Oil giants under pressure - A turning point for ESG investing?

June 11, 2021

In the wake of major events affecting oil companies in recent weeks, we look at the market reaction and the longer-term implications.

It has been a momentous few weeks for the energy industry.

Activist hedge fund Engine No 1 succeeded in kicking out three ExxonMobil directors and installing their own nominees at the oil major’s 26 May shareholder meeting.

All three new appointees have sustainability credentials and are expected to pose difficult questions to a company that has been reticent to engage on climate change issues for many years.

Alongside these developments, Royal Dutch Shell was defeated in a court battle late last month, with campaigners from the Netherlands arm of Friends of the Earth and Milieudefensie, emerging victorious after a Dutch judge in The Hague ruled that Shell had violated a duty of care obligation in relation to the human rights of people affected by climate change.

According to the ruling, the company must take stronger action to tackle its carbon footprint by reducing net emissions by 45% by 2030 – a significantly more demanding target than its previously stated aim.

Elsewhere, another Dutch campaign group, Follow This, gained the backing of 61% of Chevron shareholders at the company’s AGM in an effort to force the company to cut carbon emissions.

The same group forced through similar proposals at smaller oil companies ConocoPhillips and Phillips 66 in May.

The Shell ruling was deemed “legally, economically and societally” significant by Thom Wetzer, head of the sustainable law programme at Oxford University, who added that it had put all energy companies and heavy emitters “on notice”.

US laggards

The need for action and change is obvious, particularly for US oil companies. While European competitors – Total, Equinor, and BP, for example – are investing significantly in renewable energy and have engaged with activist shareholders, Exxon and Chevron lag behind on both counts.

As the chart in this NPR article illustrates, the combined renewable operations of Chevron and Exxon are miniscule in comparison to European rivals, and they have next to nothing in development.

Campaign groups have been attempting to change behaviour at oil and gas companies for years. What has changed in recent months, however, is that institutional investor pressure has been building – and has proven much more influential.

As Ed Crooks, vice-chair of the Americas at energy consultancy Wood Mackenzie, told the New Statesman’s Energy Business website, the vote results for both Chevron and ExxonMobil were driven by groups of institutional investors due to their “assessments of investment risk”.

“It’s been far too easy for much of the industry to kick the challenges of adapting to a low-carbon future into the long grass,” wrote Crooks’ colleague Simon Flowers in a blog post earlier this month.

“These three events will trigger a domino effect through the wider sector with more stakeholder actions through courts and AGMs. No board, whether major, NOC or independent, can now afford to dismiss the energy transition.

“The timeframe for change is accelerating, driven by investor pressures more than fundamentals.”

Commenting to CNBC in the aftermath of the Shell ruling, Tom Cummins, dispute resolution partner at law firm Ashurst, said it was “the most significant climate change related judgment yet”. He added: “Oil and gas companies will be scrutinising the judgment, as will pressure groups and claimant lawyers to see whether there is scope for similar claims to be brought against other companies in other jurisdictions.”

Others are less confident that the events of the past few weeks will signal significant change. Rystad Energy’s head of analysis Per Magnus Nysveen, also commenting to CNBC, said the Shell ruling had “negligible chance to survive appeals”.

Meanwhile, Bank of America analyst Doug Leggate said in a research note that Engine No 1’s victory at ExxonMobil was “largely symbolic” and had no impact on the investment case.

However, the events certainly signal to oil companies and other carbon-intensive organisations that they cannot ignore investor views any longer. Climate change is real, and companies must respond.