Engineering change: governance milestone reached in the low-carbon transition

On May 26, 2021, at ExxonMobil’s annual shareholder meeting, a hedge fund owning a 0.02% stake in Exxon (NYSE: XOM) proved that sometimes, and with the right backing, David can beat Goliath.

While the event in question will take time to affect Exxon’s strategy, the clock may now be audibly ticking, at least in the boardrooms of institutional fiduciaries who’re carefully considering the practical and theoretical outcomes of this case. As Exxon’s proxy vote count proved, the small but determined San Francisco-based hedge fund, Engine No. 1, had persuaded a critical mass of investors in Exxon, including major U.S. pension funds, to vote in favor of Engine No. 1’s proposal to elect new directors to Exxon’s board.

Share (%) of votes received for proposals seeking disclosure on how corporate lobbying aligns with Paris agreement goals

Source: Ceres, June 17, 2021.

And beyond voting for new directors, investors were persuaded by Engine No. 1’s suggestion that Exxon’s board wasn’t doing enough to steer the company toward a sustainable future. As numerous market participants have noted,¹ Engine No. 1 made a compelling case that Exxon needed new capital discipline directed toward the low-carbon transition. Failing that, the company’s cash flows, dividend, and shareholder value could be put at unacceptably high risk.²

Not everyone agreed with this position, particularly some longtime shareholders and avowed climate deniers, but many did—and enough to insert new directors into Exxon’s board. These individuals may well challenge company leadership to make a more definitive move in the direction of curtailing future emissions at all scope levels.³

It should come as no surprise that there’s a long history of shareholder activism standing behind this particular board shakeup and other, similar actions of shareholders speaking out on climate issues.⁴ At this point in the history of asset management, we can say that multiple generations of institutional and retail asset managers have sought to make an impact in reducing systemic climate risk.

At Trillium, we’ve been doing just that since the 1980s, seeking to find ways to mitigate climate-related effects on our communities as well as our investment portfolios. But rather than act in a silo, sustainable investors have increasingly chosen to participate in collective efforts, and these—along with the development of more robust climate risk disclosures—have created the conditions under which Engine No. 1’s proxy battle became a winnable fight. Some examples of these efforts include:

Ceres

As Ceres describes itself, it was established as a response to the Exxon Valdez oil spill in 1989, when a group of forward-looking socially responsible investors and environmentalists led by pioneer investor Joan Bavaria, who was also the founder of Trillium Asset Management, came together to form the nonprofit organization. They had a vision for a better way of doing business and redefined the role and responsibility of companies as stewards of the environment and agents of economic and social change.

Today, the organization advocates for a future of science-based emissions reduction plans and Paris Agreement-aligned policy. As Ceres recently noted on investor engagement activity, there is currently an enormous upswell of support for climate risk mitigation strategies:

“Investors’ increasing concerns about the climate crisis are reflected in 136 climate-related shareholder resolutions filed so far this year [2021] and in stepped up engagement, as investors seek to hold companies accountable for mitigating both the systemic and business-specific risks of global warming.”⁵

Climate Action 100+

Launched in December 2017 and co-led by Ceres, this organization was established to help encourage firms to improve climate-related governance and disclosure and to reduce emissions across the value chain. This collaborative work has given rise to a wide variety of initiatives to influence the boards and management of the world’s top 100+ greenhouse gas (GHG) emitters. And the collaboration itself has helped participants be more effective in addressing systemic risk on a local and global level, achieving notable success in accelerating sustainability in the oil and gas industry.

Net Zero Asset Managers initiative

At Trillium, we recently announced our participation in the Net Zero Asset Managers initiative. Along with other investors, we’re formally pledging to align our portfolios with the goal of net zero GHG emissions by 2050 or sooner, in line with global efforts to limit warming to 1.5 degrees Celsius. This is an important juncture in the long-standing work to drive carbon reductions in our economy. As we move into this new phase, the authenticity of commitments and follow-through will be critical.

We view the recent action by shareholders as a win for both climate activism and ultimately for the environment, the economy, and the investment potential of our clients’ portfolios. Even if attempts to redirect Exxon’s strategy fall short of today’s high expectations, shareholders of all size and levels of sophistication have at least a shining example to show that change isn’t impossible—even if your fiduciary responsibilities preclude your mounting an expensive proxy campaign to effect that change. As Engine No. 1 engagement practice lead Charlie Penner stated to Bloomberg, “If you can get Exxon to change, everybody else in the industry has to listen.”⁶

1 See, for example, proxy advisory firm Glass Lewis, cited in Business Wire; California Public Employees’ Retirement System (CalPERS), cited in Reuters; and New York State Common Retirement Fund, mentioned as a supporter of Engine No. 1’s proposal in Pensions & Investments. 2 Engine No. 1, cited in Business Wire, May 19, 2021. 3 As defined by the Greenhouse Gas Protocol, scope 1 emissions are emissions from operations that are owned or controlled by the reporting company. Scope 2 emissions are emissions from the generation of purchased or acquired electricity, steam, heating, or cooling consumed by the reporting company. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions. 4 Notably, ConocoPhilips, Alaska’s largest oil producer, experienced a shareholder vote for an activist climate proposal requesting concrete emission reduction targets—which also happened in May 2021. 5 Ceres, May 2021. 6 Bloomberg's The Quint, May 28, 2021.

Trillium did not hold shares of ExxonMobil before or after the 2021 annual shareholder meeting.