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Engine No. 1 versus ExxonMobil: Climate shareholder activism pays off

Simon Perrin, specialist in socially responsible investments, highlights the battle between Engine No. 1 and ExxonMobil and how climate stakeholder activism participates in the decarbonisation.

At its Annual General Meeting on 26 May, oil giant Exxon lost an epic battle with Engine No. 1, a small activist fund that holds just 0.02% of its shares. Engine No. 1 challenged the “all oil” strategy and succeeded in imposing its views by the election of three of its candidates to the Board of Directors. This new governance should allow Exxon to engage more actively on a decarbonisation pathway. 

A weak climate strategy and serious financial risks

Ahead of the Exxon AGM, in a detailed presentation (https://reenergizexom.com/), Engine No. 1 has consciously honed its arguments. The activist fund provides a critical analysis of the company’s climate strategy, specifically associating it with significant financial risks in the near future. While most European oil companies, like Total, are investing heavily in renewable energy to reduce their products’ carbon footprint (which is where the oil industry’s real challenge lies), Engine No. 1 reports that Exxon is focusing primarily on reducing the carbon emissions from its operations through carbon capture technology1. With only 0.1% of its capital expenditure invested in low-carbon solutions between 2015 and 2020, Exxon has one of the lowest rankings in the industry, according to Bloomberg’s assessment in a climate transition study.

Furthermore, according to Engine No. 1, the strategy of massive investments in oil projects with low financial returns puts the company at risk by destroying value for its shareholders. These arguments hit the nail on the head and, thanks to the support of large institutional investors, led to the election of Engine’s No. 1 candidates, who were tasked with making Exxon more sustainable and financially successful.

1Carbon capture and sequestration avoids the release of greenhouse gases into the atmosphere by recovering the carbon dioxide from the emitting facilities and then storing or making better use of it.

More than just a token victory, a fundamental trend

This shareholder success, far from being anecdotal and symbolic, highlights a fundamental trend. In a context where harmful climate change is being felt acutely, responsible investors are seizing their rights as shareholders and are opposing the management of the largest polluting companies with their views on their climate strategy via “Say on Climate” resolutions. What is most interesting is that this shareholder movement now extends beyond the (no longer closed) circle of responsible investors and, as we have seen, is now attracting the backing of more “traditional” investors. The latter realise that, as a result of existing and future regulations, the most carbon-intensive companies will have to pay more for negative externalities, which are not yet sufficiently internalised. This in turn will have an adverse effect on the value of their investments. The way in which shareholder activism makes this climate awareness possible is remarkable: rather than excluding Exxon from their portfolios, the investors who supported Engine No. 1’s campaign have opted to push the company to implement change by accompanying it in a strategic transformation.

The future is ESG shareholder activism

Shareholder activism is now a widespread approach for many of the active ESG funds, but remains confidential as far as passive funds (ETFs) are concerned. However, in the wake of Exxon’s AGM, Engine No. 1 quickly launched its own ETF −ETF Transform 500−, whose underlying philosophy is inspired by shareholder activism. While the fund replicates a traditional index of the 500 largest US stocks, the managers actively exercise their shareholder rights by proposing and voting on ESG resolutions. In response to present-day sustainability challenges, ESG shareholder activism has a bright future ahead of it, as it gains ground in the minds of traditional investors and takes shape in a range of dedicated financial products.

Contact

Simon Perrin

Responsible Investment Specialist

simon.perrin(at)mirabaud.com