Our Take: Investors Raise Climate Stakes… Within Limits

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As expected, annual shareholder meetings are delivering a clear message: Emissions reduction targets are becoming mandatory for many investors across the oil and gas value chain, and these targets should reflect a mix of concrete medium-term action and long-term ambition (EIF Apr.21'21). Yet investors also seek balance, rejecting calls for more aggressive transformation at Europe's diversifying majors. We reiterate our view that net-zero operational emissions and strategies for tackling Scope 3 (i.e. end-use) emissions will soon become the minimum standard. • US producers and refiners should take note of last week's proceedings. Nearly 60% of shareholder votes cast at ConocoPhillips and 80% at Phillips 66 demanded emissions targets encompassing Scope 3. The proportions were significant since Conoco has long been an early mover among US producers and adopted net-zero operational (Scope 1 and 2) targets last year. Phillips 66 had set targets for specific facilities and is raising its renewable fuels output and tapping offset credits. • Both resolutions benefited from broad language: Companies were told to provide guidance and accountability, not what targets should be or how to reach them. We have argued previously that US companies will likely avoid the same magnitude of energy transition strategy pressures as their European counterparts -- at least in the medium term -- given the US' role as both a major oil and gas producer and consumer (EIF Apr.21'21). But Scope 3 reduction efforts are required and cannot be limited to advocating for carbon taxes or similar policies. We see rising opportunities for partnerships down the value chain as other industries (automotive, airlines, cement, etc.) face increasing pressures to address their emissions; their Scope 1 and 2 emissions equate to producers' Scope 3. • At the same time, investors will continue to demand more if targets are insufficient. Occidental Petroleum has net-zero Scope 3 goals but had to agree to deliver medium-term targets by next year's meeting to remove a pending resolution. Refiner Valero, which has medium- and long-term emissions targets, agreed further action around executive pay and climate lobbying to have two resolutions withdrawn. • We see the bar for comprehensive emissions strategies continuing to rise, but with some space given to companies to execute bold strategies once committed. BP last week fended off a resolution calling for a more aggressive transition strategy thanks to shareholders casting 80% of their votes to reject it (IOD May12'21). Royal Dutch Shell's shareholders gave similarly strong support to its transition plans this week. • The biggest outstanding question is how the pressure will manifest at the US majors' May 26 meetings. Exxon Mobil faces a battle over its board, with four alternative directors nominated by activist investors wanting more aggressive climate action. Chevron faces a resolution for a Scope 3 target, similar to Conoco's and Phillips 66's. Both also have matching proposals demanding reports detailing how a net-zero by 2050 world would affect their strategic assumptions and valuations.

Oil and gas companies still have an opportunity to convince investors that their low-carbon strategies are credible in scope and urgency, but time is running out.
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