The ICCR says the oil and gas major is undermining both the US SEC and investors through its action.
Institutional investors have sent a letter to ExxonMobil’s board of directors, asking the oil and gas major to abandon a lawsuit it has brought against shareholder proponents.
Exxon filed the lawsuit in January against investment manager Arjuna Capital and activist group Follow This in a Texan court, asking for a declaration backing the company’s right to exclude the resolution from its 2024 ballot. The decision circumvents the US Securites and Exchange Commission’s (SEC) process for shelving or tabling shareholder resolutions.
Despite Arjuna Capital and Follow This having since dropped the shareholder proposal, which requested medium-term emissions reduction targets for Scopes 1-3 emissions, Exxon intends to pursue the lawsuit.
The Interfaith Center on Corporate Responsibility (ICCR) – a broad coalition of more than 300 institutional investors representing US$4 trillion in invested capital – sent a letter on 8 February, outlining investor concerns around the lawsuit.
“We believe this costly and unnecessary suit constitutes a serious threat to shareholder rights,” ICCR CEO Josh Zinner wrote. “It also sends a clear message that the company is seeking to shut down any debate by its shareholders on actions needed to address climate risk. To trivialise a request from shareholders that Exxon demonstrate that it is taking [the climate] threat seriously raises serious questions about its commitment to address these risks.”
Zinner also dubbed the disregard that Exxon has shown for investors seeking to mitigate portfolio risks as “breathtaking”.
“Given Exxon’s preference to fight a battle in court rather than allow shareholders the freedom of a vote at its annual general meeting (AGM), we decided to withdraw the climate proposal,” said Mark van Baal, Founder of Follow This. “Now that we have withdrawn and promised not to re-file the proposal with Exxon, the company has no reason to continue the lawsuit.”
Breaking the code
Exxon has made the unusual decision to take the issue to court, rather than filing a no-action request with the SEC. Such requests can be filed within 14 days of a shareholder resolution being brought to the table, provided a case can be made as to false or misleading statements, relevance, ordinary business, duplication, and substantial implementation.
The ICCR’s letter claims that the lawsuit is a clear attempt to undermine the SEC’s authority and credibility. Without the SEC staff as arbiter, investors will be forced to appeal to the courts to protect their rights, which would signal a new era of onerous and costly litigation, it added.
“Exxon’s suit levels not-so-subtle criticism at the SEC staff for its recent approach to shareholder proposals, which has been more permissive towards prescriptive proposals like this one,” said Amy Roy, Partner at US law firm Ropes & Gray.
Research has shown that the number of no-action challenges brought by companies during the 2023 proxy season fell to 184, from 241 the previous year. The SEC sided with companies 46% of the time, compared to 28% in 2022.
Exxon now claims it is only challenging the shareholder proposal due to its highly prescriptive nature, arguing that Arjuna Capital and Follow This are not typical shareholders, but climate activists strictly pursuing a climate-focused agenda.
“It seems fairly clear that the defendants here are self-proclaimed activists promoting particular climate-focused goals as a policy matter,” said Roy. “This is distinct from ESG-focused asset managers seeking to understand climate-related financial risks and opportunities for the companies in their portfolios to ensure long-term creation.”
The ICCR, however, disagrees. According to Zinner, investors view climate change as a systemic economic risk that imperils their entire portfolios – yet there is real concern that Exxon will invoke the courts as a default option to settle differences with its shareholders going forward.
“We would not see the suit as a signal that Exxon is not prioritising climate transition,” Roy contended. “Exxon’s public statements and financial disclosures make clear that the company is focused on climate transition, and it regularly engages with shareholders to discuss climate-related risks and opportunities.”
“Let’s not forget Exxon’s decades-long and well-documented campaign of misinformation regarding climate change, which hindered our ability to alter the current course of global warming,” countered Zinner.
A study published by Harvard University and the University of Potsdam noted that Exxon has known about the dangers of greenhouse gas emissions for decades and was able to accurately predict the extent of damages caused by continued fossil fuel use.
Exxon CEO Darren Woods has previously dismissed the need for oil and gas companies to set emissions intensity targets, and labelled Follow This as an “anti-oil and gas group”. Against that backdrop, Exxon announced increased profits of US$36 billion last year – above its own expectations.
Case or controversy
In its filing, Exxon requested relief from the Texan court by 19 March. The oil and gas major is due to file its proxy statement by 11 April, ahead of its AGM on 29 May.
Ropes & Gray’s Roy questioned whether the Texan court still has the jurisdiction to decide the outcome of the lawsuit, now that the proposal has been rescinded.
“Under the US Constitution, federal courts may only hear an action that is based upon a ‘case or controversy’ – that is, a live dispute between the parties, not hypothetical legal questions,” she explained. “With the challenged proposal now having been withdrawn, there is a question as to whether there remains [such a thing].”
Regardless of the outcome, Roy said it was unlikely that many companies would be as motivated as Exxon to pursue litigation against climate-focused shareholders. “Although we suspect many companies will be keeping a close eye on the outcome – if any – of the litigation,” she added.