting against board director re-elections.

Looking beyond ExxonMobil, investors are pressuring many other big oil and gas companies to produce good-faith reports that comport with the two-degree vision of the Paris Accord. And that work is starting to pay off. The Bloomberg-led Taskforce on Climate-Related Financial Disclosures (TCFD) released its recommendations just this summer. And Chevron published a report in the spring that represents a passable start. Very soon, we hope, ExxonMobil’s prior reports will seem even more insufficient and outmoded.

One ultimate goal is to change the business model of fossil fuel–based companies. Impact investors are betting that we can help get there by demanding risk analysis that is more demanding and reality-based (i.e. grounded in the Paris commitments about future regulation). For instance, if Chevron and ExxonMobil model regulatory pressure and even a modest decrease in fossil fuel demand, more of the company’s reserves should be deemed stranded or impaired. The economic case for exiting dirtier business lines and investing in renewables might become stronger.

Adoption of the Paris Agreement. (Creative Commons, United Nations)

Companies like ExxonMobil won’t do any of this on their own. We must pressure the company through a series of next steps:

1. Join with other investors, meet with the company, and ensure that a legitimate new report is underway.
2. Publicly push ExxonMobil to adopt the TCFD recommendations and other respected standards in its analysis and reporting.
3. Review the new report, flagging deficiencies and misrepresentations.

This path is incremental, but more and more investors are focused on using their voices (and their proxy votes) for impact in the energy sector. In the long term, better climate risk disclosure could convince even more investors to reevaluate and downgrade the long-term chances of the biggest carbon polluters — potentially forcing business model changes. Our advocacy will also push more firms to go on record and detail their climate risks. Those disclosures might spur medium-term policy action and potentially open big oil companies to more lawsuits that could disrupt the sector even sooner.

In parallel with that work, we frequently press policymakers to take climate action, recently testifying in support of proposed carbon pricing legislation in Massachusetts. For now, we are less optimistic about the federal policy environment, but we continue to press oil companies to disclose and curtail lobbying that denies science and blocks climate regulation.

It’s only halftime, and Big Oil is in the lead. Now, however, investors are forcing the sector to rethink its game plan. We’ll keep you posted with updates, and, as always, I’m available to talk through your questions and comments.

Disclosures:

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