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US Big Oil AGMs -- Why This Time Was Different

Copyright © 2021 Energy Intelligence Group

• Recent shareholder revolts at major US oil companies mark the culmination of climate risk going mainstream in the US. • Major oil industry investors BlackRock, State Street and Vanguard are taking seriously their pledges to proactively demand companies adopt robust strategies that both align and support the Paris climate agreement, adding critical mass to long-time advocacy group demands. • Global climate momentum is behind the shift, with the recent election of US President Joe Biden adding further urgency and weight to US investor thinking. The Issue Mainstream institutional investors have significantly stepped up their engagement with US oil industry management teams this past year to demand greater action around climate risk. Their votes in support of so-called Scope 3 targets at Chevron and ConocoPhillips and new board members at Exxon Mobil do not reflect discontent with how that engagement is going -- at least, not of late. Instead, they concretely signal key actions that remain outstanding. Even though non-board member votes are nonbinding, ignoring demands to set out more ambitious climate strategies over the next several months risks companies losing confidence with investors and control over their strategic direction. Going Mainstream Top oil investors BlackRock, State Street and Vanguard, as well as dozens of other key institutional investors, now firmly view climate as a crucial investment risk that requires strong corporate governance and proactive strategic mitigation. This shift was key to bringing critical mass behind shareholder votes submitted by environmentally minded activists (EIF Dec.16'20). In total, investors overcame management opposition at Chevron, Conoco and Phillips 66 to pass calls for targets that also encompass emissions from the end-use of products (Scope 3). At Exxon, shareholders voted in two -- and possibly three -- directors nominated by upstart fund Engine No. 1, which hammered the US major on its climate stance and financial performance. At Exxon, BlackRock and Vanguard, which jointly make up about 15% of the company’s ownership, backed the two members of the competing board slate that won approval. The Scope 3 emissions resolution at Chevron drew 61% shareholder support in preliminary results and had at least the backing of BlackRock. Crucially, the votes came even as these key institutional investors applauded Exxon's recent strategic about-face and willingness to more regularly engage, as well as Chevron's ongoing "constructive" engagement and recent efforts to upsize its medium-term emissions targets. The votes from these shareholders were less a rebuke than a means to continue that momentum and set the context for further improvements over the next several months. That said, they also are a warning. The bar continues to move higher for oil producers to define and execute ambitious climate strategies. Failure to adapt risks further, more dramatic activism -- as evidenced by the board revolt at Exxon (EIF Jan.15'20). Exxon's improved engagement, openness to revamping its board and launch of a no growth, CCS-focused emissions mitigation strategy all came after the alternate board slate was pitched and appear crucial in curbing fund support for a broader board reset. Chevron Top Owners 1 Vanguard 8.17% 2 State Street 7.15 3 BlackRock 6.80 4 Capital International Investors 1.99 5 Geode Capital Management 1.56 -- Total 25.67% Source: Refinitiv Exxon Top Owners 1 Vanguard 8.33% 2 BlackRock 6.66 3 State Street 6.03 4 Fidelity Management 2.03 5 Geode Capital Management 1.49 -- Total 24.54% Source: Refinitiv Activists Rise Climate-motivated investors found fertile ground this year to push for more aggressive change. Small upstart activist fund Engine No. 1 was behind the Exxon board shake-up, while Dutch activist Follow This has been behind the litany of ambitious climate strategy proposals at major oil companies in recent years. Some of the US' most progressive and activist pension funds -- California’s Calpers and Calstrs and New York’s Common Retirement fund -- happily backed the alternate board slate at Exxon given their long-standing view that the company did not take climate change seriously. At some point, what these groups would like to see US oil companies adopt strategically may prove a bridge too far for some major funds. Follow This' proposal at BP, for instance, was shot down by 80% of shareholders this year. But the runway is long on what these groups might still achieve if management teams don't acknowledge how mainstream many demands that were once deemed fringe have become (EIF Jun.3'20). The success Engine No. 1 had shaking up Exxon's board sets a significant precedent. Perfect Storm All in all, the entire backdrop against which US oil companies are engaging with investors has changed over the past year. The Covid-19 pandemic has accelerated momentum behind the energy transition and global thinking around systemic risk management. The global oil sector was brought to its knees at the height of the pandemic-led downturn in what many called a stress-test for the energy transition, bolstering calls for long-term strategic realignment. Globally, a raft of countries and financial institutions have made emissions pledges in the run up to the COP26 climate summit. In the US, this trend has been fed further by the climate-focused agenda of Biden, who recommitted the country to the Paris climate agreement and has set a net-zero goal for 2050. Now, all corners of the US economy are facing fresh questions around policy risk -- and potential opportunities presented by the energy transition. US oil companies sit front and center in this conversation, but are hardly alone. US automakers have unveiled dramatic shifts to electric vehicles, while US airlines contemplate net-zero targets. Investors want to see what US producers can bring to the table. "This was the right campaign at the right time,” says Andrew Logan, senior director of oil and gas at sustainability advocacy group Ceres (EIF Jan.6'21). Kathrine Schmidt, Houston, and Casey Merriman, Phoenix

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