Investors Could Drag Exxon Kicking And Screaming Into A Low Carbon Economy

CREDIT: AP Photo/Hasan Jamali, file

In this Wednesday, Sept. 30, 2015 file photo, an oil pump works at sunset in the desert oil fields of Sakhir, Bahrain.

ExxonMobil is not having a good week.

First, the Securities and Exchange Commission ruled that the company has to allow shareholders to vote on a climate change resolution. Then, the Rockefeller Family Fund announced it would divest from fossil fuels — and took the opportunity to hit Exxon specifically for misleading investors about the risks of climate change.

Exxon is one of the world’s largest oil and gas firms. With a business model that is almost entirely dependent on the exploration, extraction, refinement, transportation, and sale of oil and gas, Exxon is also one of the largest contributors of human-generated greenhouse gases.

Oil and gas is still a lucrative business. Exxon made $59.81 billion in the last quarter of 2015 — and that was considered underperforming. Low oil prices have cut into revenues, and the idea of a global carbon tax would certainly help change the economics of fossil fuels even further. But for the moment, investor actions are also one of the more powerful tools to change how the industry operates. At least, that’s the hope behind this week’s events — pushing and pulling a major polluter into a low-carbon future.

The top five investor-owned companies on the list — Chevron, ExxonMobil, British Petroleum, Shell, and ConocoPhillips — are responsible for one-eighth (12.5%) of all industrial carbon emissions from 1854 to 2010.

The top five investor-owned companies on the list — Chevron, ExxonMobil, British Petroleum, Shell, and ConocoPhillips — are responsible for one-eighth (12.5%) of all industrial carbon emissions from 1854 to 2010.

CREDIT: Union of Concerned Scientists

“Moving forward, they need to take a different approach, and denial is certainly not a viable business plan,” Natasha Lamb, Arjuna Capital’s director of equity research and shareholder engagement told ThinkProgress. Arjuna has been one of Exxon’s investors pushing for the company to address climate change risk — which, for an oil and gas company, includes the specter of stranded investments as the world transitions to renewable energy.

At Exxon’s shareholder’s meeting in May, investors will vote on a slew of climate change initiatives, including putting a climate change expert on the board, returning more money to shareholders, which would limit the capital the company has to invest oil and gas exploration, and outlining the business risks posed by climate change.

But activist investing is a long process.

In 2014, a year after the International Energy Agency said that two-thirds of fossil fuel reserves have to remain in the ground in order to limit global warming to 2°C, Arjuna pushed Exxon to produce a report on the risks of climate change to its business model. The company found that its current and future oil and gas holdings were not at risk.

“They said they were at no risk of leaving assets stranded because the world wouldn’t come together to put a limit on the amount of carbon that can be burned,” Lamb said.

And then Paris happened.

“Perhaps the most significant effect of the Paris agreement in the next few years will be the signal it sends to investors: the united governments of the world say that the age of fossil fuels has started drawing to a close,” the Economist wrote shortly after the deal to reduce carbon emissions worldwide was announced.

Fossil fuels investments have already proven risky in recent years. Through its commitment to fossil fuel investments, Massachusetts’ pension fund lost half a billion dollars in the last fiscal year, according to public data compiled by Trillium Group. California’s public pension funds lost $5 billion.

Clearly, investors are recognizing the risks of fossil fuel investment.

Take coal, for instance. The coal industry has seen a wave of bankruptcies over the past few years. Despite optimistic calls from within the industry to continue investing, coal is not seen as a good financial bet, particularly as China and other developing countries look to wean themselves off the power source. “The writing is on the wall for coal,” Lamb said. And, as an investor, she’s hoping oil and gas won’t make the same mistake.

“We’re asking them to shrink thoughtfully, profitably, and in so doing prevent the kind of implosion we have seen with the coal companies,” Lamb said.

Transitioning the company to a more diverse portfolio would also be an option. “We have for a very long time been saying that big oil companies need to shift to be energy companies, not just fossil fuel companies,” Lamb said. Indeed, while fossil fuel investment stagnates, clean energy industries such as wind and solar are booming. And companies like Exxon, with their huge capital reserves and expertise in engineering and energy, could be perfectly positioned to take advantage of the changing landscape.

Investors might be pushing for that — and some companies, such as BP, have started significant clean energy businesses — but Lamb is not hopeful that Exxon will make this pivot. “I am less encouraged that they are going down that path based on what I’ve seen for the last couple years,” she said. “We can’t expect these behemoths to turn into the next Solar City.”

Activist investing could be seen as the carrot approach to changing behavior. Make your investors happy, and they will stick with you.

Divestment is the stick.

And it has become a huge movement. By last September, data showed that investors representing $2.6 trillion in assets had pledged to cut fossil fuels from their portfolios, a fifty-fold increase over the previous year. The divestment movement has pushed fossil fuels — mostly coal — out of funds run by Norway, the Church of England, Georgetown University, and dozens of other groups.

Both tactics might be necessary. “Frankly, it is difficult to turn a giant oil barge, so engagement can be a slow process,” Lamb said. “Global climate change is an issue that needs to be tackled from all angles. Divestment is a completely viable angle.”

Back at Exxon, as executives prepare for shareholder votes this spring, divestment certainly appears to be the bigger threat.

The Los Angeles Times recently published an op-ed titled, “Despite what divestment activists say, ExxonMobil is searching for climate solutions,” written by an Exxon executive.

“ExxonMobil recognizes the risks posed by climate change. We believe that everyone — including oil and gas companies — should be engaged in meaningful action to reduce greenhouse gas emissions,” the piece says.

And, certainly, Exxon would be wise to recognize what so many others already have — if only for the health of its business.