English evangelical protestants allied with the Quakers initiated the campaign to abolish the UK slave trade in the early nineteenth century. Two centuries later, the Vatican has said that climate change is a “moral and religious imperative for humanity”. Will the fate of fossil fuel companies be defined by public, sovereign and religious investors? And can other investors watch from the sidelines?

Our answer is yes and no respectively, but you may be surprised to know why. First let us recap on the fight to date.

In 2016, the New York State Common Retirement Fund (NYSCRF) and the Anglican Church Commissioners put forward a resolution asking Exxon to disclose its climate risk analysis. The resolution got 38% support but Exxon ignored it. Investors tabled the it again in 2017. It got 62% and Exxon responded.

However, investors were unhappy with the disclosure and that Exxon gives no line of sight on its transition strategy. In 2019, the two funds sought to table a resolution demanding emissions reduction targets consistent with the 2016 Paris climate agreement. 

BP, Equinor (formerly Statoil) and Shell have all responded to investor requests for further assurance of the consistency of their strategies with the goals of the Paris Agreement. But Exxon objected and sought assurance from the Securities and Exchange Commission (SEC) that the resolution could be omitted from its annual general meeting (AGM) ballot on the grounds that it constituted “micromanagement”. Against the backdrop of a tough environment for shareholder proposals, the SEC blocked the resolution. The two investors then escalated the engagement, deciding to vote against all directors, support the creation of a climate committee, report on lobbying and push for the separation of the chairman and CEO roles.

In response, Exxon claims to be addressing “the dual challenge of meeting the world’s growing demand for energy while reducing the risks of climate change”, and says its global energy related CO2 emissions are in line with the Paris agreement.

Edward Mason, head of responsible investment for the Church Commissioners responsed: “Exxon has not made any commitment to long-term emissions reductions across its value chain. Nor has it engaged seriously with Climate Action 100+.”

So why is Exxon set to be the litmus test for climate aware investors?

● First, there is Exxon’s shameful record on climate change. It pays lipservice to the importance of tackling it then undermines its own claims through a systematic campaign of misinformation to reduce regulatory action via the trade associations it funds, which seek to block any challenges to its core business model.

● Second, engagement has been given every chance and if these investors retreat, they would cease to be credible to many, the authors included.

● Third, the tidal wave of regulatory capture happening in many countries but especially in the US. Nowhere is the challenge to investor rights as explicit as with Exxon, where the SEC has prevented the strategic disclosure which financial regulators (the Network for Greening the Financial Sector, NGFS) say is needed and which investors will get from non-US companies.

Property rights
In the early 19th century, slave owners objected to the loss of their ‘property rights’. But there were also disagreements between those who favoured immediate abolition and ‘pragmatists’ who argued for more time. For example, in an 1823 agreement between owners and the UK government, the former agreed to voluntary codes to protect the core model.

Similarly, NYSCRF and the Church Commissioners are under pressure both from those who think they are going too far, but also from those who think they are being too accommodating.

● Criticism 1: These funds should divest because they and the company fundamentally disagree. This argument comes from advocates like the Californian Democrat Ted Lieu, who in 2016 said: “There is a fierce urgency to address climate change, and the pension funds are fooling themselves if they think engagement is working”. But an investor may be indexed, have held Exxon for many decades and cannot sell and both consider it has a responsibility to its members and wider society to act as catalysts for change on this critical systemic risk. 

● Criticism 2: Exxon is moving and now is not the time to be disruptive. Yes there are some changes but it is not being fit for purpose. Exxon’s Outlook for Energy report assumes no peak in oil demand by 2040 and the company plans to increase production by more than 25% on 2018 levels to over 5m barrels per day by 2025. The investors argue that by focusing on the election of the next board chair, there is no disruption to the business and no personal criticism should be assumed.

● Criticism 3: This is tokenism. If the investors wanted change, they would target one or two of the worst directors, deselect them and propose a slate of three investors – changing one director has been shown to be pointless. Investors respond that they want to send the strongest signal of discontent, but have encouraged others to vote firmly in line with their own policies if this is targeted voting. Proposing new directors was impossible in the short time frame following the SEC decision, but will be possible next year. Picking on the oil company that has the largest greenhouse gas (GHG) and political footprint sends a signal to the market that investor patience has hardened. 

As New York State Comptroller Thomas DiNapoli told us: “Our pension fund, and other institutional investors, are engaged with numerous companies in the fossil fuel and energy sectors in an effort to help the transition to a lower carbon global economy. Companies across these sectors need to take steps to address climate risk or they put themselves and their investors in harm’s way. Exxon’s refusal to adequately address climate risk or properly respond to investors’ concerns stands out among its peers. It’s a red flag that it has a larger governance problem and needs a thorough reform of its board.”

raj thamotheram

Raj Thamotheram

On balance we consider that NYSCRF and the Church Commissions have the stronger argument and by being attacked by both sides indicates they have struck the necessary compromises.

Context is key: human civilisation faces a climate emergency which is systemic and existential yet even NGFS regulators have not highlighted how fossil fuel companies will affect market stability.

This is why, today, an independent chair and appropriate stewardship of fossil fuel companies is so important. Both to prevent the climate emergency but also to make the transition as orderly as possible, governments will soon have to deliver a managed decline of this entire industry. 

If we miss this chance, the costs will be huge. We should remember that rather than abolishing slavery as the UK did, the US delayed. The result was the Civil War, with human and financial costs and tensions that still reverberate.

If fossil fuel companies are going to benefit from meaningful government and investor support, truly independent chairs who can reflect these wider interests are essential prerequisites, in the same way that EU governments dealt with banks after 2008. Now is the right time to start shifting the culture of energy majors and provide investors with genuine confidence that the necessary physical, financial and cultural transition can be made while ensuring greenhouse gas emissions are indeed Paris compliant. 

Raj Thamotheram is the founder and chair of Preventable Surprises, a responsible investing think-tank. Richard Barker is a climate advocate – see his TEDx on the analogy with slavery