Exxon Exits: After the Storm

Two years after a historic push from investors, ExxonMobil serves as an instructive case study of taking engagement efforts to the board.  

Oil and gas major ExxonMobil’s annual general meeting (AGM) on 26 May 2021 was “the perfect storm”, according to Aeisha Mastagni, Portfolio Manager within the Sustainable Investment and Stewardship Strategies Unit at California State Teachers’ Retirement System (CalSTRS).  

In a historic moment, a majority of the company’s shareholders unseated three board members, replacing them with individuals from the energy industry with the necessary experience to oversee and accelerate Exxon’s low-carbon transition.  

“It was indicative of a broader shift of power – a coalition of players working together to achieve the result,” says Edward Collins, Director at NGO InfluenceMap.  

What made the outcome even more impressive was that it was headed up by small US$250 million hedge fund Engine No. 1, albeit supported by a wide range of shareholders, including asset owners like US pension fund CalSTRS, and the three biggest passive investors – BlackRock, Vanguard and State Street. Engine No. 1 owned just 0.02% of Exxon’s shares and was concerned about the company’s diminished returns and high debt levels, as well as its carbon emissions. 

Mastagni says CalSTRS backed Engine No. 1 due to Exxon’s “poor capital allocation, lack of [relevant] skill sets on the board to handle the climate transition, and a breakdown in governance”. 

“Our goal in working with Engine No. 1 was really to support credible candidates that had deep, transformative industry experience to handle the climate transition,” she tells ESG Investor. 

“It made for a compelling story when talking to other investors, as there was this increasing level of frustration amongst shareholders and what felt like a lack of accountability.”  

A 2020 Carbon Tracker report outlined how Exxon’s shareholder returns deteriorated between 2007-14, with shareholders losing money between 2014-19, due to the company betting on “high cost, low return” and unsustainable assets in its portfolio of future development projects, including heavy oil and liquified natural gas (LNG). 

Between 2007 and 2019, Exxon delivered less than 1% in shareholder returns (capital gains and dividends) per annum, around 10% in total over the 12-year period, the report noted. Chevron shareholders saw returns double to 6% a year over the same timeframe.   

In 2019, Exxon dropped out of the S&P 500’s top ten stocks and was removed from the Dow Jones Industrial Average in 2020.  

Exxon’s approach to climate change also appeared to lack ambition – for example, while Exxon agreed to set interim Scope 1 and 2 decarbonisation targets at the 2020 AGM, it continues to push back against setting targets for Scope 3 emissions. 

CEO Darren Woods even dismissed the need for oil and gas companies to set emissions intensity targets and characterised the practice of divesting fossil fuel assets as a “beauty competition”, arguing this would not tackle climate change.  

Of course, it’s important to note Exxon’s lengthy history of climate denial, hiding scientific evidence and attempts to stall climate action, which has been handily outlined by Greenpeace.  

The outcome at Exxon’s 2021 AGM ultimately “sent a signal [to the oil and gas industry] that, after years of declining demand for oil and gas and not listening to shareholder requests for capital discipline and climate action, they had crossed a threshold,” says Andrew Behar, CEO of US shareholder advocacy group As You Sow.  

But how much progress has Exxon made since? Did escalating engagement by targeting directors move the dial? And what parallels or lessons are there with the 2023 target of voting against board members?  

Ben Cushing, Campaign Director of Sierra Club’s Fossil-Free Finance Campaign, says incremental progress should not signal the end of the road for climate-focused engagement.  

“If anything, the outcomes of Exxon’s AGMs since – and the lack of change – should be a signal that pressure on Exxon’s directors and management should continue indefinitely.”  

Small steps  

Two years later, opinions on whether the new board members have delivered sufficient climate-related progress are mixed. 

“The board shake-up has had a material impact on Exxon’s climate approach,” says Andrew Logan, Senior Director for Oil and Gas at US Investor network Ceres.  

“This is a company that, for 20 years, refused to even set a simple emissions reduction target. 

“They never allowed investors – even the largest investors – to meet with the board; they had an insular culture that actively kept out external ideas.” 

The Engine No. 1 campaign has changed that, he argues.  

Exxon has since set a number of targets, including net zero greenhouse gas (GHG) emissions for its operated unconventional assets in the Permian Basin by 2030. Logan also notes there has been cultural change through a series of external hires, including their CFO and Head of its low-carbon business 

One year after the new director appointments were made, Engine No. 1 praised Exxon for its transition progress and highlighted its achievements, including the company’s commitment to invest US$15 billion over the next six years to advance low-carbon solutions. 

However, As You Sow’s Behar questioned Exxon’s decision to invest in controversial technologies like carbon capture and storage (CCS), “rather than following the transformational plan to invest in becoming an energy company rather than an oil and gas company”.  

Neil Quach, Senior Corporate Research Analyst at Carbon Tracker, determines that the rate of progress “may not appease the ESG-oriented investor community, but Exxon has improved significantly”.  

In some key respects, progress seems negligible. InfluenceMap research highlights Exxon’s continued attempts to lobby against climate-focused policy, which Collins says is “significantly misaligned from what the science tells us”. 

Barbara Davidson, Carbon Tracker’s Head of Accounting, Audit and Disclosure, also argues that Exxon’s board is still “failing to provide all the required climate-related financial information to investors”.  

