Q&A: the end of big oil?

The oil industry last week faced a “paradigm shift” after climate activists and asset managers led revolts at the annual general meeting (AGM) of the US companies ExxonMobil and Chevron.

Meanwhile, in Europe the Anglo-Dutch oil major Shell lost a landmark court case that will force it to cut its carbon emissions.

In this, the latest in our In the news series, we explain what happened and also how Schroders, which has been active on the issues for many years, is using its influence to take climate action.

What happened at ExxonMobil?

Hedge fund Engine No.1 put forward resolutions at Exxon’s AGM aimed at replacing four directors with its own choices. It had been supported by investors including some of the US’ largest pension funds.

Schroders supported all four resolutions proposed. Other investors did likewise, such as BlackRock, Vanguard and The Church of England’s investment fund.

Two of the resolutions were successful, resulting in two new members joining the board: Gregory Goff, an executive at Marathon Petroleum and Andeavor and Kaisa Hietala, formerly of Neste Oyj. These directors were chosen for their expertise in sustainability and the energy transition.

Yesterday a third nominee, Alexander Karsner, a strategist at Google owner Alphabet Inc and former US assistant secretary of energy, won a seat on the American energy corporation’s board.

What is Engine No.1?

It is a San Francisco-based hedge fund set up in December by Chris James, a veteran investor. The name makes reference to one of the city’s most famous fire stations.

There are six further directors with backgrounds in private equity, activism, environmentalism and technology.

The campaign was led by Charlie Penner, one of the six. In a previous role he worked with California State Teachers Retirement System to force change at Apple.

Why was Exxon targeted?

Shares in Exxon, which trades with the Esso and Mobil brands, have underperformed the sector over five years. While some oil companies have embraced the energy transition, Engine No.1 said Exxon had not. The fear is that Exxon will be left heavily exposed to assets that will be stranded by accelerating action to tackle climate change.

Pressure intensified after the company suffered a $22.4bn loss last year, mainly as a result of a Covid-induced slump in global oil prices. Chris James of Engine No.1 told Bloomberg: “It was a campaign that was built on logic and economics".

What happened at Chevron?

Its AGM was the source of a further shock on the same day as Exxon’s. 61% of shareholders voted for a resolution calling for the company, which also trades as Texaco, to “substantially reduce” its scope 3 emissions, those from its products. The company said it would carefully consider the result.

Chevron has lagged behind peers in setting a net zero target that takes into account the carbon emissions of the oil and gas that it sells.

We supported the resolution and also continued to vote against the chair of the governance committee, to show our disappointment at the lack of progress in setting robust emissions targets. 

What happened with Shell?

More broadly, European companies are perceived to be changing faster than their US rivals. However, Shell also faced a wake-up call last week. In a case brought by Friends of the Earth, a Dutch court ordered the company to reduce its carbon emissions by 45% by 2030 from 2019 levels.

Shell recently set a target to cut the carbon intensity of its products by at least 6% by 2023, by 20% by 2030, by 45% by 2035 and by 100% by 2050 from 2016 levels, “one of the sector's most ambitious climate strategies,” according to Reuters.

But the court said that Shell's climate policy was "not concrete and is full of conditions...that's not enough".

Shell said that it would appeal the court verdict and that it has set out its plan to become a net-zero emissions energy company by 2050.

Why is so much happening now?

Each year climate activists target “AGM season” from April to June, using these forums to drive change, albeit sometimes just by shining the light of publicity on failings. Oil companies are also facing a protracted spell of poor financial performance, partly due to falls in the price of crude. But it has coincided with greater awareness of the cost to shareholders if companies do not transition fast enough, especially in the face of fast-changing legislation.

As the FT’s Gillian Tett put it: “The new activists are not just trying to save the world; they are also trying to save their own portfolios in a world where regulators are enforcing green standards". 

The events of last week were also preceded by a report from the International Energy Agency (IEA). It said development of new oil and gas fields must stop this year and no new coal-fired power stations could be built if the goal of net zero emissions by 2050 were to be met. It also called for no new fossil-fuel cars to be sold beyond 2035.

What next?

Attention will increasingly fall on COP26, the next United Nations climate summit. Its full title is the 26^th Climate Change Conference of the Parties and will take place in Glasgow in November. 

More than 190 countries have signed the Paris climate accord struck at COP21 in 2015. It aims to limit temperature rises to well below 2 degrees Celsius, and ideally to 1.5 degrees Celsius, compared with 1900 levels. The latest Schroders Climate Progress Dashboard - our climate change tracker - suggests progress is too slow, forecasting a rise of 3.6 degrees.

Campaigners are hoping for further commitments to be agreed upon at COP26, or in the run up to it.

The attention on fossil fuel companies, and for the banks that lend to them, is also expected to increase this year. Investors are becoming more orchestrated in their approach to influencing companies. Climate Action 100+ has attracted 575 institutional investment firm signatories, including Schroders. They represent $54 trillion-worth of company ownership.

But it doesn’t stop at oil companies, this year our own engagement has focused on the banks that finance these fossil fuel companies. And we have seen a number of encouraging responses.

In one example of increasing collaborative influence, investors brought together by the UK’s ShareAction group encouraged HSBC to commit to phase out its financing of coal-fired power and thermal coal mining in the EU and Organisation for Economic Co-operation and Development by 2030 and globally by 2040.

Following pressure from the climate motion led by ShareAction a new management-proposed resolution passed, overwhelmingly, in May.

Our view

Resolutions at AGMs make up one part of the picture on corporate influence. Active asset managers should also be engaging with companies throughout the year in order to identify risk and enhance value for their clients.

Rory Bateman, Global Head of Equities, said: “There is no doubt that we need to see faster action in the oil industry. There are various mechanisms that can help achieve this.

"We believe it is essential to engage with companies consistently. We regularly meet with management and board members to share our concerns and our expertise on how they can accelerate change.

“We will back resolutions if companies are not changing fast enough. A lack of action increases the financial risks faced by our clients and that is something we can’t accept.

“However, each resolution needs to be assessed on its own merits. This involves careful fundamental analysis of the resolution and the company’s behaviour. In some instances, these resolutions can tie the hands of management and actually slow climate action.”