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It’s been a seismic week for Big Oil. Royal Dutch Shell and ExxonMobil have both been forced into historic concessions following major environmentalist backlashes, culminating in what could be a watershed moment for the sector.
Oil majors were looking on nervously this week at a landmark trial in the Netherlands which saw Shell forced to cut its net carbon emissions by 45% by 2030, after a Dutch court was left unconvinced by the company’s current climate strategy.
Previous climate cases against oil majors have focussed on past misdemeanours, but Wednesday’s demanded a change in future strategy. That’s a significant precedent to set. Judge Larisa Alwin noted that the ruling is likely to have “far-reaching consequences” for the company, and those could reverberate across the entire energy sector. It’s likely to herald a fresh wave of litigation - even if it doesn’t, every oil major is now under increased pressure to accelerate its transition to green energy.
A bad Wednesday for Shell was matched across the pond by a fraught AGM held by ExxonMobil. Engine No 1, a tiny hedge fund, persuaded shareholders to elect at least two of four nominated directors to Exxon’s board, after months spent campaigning for the oil giant to accelerate its transition to green energy. Among the shareholders convinced to support Engine No 1 were BlackRock, Vanguard and the New York state pension fund.
Engine No 1’s victory represents a landmark in the history of climate shareholder activism. Remember this is ExxonMobil, once the world’s largest traded company, bowing to the climate-driven pressure of a 0.02% stakeholder. That’s a serious shift in power and signifies the weight of investor sentiment against current policy. Nothing inspires corporate change like a director fearing for their job.
But there’s more going on here than just environmental concerns. Small though it is, Exxon’s prime adversary was a hedge fund. Big Oil has always had climate activists to contend with, but that’s not Engine No 1’s focus. Rather, it believes Exxon has been too slow to respond to shifting demands, and that its lethargy could threaten its future financial viability.
Chris James, the hedge fund’s founder, said: “Exxon thought this was ideological… our idea was that it would have a positive impact on the share price”. James’ interest lay more in managing a financial risk than confronting the environmental realities.
Charlie Penner, who ran the hedge fund’s campaign against Exxon, put it in similar terms: “They (Exxon) need to position themselves for success. You would certainly believe this would mean less oil and gas going forward.”
Investors would be wise to think in similar terms. Many still see sustainability considerations as nice-to-haves that are of secondary importance to financial returns. This week’s rulings remind that the two are one and the same.
Environmental, Social and Governance (ESG) factors should be viewed in terms of financial risks just as you would others like inflation and credit risk (i.e. the risk of a company folding). That applies regardless of whether you care about the non-financial impact of your money or not.
Similar lessons emerge from the Shell case. The defeat was the first of its kind against an oil major. The judge highlighted the human rights obligation on the company to accelerate its increase in its emissions cuts. It’s hard to look at all that and not be reminded of the Big Tobacco suits of the 80s and 90s which transformed the industry.
For ExxonMobil, those parallels go further. According to a recent Harvard study, ExxonMobil’s climate change messaging mimics the rhetoric used by Big Tobacco to shift responsibility away from corporations.
Beyond the reputational damage, the corporate costs for Shell could be immense. The firm will have to alter its policy in such a way that will undoubtedly have meaningful implications on its cash flow. Regardless of any existential questions this raises for the company, the ruling is going to leave a notable dent on its balance sheet. That could eventually feed into the company’s stock price and perhaps even shareholder payments.
Activist organisations, rebellious shareholders, financial regulators - each is imparting greater influence over corporations than ever before. Investors should now consider companies with poor ESG credentials as ones which come with meaningful risks. As ever, risks should be weighed against the rewards - most oil majors pay sizeable dividends, for instance. Ethical and financial considerations are increasingly intertwined.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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