For the year ending 31 December 2022, Exxon disclosed considerations of climate-related matters within its financial statements when determining “asset impairments”, according to Carbon Tracker research 

But “it was not clear how Exxon made [these] considerations, and what the impacts were on its financial statements (if any)”, or whether the company “considered the impacts of any other material climate-related matters, such as changes to demand or achieving its other emissions targets, in its impairment assessments”.  

Shareholder pressure appears to have stalled. This AGM season, Exxon shareholders rejected all filed shareholder proposals – the majority of which addressed climate-related issues. These included a request by activist group Follow This – which was labelled “an anti-oil and gas group” by Exxon CEO Woods – for the company to set medium-term decarbonisation targets for Scope 3 emissions. The resolution received support from just 11% of shareholders, down from 28% the previous year.  

Mastagni emphasises that while “progress doesn’t happen overnight, we are starting to see the company move in the right direction”. 

She says that the pension fund has had conversations with Exxon about lobbying transparency, methane emissions, and unlocking climate-related opportunities.  

Board of change  

Challenging corporate directors has long been viewed as a form of engagement escalation for shareholders, but is it the most effective tool available to them?  

Exxon shareholders’ decision to escalate their concerns “was a really important signal that investors were prepared to directly hold the board accountable and change its composition”, says Cushing from Sierra Club.  

“Anything that investors and other financial institutions can do to push forward decarbonisation and reduce systemic risks is vital – and companies really do care when directors are challenged as a part of those efforts.” 

A new briefing published by the Climate Governance Initiative in collaboration with InfluenceMap highlighted best practice for demonstrating board members are accounting for climate-related risks and effectively implementing and delivering their transition strategies.  

Board directors should ensure their company adopts a “proactive, transparent and constructive” voice in public policymaking and broader societal engagement, it said, adding “it is not unusual for companies to make ambitious climate commitments that are then inconsistent with, or actively undermined by, the lobbying policies of the trade associations of which they are members”. 

Clara Melot, Stewardship Specialist at the UN-convened Principles for Responsible Investment (PRI), tells ESG Investor that, beyond voting on director appointments or challenging the company at the AGM, investors may also find it useful to assess the board’s climate competency to understand its ability to manage climate-related risks and their impacts to the company’s operations and business.  

“Investors may be able to identify and suggest opportunities to improve competency through targeted training, director education programmes or use of external expertise,” she says.  

Climate stewardship [of directors] doesn’t end at the AGM,” she adds.  

“Once a management proposal or shareholder resolution has passed, investors should monitor progress on targets and outcomes and hold directors accountable for failing to act on majority-supported resolutions.” 

Changing tack  

While some shareholders look at Exxon’s record over the last two years with guarded optimism, progress made by the oil and gas sector overall has been disappointing.  

“There have been decades of investor engagements with major polluters like oil and gas firms that have only yielded incremental progress at best and, in many cases, no progress at all,” says Cushing. 

In February, the International Energy Agency (IEA) criticised the oil and gas sector on its limited progress cutting down methane emissions, of which the energy sector accounts for 40% of emissions attributed to human activities in 2022. Halting all non-emergency flaring and venting of methane in the industry would cost US$100 billion to implement, the IEA said, noting the technologies needed to implement these changes are “available and are cheaper than ever”.   

The latest Net Zero Tracker Stocktake report, which was compiled by Net Zero Tracker, Oxford University and the Energy and Climate Intelligence Unit, said the fossil fuel industry’s decarbonisation efforts remain “deeply misaligned” from a Paris-aligned net zero trajectory. Of the world’s 114 largest fossil fuel companies, 75 (67%) had made public net zero commitments, as of May 2023, but there continues to be a notable absence of phase-out plans for oil and gas production within these targets, as well as a failure to properly address Scope 3 emissions.  

Some investors are choosing to cut their losses and divest from the sector altogether. This slashes portfolio emissions and sends a strong signal to oil and gas firms about the financial consequences of failing to set out credible transition plans. But it also silences the ‘good angels’, especially if less climate-conscious investors take their place.  

The argument for influence is open to question. Climate-related resolutions have failed this AGM season, with some gathering less support than last year. Efforts to unseat chairs also received insufficient support, although the motivations for these shareholder rebellions were different from the one that removed Exxon’s directors.  

One response is for investors to step back from the oil and gas sector altogether and consider how best to engage with the rest of the value chain.  

Adam Matthews, Chief Responsible Investment Officer at the Church of England Pensions Board, and former Climate Action 100+ engagement lead for Shell, has argued that investor engagement with the oil and gas sector is at a crossroads, and that more focus should be placed on the demand-side and how quickly these companies can reduce their dependency on oil and gas.  

This whole system approach is the only way to make change at the scale and pace needed to address the urgent challenge of climate change,” agrees Logan. 

The writing is on the wall for oil and gas firms. As highlighted by the IEA: there can be no more new oil and gas production if the world is to achieve a 1.5°C scenario. But with scientists expecting us to breach this barrier next year, waiting for oil and gas firms to reach the logical conclusion is not an option.  

Mastagni from CalSTRS is confident that the waves made by Exxon’s AGM in 2021 are still being felt and considered by oil and gas companies globally. 

She says: “The outcome that day told the oil and gas industry that no company is too big or too iconic to escape the influence of shareholders and investors. We will continue to hold the directors of companies like Exxon accountable.”  

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