ExxonMobil (NYSE: XOM) tried to beat back a move from shareholders to press the company to disclose its vulnerabilities to climate change and climate regulation, but it failed. At its annual meeting on Wednesday, shareholders passed a climate resolution with a vote of 62% in favor.
Exxon became the second major oil company in recent weeks to suffer a defeat at the hands of its own shareholders. Shareholders of Occidental Petroleum passed a climate resolution in early May, an important development in years of work for climate activists who have tried to push similar measures through, with little success. The Occidental resolution calls upon the company to review and report on the company’s exposure to climate change.
In the past, these moves have been viewed through the lens of corporate social responsibility. That is, shareholders pressed their companies to clean up their act for the sake of the environment. Or, put more cynically, to at least clean up their public image by being seen complying with the requests of environmental groups.
But that approach has failed to really move the needle for the bulk of shareholders. More recently, however, things are starting to change because the financial calculus is changing. The long-term financial health of the industry no longer looks as rock-solid as it did as recently as just a few years ago.
Over the coming decades, the oil industry will be under assault on multiple fronts. First, governments around the world will steadily tighten the noose around the industry’s collective neck in order to cut down on carbon emissions, President Trump’s rumored withdrawal from the Paris climate agreement notwithstanding. The industry could see death by a thousand cuts through taxes, stricter environmental enforcement up and down the industry such as limits on methane emissions or stricter pipeline safety standards, or an outright ban on certain regions for drilling. In short, public policy could force the industry to leave oil and gas reserves in the ground.
Second, the industry could face peak oil demand at some point because of the rollout of electric vehicles, a development that is not immediately imminent but is the subject of growing speculation from even the most conservative and hard-headed oil companies.
These industry trends have changed the equation for investors. In a potent sign that the industry is suddenly facing more pressure, BlackRock, the world’s largest asset management company, supported the climate resolution for Occidental Petroleum, using its 8% of the company’s shares to tip the scales.
But the passage of a climate resolution by Exxon’s shareholders is on a different level in terms of importance and symbolism. Ceres, one of the leading groups on environmental shareholder activism, called it an "historical shift in investor support for climate disclosure."
Exxon was under added pressure because of the investigation by several attorneys general, led by New York, which allege that the oil major is misleading its shareholders by not disclosing its long-term climate risks. The outcome of the investigation is uncertain but could be a watershed moment for the industry.
Last year, a similar measure only garnered 38%of the vote. Exxon reportedly lobbied shareholders directly in the lead up to this year’s vote, pressing them to reject the resolution. Exxon maintains that it is already scenario-planning for different possible futures. "[T]he corporation agrees with the underlying objective - we just have a different view on the best means to achieve it," Exxon said in a statement. In any event, the company maintains that it is confident it will be able to produce all of the oil and gas on its books.
But on Wednesday, 62% of them passed the resolution. Shareholders also passed separate resolutions calling on Exxon to describe its plans to reduce methane emissions.
The passage of the resolution by a large margin will force Exxon, whether it wants to or not, to become more transparent about its financial risks. "Whether it's shareholders or attorneys general or the passage of time, they're going to have to become honest about the potential for their assets to be stranded," Bob Litterman, chairman of the risk committee at asset-management firm Kepos Capital, told CNBC. And with major pools of money from asset management companies like BlackRock shifting in favor of climate disclosure, there is probably no going back.
Nick Cunningham of Oilprice.com
