Analysis of the Week: Oil’s Black Wednesday​


By Alison Catchpole​

The Story

“Over the past decade, the Company has failed to evolve in a rapidly changing world… We believe that to address this underperformance, the Company must commit to evolve and chart a long-term strategic plan for sustainable value creation.”

This was Engine No. 1 LLC's Proxy Statement, which was voted through at ExxonMobil’s annual shareholder meeting on 26 May 2021 (Bloomberg). By the end of the meeting, two of the activist hedge fund’s nominated candidates had been voted onto the board.

The same day, Royal Dutch Shell was ordered to increase its emission cuts in a landmark ruling. The Anglo-Dutch company will need to curb emissions by 45% by 2030 (compared to 2019). A district court in The Hague ruled that there is a human rights obligation on the company to take action beyond their current policy (Financial Times), and that the company is partially responsible for climate change (Wall Street Journal). Even though the case was argued in the Netherlands, the defeat of an industry giant by an environmental group– here, Milieudefensie (the Dutch wing of Friends of the Earth), amongst others – can be seen as a turning point.

And again, on 26 May 2021, Chevron faced a similar challenge stateside when rebelling shareholders approved a measure to set strict emissions targets. A large majority voted through a resolution calling for a ‘substantial reduction’ in the scope 3 emissions, which are those from products it produces (Financial Times).

The Background

With only a 0.02% share in Exxon (a $50 million stake in an energy behemoth worth $250 billion), Engine No.1 had to convince other shareholders of its strategy. Part of that strategy was based on Exxon’s current approach failing – the oil giant lost $22 billion last year. But campaigning for change is an expensive business: in Exxon’s case, the opposing sides spent $65 million (BusinessInsider).

Big greenhouse gas emitters are accountable to their investors, and the line taken by Engine No. 1 addressed this - pushing experienced energy industry directors into positions where they can make a tangible difference. The new directors will be a minority, two among 12, but with the notable backing of shareholders including the world’s largest fund manager BlackRock, and Europe’s largest fund manager Legal & General Investment Management, Engine No. 1 will have power to override and potentially even derail (ITN/Channel4).

What it Means for Businesses and Law Firms

The Financial Times reports that 1,824 climate litigation cases have been brought in 40 different countries since 1990, all of which has provided plenty of work for law firms, who have been looking in the mirror as well as the magnifying glass.

On 7 May 2021, Slaughter and May became the first law firm to set approved science-based climate change targets. On 20 May 2021, Allen & Overy announced an ambitious commitment to a 50% reduction in absolute annual carbon emissions by 2030, from a base year of 2019.

Environmental, social and governance (ESG) issues are in the spotlight more than ever, as is stockholder democracy. The Paris Climate Agreement, signed by almost 200 countries, with the 2030 target of limiting global temperature increases to 1.5°C above pre-industrial levels, means the clock is ticking. The oil majors regard fossil fuels as their bread and butter, but Wall Street and global investors are driving meaningful change: pressure is escalating on multinationals to commit to decarbonisation.

The Shell ruling set a precedent for holding companies accountable for future, as well as past, behaviour. “This will be seen in retrospect as the day when everything changed for Big Oil,” Andrew Logan, head of oil and gas at investor climate group Ceres told the Financial Times. Time, and the global climate crisis, will tell.