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Why Huge Oil Ought to Fear After A Day Of Reckoning

Three of the world’s largest oil companies faced a major reckoning on Wednesday for their part in climate change.

First, a Dutch court asked Royal Dutch Shell to cut its greenhouse gas emissions by a whopping 45 percent by 2030 in response to a lawsuit brought by seven environmental groups. The court argued that Shell was bound by an “unwritten standard of due diligence” to human rights and the Paris Climate Agreement, and ruled that Shell had a responsibility to “help prevent dangerous climate change”. While the judge’s decision will not be the final word on this matter, her words could influence other ongoing climate disputes around the world.

The second settlement came at Chevron’s unusual general meeting, where 60 percent voted for a resolution recommending the company to reduce its emissions – not just in the production process, but also in the products it sells to consumers. The vote is not binding, but follows a trend from other shareholders’ meetings this year. A similar resolution was passed at the recent ConocoPhillips meeting in May, and another resolution 66 by Philips requires the company to report on its lobbying activities.

Finally, there was an even more improbable development. At ExxonMobil’s annual shareholders meeting, a small advocacy investment firm called Engine No. 1, which owns just 0.02 percent of the company, struck a coup by winning at least two seats on the Exxon board of directors. (A third seat is still a toss-up.)

The activists won seats despite Exxon’s last-minute concessions to add a director with “climate experience” and warnings that choosing the climate-conscious candidates “would hurt our progress and jeopardize your dividend.” According to the company’s website, the board had a total of 13 seats as of May – but company boards have hiring and firing power, and the vote signals that oil managers may find their jobs at stake if activist shareholders build their power.

A year ago these developments would have seemed implausible, and so activists and other climate protection enthusiasts see this moment as a turning point.

For example, a California teacher pension fund threw its weight behind the Engine No. 1 and issued a statement that could be interpreted as a warning to the rest of the industry. “ExxonMobil’s board election is the first of a major US company focused on the global energy transition, but it won’t be the last.”

Each of the events on Wednesday is significant in itself. Together, they are a signal that fossil fuel companies can now be legally held accountable for their role in climate change – and that they run the risk of losing their jobs if oil managers fail to respond to the climate.

Why is accountability finally coming

The reason companies face a certain amount of accountability now that many pro-climate resolutions and lawsuits have failed has to do with the turbulent last year for Big Oil. More and more investors have become suspicious of companies that rely on fossil fuel burning for profit in a world that is trying to achieve net-zero greenhouse gas emissions by mid-century. BlackRock, the giant investment firm led by Larry Fink, said in early 2020 that it would base its shareholder votes on climate commitments. As the world’s largest wealth manager, he threw his weight behind the game of Engine No. 1 by three candidates for the board.

The coronavirus pandemic, which froze air traffic and plunged oil prices into negative territory, also helped create a business model centered on oil cannot be sustained. The debate was fueled by a May report by the International Energy Agency, a fairly conservative body, calling for “no investment in new fossil fuel supply projects” to be made effective immediately in order to meet the commitments of the Paris Agreement.

“It’s a different world,” said Danielle Fugere, president of the activist shareholder group As You Sow, after Wednesday’s developments. Oil companies “have to say very seriously: ‘Are we going in the right direction with climate change?'”

For the first time ever, the industry may have to face all of the pollution that its products cause

Don’t expect the industry to change in an instant. But investors and courts are finally making an important distinction: They are calling on oil companies to take responsibility not only for their production processes, but also for the dirty products they sell.

If oil companies have been promoting their efforts to fight climate change for decades, they have focused on a narrow segment of the their effect. For example, all of Chevron’s promises on climate change focus on reducing the footprint of its operations – the fossil fuels they burn only to extract, transport, and refine their products. Chevon and other companies have taken no responsibility for the greater part of their climate problem – the combustion of their products, for example in cars and natural gas power plants. Richard Heede of the Climate Accountability Institute found in his research that the products of the top polluters account for 90 percent of global greenhouse gas emissions.

Chevron and ExxonMobil shareholders, as well as the Dutch court, opposed the oil industry’s narrow view of its emissions, which puts pressure on companies to admit their bigger impact. Optimizing their operational footprint requires relatively small changes, but reducing their larger impact downstream would require entirely new business models that do not rely on fossil fuel extraction.

To be clear, it is unlikely that we will see any shifts right away. “Existing board members need to recognize that this vote was really a rejection of the company’s current approach to climate change,” said Andrew Logan, oil and gas director of Ceres, a nonprofit focused on corporate environmental solutions, of ExxonMobil’s vote . “[But] it doesn’t force them to do anything else. ”

Still, there are a few other reasons the oil companies might want to listen to them.

The coup on the ExxonMobil board was radical, because for the first time climate activists managed to win seats on the board of a large oil company. The win adds a new level of credibility and accountability when shareholders urge companies to take a more aggressive stance on climate change: executive jobs could be at stake. “This demonstration that investors are ready to run a full board campaign, essentially firing directors and companies that ignore the will of investors, will certainly be seen as a warning sign for companies not to ignore those voices,” said Logan.

Meanwhile, the Shell case shows companies are beginning to have “a very tangible notion of legal risk,” Logan said. This is going to get Wall Street’s attention.

It is not yet clear whether the Dutch court ruling – that Shell must reduce 45 percent of its greenhouse gas emissions by 2030 compared to 2019 – will stand. Shell has already announced its appointment. But it’s just one of 1,800+ examples of climate disputes around the world, so it could be the first of many cases where companies have to meet their emissions reduction commitments. There are 1,300 cases in the U.S. alone, and many mirror decades of tobacco litigation by claiming that oil companies have deliberately misled the public about their products.

Next year climate activists have new goals

One way to deepen the accountability of the fossil fuel industry is to replicate these findings with other oil companies. Risks to board memberships can mean that executives are more likely to live up to investor expectations about climate reform, for example by setting more aggressive emissions targets for their products or restricting their anti-climate lobbying. If you’re Chevron, you don’t want to face a board campaign like the one Exxon just lost.

That will put pressure on investment giants like BlackRock, Vanguard, and pension funds that have adopted climate targets.

Ben Cushing of the Sierra Club, one of many environmental groups that played a role in Wednesday’s events, said the next phase of activism will pressure investment firms like BlackRock to turn against even more of Exxon’s current leadership. While BlackRock and Vanguard endorsed some of Wednesday’s climate action, they turned down another request from the Sierra Club to remove ExxonMobil CEO Darren Woods from the board.

“As of now, in 2021, [the industry] can’t invest in new fossil fuel projects, ”said Cushing. “For BlackRock and Vanguard and other investors, they have to hold the leadership of these companies accountable and vote against their top management.”

The revolution in the industry’s business model – ultimately to produce less gas and oil – requires more constant pressure. Activists have to deliver a lot more days like Wednesday. “The real test now will be what becomes of it in response,” Logan said.

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