Building momentum around shareholder resolutions marks a fundamental change in investor sentiment
At ExxonMobil's AGM on May 31st, shareholders backed by 62% a resolution put forward by activist investors to force the company to declare how it will prepare for a lower-carbon future.
The ExxonMobil resolution follows only a few weeks after a similar vote passed at Occidental's AGM. Both boards objected to the resolutions, marking a notable split between management strategy and stockholders' aspirations.
What are the implications?
Pressure on oil and gas companies to publicly declare the portfolio risks of climate change and potentially falling demand for oil and gas has been building steadily for several years. To date, the European Majors have tended to be more proactive (often spurred into action by legislation), while their US peers – and their larger shareholders – have resisted activists' calls for change.
The May 31st vote marks a change in strategic direction – not for the companies themselves, but for institutional investors. The ExxonMobil vote followed the passing of a similar resolution at Occidental's AGM earlier in May, both of which were backed by BlackRock, the giant fund manager with an estimated US$5 trillion in assets.
The actions the resolution calls for are consistent with the recommendations published by the Task Force for Climate Related Financial Disclosures (TCFD).
Though the TCFD has yet to finalise its recommendations, and even once finalised, they will only be voluntary, we expect they will increasingly become mandatory, whether formalised under SEC or other jurisdictions' disclosure rules, or through shareholder action.
The prospect of lower and even declining oil demand growth and/or greenhouse gas limits could in time erode the commercial proposition for legacy oil and gas operations, which underpin the Majors' valuations. Major stockholders are now demanding transparency over the financial impacts of these threats.
With ExxonMobil on board, pressure is likely to mount on other companies to disclose their exposure to climate risks. If (as seems likely) portfolio risks of a '2 degree world' are deemed negative, then investors may ramp up pressure further, and push companies into adaptation strategies such as divesting carbon-intensive production, focusing on gas, or moving into renewable energy.
Arriving at a moment when US participation in the Paris Agreement is in question, the timing of the ExxonMobil resolution is apposite. Technology has shifted the decarbonisation agenda in recent years.
Are investors now willing to take the next steps, and leave climate policy as a bookend to the seemingly inevitable change sweeping the energy sector?