Companies can no longer afford to be inactive when it comes to their environmental impact, and ExxonMobil is case in point. The once climate change denying oil supermajor has found itself in the spotlight of activist investors who aim to strengthen the environmental agenda at the top of the company.
Good environmental performance needs to start from the boardroom. Corporate boards need to ensure they have the diverse representation to achieve this or they might face voting action, like Exxon. The group, spearheaded by hedge fund Engine No 1, will attempt to place four new climate minded executives on Exxon’s board to steer the company towards a lower-carbon future.
This will culminate at the company’s shareholder meeting on May 26th, where Calpers, Calstrs, and the New York state retirement fund – the US’s three largest pension funds – alongside Legal & General Investment Management and the Church Commissioners for England all back Engine No.1’s proposals. The movement also has the backing of the Institutional Shareholder Services (ISS), an independent proxy advisory firm, who released a statement of support for the election of Engine No 1’s nominated directors.
Exxon’s three other largest shareholders – BlackRock, State Street, and Vanguard are yet to disclose their position on the situation. However, based on their vocal position on climate change and BlackRock voting to split the chairman and CEO roles at ExxonMobil’s AGM last year, it wouldn’t be surprising to see these companies vote in favor of the new directors.
Capitalism is both the problem and solution
Capitalism and the continuous search for economic growth has come at the expense of the environment. While imperfect, capitalism must also be the solution. Thankfully, a market-based mechanism for climate change is emerging. Large asset managers are voting against the management of companies they believe are not adequately addressing climate risk in their business strategies, insurers are refusing to cover new fossil fuel projects, and customers are increasingly making greener choices. This set of interlocking forces creates a “climate action feedback loop” that rewards and reinforces corporate action on climate, prompting more climate action. Regardless of the outcome of Exxon’s shareholder meeting, the action taken against Exxon is the perfect example of the climate action feedback loop in action.
Pressure from investors will not relent
Shareholders are stepping in where governments have failed and are demanding companies disclose their climate risks and have a comprehensive plan to reach net-zero. One study titled “Shareholder Activism and Firms’ Voluntary Disclosure of Climate Change Risks”, published in Harvard Business Review found that companies increase their voluntary disclosure of climate change risks by 4.6–4.7%following the submission of an environment related shareholder proposal. It also found that companies that voluntarily disclose climate change risks following environmental shareholder activism achieve a higher valuation post-disclosure.
All companies need to be taking note of this and realize that shareholders can and will take voting action against those they believe are falling behind in their environmental performance.
Every company should understand that the forces that create the climate feedback loop are driving in one direction only – toward net-zero – and that this pressure continues to ramp up.