The Fuse

Shell Loses Court Case, Exxon Loses Board Fight in Stunning Rebuke For Big Oil

by Nick Cunningham | May 26, 2021

On May 26, a Dutch court ruled that Royal Dutch Shell must cut its greenhouse gas emissions by 45 percent by 2030. While the landmark decision does not apply outside of the borders of the Netherlands, it was a historic blow to the oil major and could have far-reaching implications for the global energy transition.

Shell was not the only oil major coming under intense scrutiny. On the same day, ExxonMobil’s CEO Darren Woods was fighting for his job and seeking to fend off an attempt by activist investors to sack members of his board. The battle is another sign that the energy transition is gaining steam.

Court-ordered cuts and investor activism

Shell previously laid out a net-zero target by 2050, and a goal of cutting emissions by 20 percent by 2030. The Anglo-Dutch oil major has also heavily advertised its various forays into renewable energy and electrification. But a court in the Netherlands ruled that it is not doing enough, and the decision now requires much deeper cuts of 45 percent by the end of this decade, although Shell can appeal.

Crucially, the decision applies to Scope 3 emissions – emissions from consumers that burn the products produced by Shell.

A group of environmental and human rights groups brought the case against Shell, alleging that the oil major was infringing upon human rights due it its role in fueling climate change. The landmark decision could impact other litigation, especially in Europe. As Bloomberg notes, there are roughly 1,800 climate-related lawsuits around the world, but the decision against Shell is arguably the most significant result to date.

A few hours after that decision, ExxonMobil’s CEO Darren Woods was gearing up to host the annual shareholder meeting, which was widely seen as a referendum on whether he could hold onto his job. A variety of shareholder resolutions were put to a vote, many of which challenge Woods and his stewardship of the company.

Most important was the campaign by activist investor Engine No. 1, which sought to replace one-third of Exxon’s board. Engine No. 1 argues that Exxon is doing a disservice to its shareholders by refusing to take more substantial steps to prepare for the energy transition. Unlike some of its peers, Exxon has not laid out a decarbonization strategy, and has ignored calls to make commitments to its Scope 3 emissions. Exxon has only talked about reducing emissions from its direct operations.

Activist investor Engine No. 1’s argument is not an environmental one, but one of financial performance.

Engine No. 1’s argument is not an environmental one, but one of financial performance. Engine No. 1 says that Exxon’s corporate strategy has resulted in “value destruction” in recent years and Woods risks destroying even more value if he continues to shrug off the risks to the incumbent fossil fuel industry.

This is not an isolated complaint. By a variety of financial measurements, ExxonMobil’s financial performance has deteriorated amid overspending, stagnating production, and rising debt. “[I]n the last three years, there has been a steep decline in the fundamental financial metrics the company uses to judge performance. Its own data shows that Woods’s leadership is weak relative to its competitors even before the global pandemic,” Tom Sanzillo, director of finance at IEEFA, said in a report in October 2020. “The board of directors cannot afford to continue giving Woods a free pass. The downward slide will accelerate. Woods should go.”

Oil majors at a crossroads

The warnings for the oil majors have grown louder. Just a week before Exxon’s annual shareholders meeting, the International Energy Agency laid out a path to net-zero emissions by 2050, and stated that no new fossil fuel projects are needed beyond those already in development.

Investors at other American oil companies are also slowly ratcheting up the pressure. Shareholders easily passed resolutions at ConocoPhillips and Phillips 66 to force the companies to issue targets on Scope 3 emissions.

On May 26, shareholders passed a similar resolution at Chevron’s annual meeting, another revolt by shareholders against management.

But the Exxon vote was the most closely-watched. Engine No. 1 picked up a lot of momentum only recently, earning the backing of big institutional investors, including the California State Teachers’ Retirement System, the California Public Employees’ Retirement System, and the New York State Common Retirement Fund, the nation’s three largest pension funds. On May 25, BlackRock, one of Exxon’s largest shareholders, said that it would vote for three of Engine No. 1’s four nominees to the board.

That decision from BlackRock, the world’s largest asset manager, dramatically increased the pressure and the anticipation heading into Wednesday’s shareholders meeting, which the Wall Street Journal billed as a “showdown” between Exxon and activists, and Argus called a “day of reckoning over climate.”

“If you can win a board campaign at Exxon, you can win anywhere,” Andrew Logan, senior director for oil and gas at Ceres, told Argus. “They’ve been the least willing to acknowledge that the world around them is changing.”

During the meeting, ExxonMobil paused the proceedings for more than an hour so that it could count votes, adding yet more anticipation to the results.

The result is a stunning blow to an oil major not accustomed to losing.

In the end, two of Engine No. 1’s candidates won, with the other two unclear as the vote counts were too close to call. The result is a stunning blow to an oil major not accustomed to losing.

More broadly, the result shows that even one of the world’s most powerful oil companies will struggle to keep its grip on to the existing corporate strategy of endless supply growth. The demands of shareholders are growing too loud.

At the same time, the decision from the Netherlands against Shell signals that the oil majors cannot run from climate accountability either.

Taken together, the string of losses for the oil majors potentially signals a historic turning point, adding even more momentum to the energy transition that is already underway.

“Investors have sent a shot across the bow of Exxon, but its impact will ricochet across the Boards of every major fossil fuel company. Investors are clearly saying that fossil fuel companies need to produce business plans that are aligned with 1.5 degrees,” Mark Campanale, Founder and Executive Chair Carbon Tracker Initiative, said in a statement. “Noting that in the views now of the IEA, this means no new investment in expanding fossil fuel production. Anything less than this will mean that investors are prepared to vote directors out.”