Shareholder activists continue to put pressure on oil and gas majors to reduce their greenhouse house gas emissions, and the sector is consequently facing a significant threat to its core business model to transition to low-carbon energy.
In recent years, several oil and gas majors have amplified discussions surrounding clean energy and climate change, pledging decarbonisation strategies, and investing in alternative energies.
In 2019, capital investments in alternative technologies from 10 oil companies breached $2 billion for the first time, albeit amounting to a small portion of their total expenditure.
The investment allocated has seen little change since, with the oil and gas industry’s capital spending on low-emissions alternatives accounting for less than 5 per cent of its upstream spending in 2022.
According to the International Energy Agency’s Net Zero Emissions scenario, to meet emissions reductions goals a large-scale transition from fossil fuels to low-carbon energy technologies is needed, with fossil fuels needing to decline from nearly four fifths of global energy supply to one fifth by 2050.
While major oil and gas companies have made emissions reductions commitments and made some achievements towards these, there are few examples of companies fully embracing the energy transition.
Therefore, with slow company action, shareholder activists are increasingly pushing businesses to make more changes, and faster.
In 2022, some 282 climate-related proposals were submitted at US-registered company annual general meetings, almost double the previous year; and there was a record number of negotiated agreements between investors and their boards.
In saying that, research into three major oil and gas players, namely ExxonMobil, Chevron and BP, has found that the vast majority of climate and transition-related shareholder proposals were opposed by the companies.
Despite this, climate-related shareholder activism has become more successful over the last decade at the three companies.
Three fifths of successful proposals were at ExxonMobil annual general meetings, while Chevron advised to vote against all but one relevant proposal in 2022, and BP advised to vote in favour of two resolutions in 2015 and 2019.
Ahead of ExxonMobil’s upcoming shareholders’ meeting on 29 May this year, Dutch shareholder activists Arjuna Capital LLC and Follow This filed a new proposal, urging ExxonMobil to go beyond current plans, further accelerating the pace of emission reductions in the medium-term for its GHG emissions across Scope 1, 2, and 3, and to summarise new plans, targets, and timetables.
While ExxonMobil aims to reach net zero operated Scope 1 and 2 greenhouse gas emissions by 2050, the company has so far not included Scope 3 emissions reduction targets.
It is the only one among the five Western supermajors without a target for its Scope 3 emissions, which refer to the emissions produced from across a company’s entire value chain, and often account for the major share of a company’s carbon footprint.
The others, Shell, BP, Chevron, and TotalEnergies, have set these targets after shareholder votes for climate resolutions.
In response to the latest proposal, ExxonMobil filed proceedings in a US District Court against the shareholders in January, alleging that proposals seeking an increased pace for reductions in emissions amount to “intrusion” into its ordinary business operations and should not be put to a shareholder vote.
The proposal is currently with the Securities & Exchange Commission (SEC) for review. The SEC, under US securities law, permits companies under a few specific circumstances to exclude certain proposals from shareholder votes.
Similar proposals were put to a vote in 2022 and 2023 but were rejected by a majority of ExxonMobil shareholders – the 2023 resolution received only 11 per cent support.
ExxonMobil argues that the latest proposal does not seek to “improve ExxonMobil’s economic performance or create shareholder value” but rather is an attempt to “micromanage” ExxonMobil’s ordinary business and does not meet the required regulatory thresholds for voting. It is further alleged that the proxy voting process has become a target for abuse by activist shareholders.
According to a report authored by three Bracewell lawyers, this case marks a new approach in dealing with climate activists, with ExxonMobil requesting declaratory relief directly from the US courts in support of its decision to exclude the proposal. It is believed to be the first time that ExxonMobil has taken this route.
“Although a US case, it will be watched closely by other energy companies in a number of jurisdictions,” the lawyers note.
“If successful, it may provide further guidance on the SEC’s interpretation of the relevant rules for those in the US and, more generally, could represent a new willingness by corporates to take proactive steps against climate activists rather than simply adopt defensive strategies.”
Following ExxonMobil’s commencement of proceedings, Arjuna Capital and Follow This withdrew their proposal.
“The decision to withdraw in these circumstances may have important consequences for climate activists looking to take similar steps in future, as well as providing an interesting example for other energy companies in similar positions,” the lawyers note.
It is understood that ExxonMobil intends to continue with the case, although it has dropped its request for proceedings to be dealt with on an expedited basis.
This case follows a number of setbacks for climate campaigners in England and Wales.
In July 2023, the English Court dismissed ClientEarth’s derivative claim against Shell, a case in which Shell was also awarded its costs.
ClientEarth was also unsuccessful in a recent judicial review claim against the Financial Conduct Authority, intended to seek a declaration that a decision to approve Ithaca Energy Plc’s prospectus was unlawful.
In November 2023, Shell also began legal action against Greenpeace in the English Court after members of the environmental group boarded a Shell FPSO vessel near the Canary Islands.
These cases suggest an increased willingness of energy companies to use litigation as a means of protecting their position.