On the same day a Dutch Court ruled that Shell must cut its emissions by 45%, an activist investor group won two seats on the board of Exxon.

Wednesday May 26th may well go down in history as the day global oil companies were finally forced to take responsibility for their emissions and for climate change.

Shell Held Responsible for Human Rights Impact of Climate Change

Shell was taken to court by an environmental protection organisation called Friends of the Earth who argued that the company has a ‘duty-of-care’ to reduce emissions in-line with the Paris Agreement.

The Paris Agreement is an international treaty, so it’s binding only between countries, not companies. However, in The Netherlands, a previous court case (the Urgenda case) found that companies have a responsibility to contribute to national efforts to achieve the Paris Agreement goals.

So, along with this precedent, the Dutch court found that Shell did in fact violate its duty of care, under Dutch law, because its policies and emissions contributed to dangerous climate change.

This is a big deal. Shell will now be forced to reduce its emissions by a staggering 45% by 2030. This is a far greater reduction than Shell had promised under its own emissions reduction plan.

But the impact of the case goes further, because it recognises that climate change is a human rights issue, and that private companies have a responsibility to do their part in reducing emissions.

And even amid so much pressure for action on climate change, even under the spotlight of international media attention, Shell still maintained their climate-denial stance, stating that the plaintiffs could not establish that reducing Shell’s emissions would have an impact on climate change.^[i]

Activist Shareholders Claim Huge Victory Against Exxon

A small activist investment fund has achieved a momentous feat; they proposed 4 new directors for the board of oil giant, Exxon, and with the support of huge investors like calSTRS and Blackrock, they got sufficient votes to have 2 of their nominees added to the Exxon board.

This is an unprecedented win, and it marks a distinct change in attitude from major investors who are tired of big energy companies ignoring the investment risks of continuing to invest in oil exploration and production.

‘Shareholder activism’ of this type is not new, but Engine No. 1 learned from the past and took a different approach.

But first, a brief explanation of how corporate voting works.

Every year companies hold an Annual General Meeting in which shareholders come face-to-face with a company’s board and management. Shareholders have the chance to vote on issues like CEO pay, and re-election of board members. But, shareholders can also put forward a ‘shareholder resolution’. These resolutions are often a way for investors to air their grievances towards the company, to try to drive change, but for obvious reasons, company management very rarely supports them, and historically, big institutional investors tend to back the position taken by management.

Engine No. 1 knew this well, and so they didn’t file a resolution that demanded the company reduce the emissions its customers produce (like they did at Chevron). Instead, they targeted the board, and they proposed 4 new directors, all of which are highly regarded in the energy industry, plus, they have experience in the transition to renewable energy^[ii].

(It’s notable that this case brought to light the fact that Exxon previously had no independent directors with energy experience. Which has been raised as evidence for Exxon’s aversion to change^[iii].)

While Engine No. 1 has only a tiny shareholding in Exxon, they were able to garner the support of investors who have a material holding. They got the likes of calSTRS and Blackrock to back their candidates, and they gained two board seats, with the potential for a third board seat as vote counting continues.

Shareholder Action in Australia will get a boost

While Exxon’s headquarters are in the US, the company has a major presence in Australia, which means climate-action at HQ is likely to have an impact here^[iv]. The same goes for Exxon and Chevron, with both companies controlling large-scale projects in Australia.

We also have our own shareholder activists here too, with organisations like ACCR and Market Forces working diligently to file shareholder resolutions, and do in-depth research into corporate bad behaviour.

A key example is the strong support the ACCR received for its proposal that Woodside Petroleum should set climate targets in line with the goals of the Paris Climate Agreement, and make progress to reduce its own operational emissions, as well as those of its customers^[v]. The resolution received an unprecedented 50% support from the company’s investor base.

Organisations like ACCR depend on support from both small and very large investors. On the one hand they need the support of, at least, 100 small-scale investors, who hold at least $500 worth of shares in a target company. This is the minimum level of support their resolution must have to be accepted by the regulator. But once it’s added to the agenda to be voted upon, they then need to campaign for support from the institutional fund managers who cast ‘proxy votes’ on behalf of their investors. They need to swing these large pools of votes if they hope to achieve a material result.

The next hurdle is that many shareholder resolutions are not binding, the result is simply a message to company management, and it’s up to them whether they respond.

The stronger the vote, the harder it is for the company to ignore the will of its shareholders.

If you’d like to offer your support, you can sign up to the ACCR’s newsletter. They often put a call out, trying to find independent shareholders of companies they’re targeting. If you hold the shares, you can agree to go on their register so that they can reach the required number of 100 investors, and then put forward the resolution.

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^[i] https://www.reuters.com/business/legal/big-oil-may-get-more-climate-lawsuits-after-shell-ruling-lawyers-activists-2021-05-28/

^[ii] https://impactalpha.com/charlie-penner-engine-no-1/

^[iii] https://www.reuters.com/business/energy/exxon-vows-add-two-new-directors-ahead-bitter-proxy-fight-2021-05-24/

^[iv] https://www.accr.org.au/news/extraordinary-24-hours-has-massive-implications-for-australian-oil-and-gas-industry/

^[v] https://probonoaustralia.com.au/news/2020/05/woodside-shareholders-send-strong-climate-message/