1/07/2021·3 mins to read
Carbon-major shareholders take action on sustainability, for long term value
Recent shareholder votes at ExxonMobil and Chevron may start a shift in the long term value proposition represented by these two companies.
A small (activist) hedge-fund won three seats on ExxonMobil’s board of directors, and 60% of Chevron Corporation’s shareholders backed a proposal to cut Chevron’s indirect emissions. These investor-driven decisions showcase the growing focus on long term sustainability of companies and value creation in a carbon-constrained world.
We discuss these developments below, and what they might mean for businesses in Aotearoa New Zealand.
New ExxonMobil board members bring a sustainability focus
In May 2021, a board re-shuffle saw Engine No 1 win three (out of the total of 12) seats on the board of ExxonMobil. Engine No 1 is a small hedge fund, with a relatively small stake in ExxonMobil ($54 million, where ExxonMobil’s total market capitalisation is 272 billion). The fund nonetheless had the backing of large institutional investors such as BlackRock and Vanguard and, with that support, managed to get three seats at the table of one of the largest publicly traded international energy companies.
BlackRock (and its CEO, Larry Fink) is famously vocal in its strong support for companies to shift their governance and business focus to long term value, and not just short term gains. The urgent need for businesses to adapt to the impacts of climate change, including significant financial risks, is a recurring theme in Fink’s letters to the companies in which BlackRock invests. It will come as no surprise, therefore, that BlackRock would support the appointment of representatives of Engine No 1 - a hedge fund whose stated objectives are to create long-term value by driving positive impact, to the board of ExxonMobil.
With the backing of these funds, the Engine No.1 nominees could make a significant impact on the business direction of ExxonMobil.
Chevron shareholders require reduction in scope 3 emissions
61% of Chevron shareholders recently voted to cut Chevron’s scope 3 emissions at its annual general meeting.
Scope 3 emissions are emissions that do not occur within the company itself, but in its wider value chain – including the suppliers and customers. By voting to cut its scope 3 emissions, Chevron will be altering its business model to accommodate wider interests, beyond its own immediate financial interests.
This expansion of Chevron’s emissions reductions targets echoes recent legal developments.
A Dutch court decision involving Royal Dutch Shell found (among other things) that RDS, as a group, was responsible for approximately 1% of global carbon emissions, and that scope 3 emissions accounted for roughly 85% of those total emissions. The Dutch Court ruled, among other things, that Shell must cut its total emissions (including its value chain) by 45% by 2030 where, traditionally, international oil companies have not been found legally responsible for the emissions generated in their value chain. Read more about this decision here. While the RDS case will almost certainly be appealed, the case shows the willingness of courts to hold companies responsible for a widening circle of carbon-related activities, direct and indirect.
A vote for sustainable business and long term value
All this is more reason for companies to consider, and take steps to protect, long term value. Doing so in a proactive way is also likely to be beneficial for corporate reputations.
What this means for NZ businesses
NZ-based companies are now starting to address the long term value impact of tackling climate change risks and considering other sustainability / ESG factors in how they do business.
Sustainability reports released by several NZ companies recently all point to incorporating ESG factors, including addressing climate change risks, into their business operations as a means of preserving their corporate reputation and ultimately value.
The climate reporting regime proposed for NZ is intended to have a similar effect. Climate reporting entities must identify the financial risks that climate change presents to their business (physical and transition risks), disclose those risks and actively manage and reduce them. The consequence of the reporting requirement is that primary reporting entities will expect their customer base will take similar action, thus reducing the reporting entity’s own exposure. Thus, by requiring the disclosure (and the tacit expectation that the numbers will “move in the right direction” year by year), the economy will begin the transition to a net zero carbon position.
Companies will need to consider how these developments impact them and, where necessary, implement the governance, strategic, operational changes necessary to meet the challenges.
Special thanks to Hugh Morrison for assisting with this article.