Oil Giants Are Dealt Major Defeats on Climate-Change as Pressures Intensify

Exxon XOM 1.17%

Mobil Corp. and Royal Dutch Shell RDS.A. 0.38%

PLC suffered significant defeats on Wednesday as environmental groups and activist investors increased pressure on the oil industry to address climate change concerns.

Successive decisions showed how dramatically the landscape is changing for oil and gas companies as they face increasing pressure from environmentalists, investors, lenders, politicians and regulators to switch to cleaner forms of energy.

“Today’s events definitely show that many leaders in the oil and gas industry are tin eared and fail to understand that society’s views and the legal and political environment in which they operate are radically changing,” said Amy Myers Jaffe, a professor at Tufts University’s Fletcher School who has advised energy companies.

Climate change activists celebrated after a district court in The Hague ruled that Royal Dutch Shell must cut its emissions by 45% by 2030.


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remko de waal / Agence France-Presse / Getty Images

Many oil companies have started to adopt major emission reduction plans and some, particularly in Europe, have specialized in renewable energy. However, reducing emissions without sacrificing earnings is challenging and many are skeptical of their strategies.

“It’s a real market crisis,” said Peter Bryant, managing partner at business consultant Clareo. “Even if your plan is solid, it doesn’t matter right now.”

The Shell ruling passed by the District Court in The Hague stated that Shell must cut its CO2 emissions by 45% by 2030 compared to 2019 – and that the company was not only responsible for reducing its own direct emissions from drilling and other operations but also those of the oil, gas and fuels that are ultimately burned by consumers.

The goal is in line with the United Nations guidelines for member states, which are intended to prevent global temperatures from rising more than 1.5 degrees Celsius above pre-industrial levels. As part of the 2015 Paris Climate Agreement, which the US rejoined earlier this year, governments agreed to limit global temperature increases to 2 degrees Celsius, and preferably to 1.5 degrees.

“This ruling will shudder not only the collective thorns of the oil industry but also of all other industries that are significant contributors to greenhouse gases,” said Martyn Day, an attorney at Leigh Day, a London-based law firm who has been involved in other pollution cases against Shell .

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Lawyers and advisors said the ruling could set a precedent in other western countries, particularly Europe, exposing oil companies to new legal threats to their carbon emissions. Companies in other high-polluting industries could also face tougher environmental scrutiny, they added.

“This case opens the door to challenges for other energy-intensive sectors,” said Liz Hypes, an analyst with Verisk Maplecroft risk consultancy. Other industries that could be brought to justice include agriculture, transportation and mining, all of which are already targeted by regulators and civil society for their emissions, Ms Hypes added.

The civil action against Shell was brought by the Dutch arm of the environmental organization Friends of the Earth. Shell’s production of oil and natural gas contributed to climate change, violated what is known as the duty of care towards those affected and failed to meet the company’s human rights obligations.

The activists brought the case to The Hague because one of Shell’s two headquarters is located there. Instead of asking for damages, they asked the court to force Shell to reduce its carbon emissions. Shell’s current emission reduction targets are based on intensity – the amount of carbon in each unit of energy – which means Shell’s total emissions could still increase.

The court stated that Shell was not breaching its commitment to reduce carbon emissions, but that there was an “imminent breach”, so it set the reduction requirement. It has not specified how the cuts will be achieved or how the decision will be monitored or enforced.

The Dutch court found Shell responsible not only for its own direct emissions, but also for those of consumers who burn fossil fuels. A man in Tianjin, China charged an electric car in 2018.


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VCG via Getty Images

The loss of Exxon went to Engine No. 1, an emerging hedge fund that owns only about 0.02% of the oil giant’s stocks. It had run an aggressive campaign that challenged the company’s energy transition strategy and response to climate change, portraying it as a corporate dinosaur.

The vote at the company’s annual meeting ended a fierce month-long battle between the company and the activist to convince Exxon shareholders that it became one of the most expensive proxy battles of all time.

Engine # 1 urged Exxon to gradually diversify its investments to prepare for a world that will use less fossil fuels in the decades to come. Exxon defended its strategy to expand the wells, saying demand for fuels and plastics will remain strong for years to come. As proof that climate change is being taken seriously, Exxon pointed to a new business unit dedicated to carbon capture and storage.

The Texan oil giant announced on Wednesday that a preliminary vote count showed shareholders at least two of the four nominees for Engine No. 1, although some votes were not awarded and the final result of several seats on the 12-member board is still unclear.

Darren Woods, Exxon’s chief executive, took a personal stand against Engine # 1. Many viewed the vote as a referendum on Mr. Woods’ performance.

Exxon lost a record $ 22 billion last year and struggled to regain its status as the industry’s leading profit engine even before the coronavirus pandemic squeezed global demand for oil and gas.

Both sides feverishly prevailed among investors until the last minute. Exxon delayed the closing of the vote by an hour on Wednesday morning, and Engine # 1 said the company was calling investors to ask them to change their votes. In a message sent to shareholders, the Fund urged them “not to fall victim to such strategic efforts”.

“With nearly 3 million shareholders, it is not surprising that we heard a wide range of views and many supported the work we are doing to improve earnings and cash flow capacity, as well as the work we are doing to move the company towards a lower carbon future “said Mr. Woods in a post-vote statement.” Today we heard that Exxon Mobil shareholders have indicated their desire to drive these efforts forward. We are well positioned for that. “

Exxon Mobil was struggling to regain a foothold as an industry leader even before the pandemic that depressed demand for oil and gas. an Exxon oil refinery in Channahon, Illinois, in September 2019.


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Firs Maury / Shutterstock

The hedge fund received a big boost from some of Exxon’s largest shareholders. BlackRock Inc. endorsed three Engine No. 1, and some of the largest US pension funds also endorsed the list of activists.

Asset managers themselves are under pressure to influence their portfolio companies to do more against climate change. Many institutional investors, including BlackRock, have signed pledges in support of targets of zero net carbon emissions by 2050 or earlier.

BlackRock and other asset managers have urged companies to prepare for disruptions from climate change. Critics of the world’s largest wealth manager said BlackRock shouldn’t get into areas that should be addressed by policymakers, but the company’s chief executive Larry Fink has claimed that “climate risk is an investment risk.”

BlackRock announced earlier this year that it would increase its support for shareholder-led environmental, social and governance proposals that could encourage other asset managers to take over companies.

BlackRock said in a statement that it voted in part for the Engine # 1 nominee because it believes Exxon and its board need to continue exploring the possibility that fossil fuel demand will decline rapidly in the coming decades could.

“We remain concerned about Exxon’s strategic direction and the expected impact on long-term financial performance and competitiveness,” said BlackRock.

Write to Sarah McFarlane at [email protected] and Christopher M. Matthews at [email protected]

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