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Chevron Shareholder Vote Increases Climate Pressure

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US oil major Chevron faced some stiff shareholder pushback at its annual general meeting this week, including pressure to do more on climate concerns (OD May26'21). Energy Intelligence breaks down what unfolded at the meeting, and what it means for the company. Q: What was the Scope 3 proposal that passed Wednesday? A: The proposal asks Chevron to take actions to “substantially” reduce Scope 3 emissions -- those released by the products it sells -- over the medium to long term. The resolution is both vague and nonbinding, and does not explicitly require any specific course of action. It needed to be structured that way due to *S Securities and Exchange Commission (SEC) rules that prohibit “micromanaging.” The resolution leaves it up to Chevron as to how best to address the issue. Q: What does its passage mean for Chevron? A: While the resolution creates no formal obligation, it brings considerable pressure on Chevron to rethink its emissions strategy of setting only incremental medium-term targets. Chevron recommended a vote against any Scope 3 goal, saying its existing plan and actions were enough (OD Mar.9'21). US companies have thus far largely resisted the broader climate goals set in Europe, instead backing a more incremental approach focused on Scope 1 and 2 emissions from operations (OD May21'21). But 61% of shareholders defied Chevron’s management to vote in favor of Scope 3 reductions, according to preliminary results, showing dissatisfaction with the status quo. Chevron told Energy Intelligence it will carefully consider the results and will continue to engage with stockholders. Investment giant BlackRock threw its weight behind the proposal, saying in a note that it believes companies in carbon-intensive industries should aim to set Scope 3 emissions reduction targets, although acknowledging this remains a "nascent" area, especially in the US. BlackRock believes Chevron is on the "right path" and has confidence in its management, but says it "supported the proposal, which is clear and not prescriptive, to reflect our desire to see the company continue to evolve its approach and demonstrate progress on these challenging topics." Q: What about the net-zero emissions proposal? A: Shareholders also came very close (48% support in preliminary results) to achieving majority support for a resolution calling for the company to prepare an audited report by January 2022 on how its business plan conforms with a global target of net-zero emissions by 2050. This underscores the increasing emphasis by investors on a path to net-zero, and the significance of the recent IEA report in providing a yardstick for strategies (OD May18'21). Basically, this resolution would have required Chevron to say how projections for sharply declining hydrocarbons use would impact its business model, including accounting for stranded assets and write-downs. Given the global decarbonization push, “marginal climate action by companies is increasingly out of step with the norm,” Lila Holzman, senior energy program manager at the As You Sow activist investor group, said during the meeting. “Chevron recognizes ... that climate change must be addressed, but then assumes business as usual in its financial statements.” Chevron had said the move was unnecessary given its existing planning and risk management process. BlackRock agreed with the company under a similar justification and voted against it. Q: How was the shareholder activism at Chevron different from Exxon Mobil? A: Exxon saw a shareholder push to replace board members because of a lack of confidence in management and poor returns. Chevron did not see the same controversy over its board slate. The company is seen as more responsive to shareholder concerns on returns and profitability and generally seen as better run. That said, the meeting showed that investors still want to push management further on climate issues. Q: How will this affect Chevron’s capital spending, projects and oil operations? A: Near-term investments (this decade) are unlikely to be affected due to the medium and long-term focus of the proposal. Chevron’s near-term capital spending strategy already focuses on resilient, low-cost projects that should compete well, even given today’s uncertain demand picture. But future investments might have to meet tougher lower-carbon criteria and face tougher shareholder scrutiny. Q: Does this mean Chevron will be pushed into renewable power generation where it might lack a competitive advantage, or emerging technologies that have yet to scale up? A: Not necessarily -- shareholders are leaving it up to Chevron about how it makes the math work. Chevron has long insisted it does not see renewable electricity fit as a business model, or in terms of desired returns. If that view doesn’t change, the company could push further into other low-carbon business lines it has already highlighted as promising, including renewable natural gas, liquid biofuels and hydrogen (OD Mar.11'21). Chevron has already made some modest investments along those lines, and the future could also include a further push into marketing renewable diesel in California as the state pushes ambitious goals to decarbonize (OD Aug.18'20). Chevron also might look at carbon capture and storage, potentially in depleted California fields. Q: What does this mean for other US companies? A: Similar Scope 3 resolutions have already passed at Phillips 66 and ConocoPhillips -- and the latter was already one of the more proactive US companies on climate (OD May11'21). Chevron’s high-profile case is likely to prompt further soul-searching in US boardrooms. Even companies that have taken substantial action will face shareholder pressure to go further and faster. Scope 3 emissions look set increasingly to be part of that conversation, with a growing emphasis on medium- and long-term targets. Kathrine Schmidt, Houston

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