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Why Big Oil should be worried after a day of reckoning

Exxon, Shell, and Chevron are under siege in the courtroom and the boardroom.

Tall smokestacks in an oil refinery.
Pollution from an oil refinery.
Christian Lagerek/Shutterstock
Rebecca Leber is a senior reporter covering climate change for Vox. She was previously an environmental reporter at Mother Jones, Grist, and the New Republic. Rebecca also serves on the board of the Society of Environmental Journalists.

Three of the world’s largest oil companies faced a major reckoning on Wednesday over their part in climate change.

First, a Dutch court told Royal Dutch Shell to cut its greenhouse gas emissions by a whopping 45 percent by 2030 in response to a lawsuit filed by seven environmental groups. Arguing that Shell is bound by an “unwritten standard of care” to human rights and the Paris climate agreement, the court ruled that Shell has the responsibility to “contribute to the prevention of dangerous climate change.” Although the judge’s decision isn’t the final say in the matter, her words could affect other ongoing climate litigation around the world.

The second reckoning came at Chevron’s unusual shareholders meeting, at which 60 percent voted for a resolution recommending that the company reduce its emissions — not only in its production process but also in the products it sells to consumers. The vote is not binding, but follows a trend from other shareholder meetings this year. A similar resolution passed at ConocoPhillips’ recent meeting in May, and another Philips 66 resolution requests that the company produce a report on its lobbying activities.

Last came an even more unlikely development. At ExxonMobil’s annual shareholder meeting, a small advocacy investment firm called Engine No. 1, which owns just 0.02 percent of the company, staged a coup by winning at least two seats on Exxon’s board of directors. (A third seat is still a toss-up.)

The activists won seats despite Exxon’s last-minute concessions to add a director who had “climate experience” and warnings that electing the climate-conscious candidates would “derail our progress and jeopardize your dividend.” The board had a total of 13 seats as of May, according to the company’s website — but corporate boards have hiring and firing power, and the vote signals that if activist shareholders build their power, oil executives could find their jobs on the line.

These developments would have seemed implausible just a year ago, and so activists and others eager for climate action see this moment as a tipping point.

A California teachers’ pension fund, for example, threw its weight behind the Engine No. 1 nominees and issued a statement that could be interpreted as a warning for the rest of the industry. “While the ExxonMobil board election is the first of a large U.S. company to focus on the global energy transition, it will not be the last.”

Each of Wednesday’s events is significant in its own right. Together, they are a signal that fossil fuel companies may now be held legally responsible for their role in climate change — and that if oil executives don’t act on climate, they risk losing their jobs.

Why there’s finally some accountability coming

The reason companies are facing some accountability now, when many pro-climate resolutions and court cases have failed before, has to do with the turbulent last year for Big Oil. More investors have grown wary of businesses that rely on burning fossil fuels for profit in a world that is trying to hit net-zero greenhouse gas emissions by the middle of the century. BlackRock, the behemoth investment firm led by Larry Fink, said in early 2020 that it would align its shareholder votes with climate commitments. As the world’s largest asset manager, it threw its weight behind Engine No. 1’s play for three nominees for the board.

The coronavirus pandemic, which froze air travel and sent oil prices tumbling into negative territory, also helped make the case that a business model centered on oil can’t be sustained. Adding more fuel to the debate was a May report from the International Energy Agency, a fairly conservative body, that called for “no investment in new fossil fuel supply projects,” starting immediately, to meet the commitments of the Paris climate agreement.

“It’s a different world,” said Danielle Fugere, president of the activist shareholder group As You Sow, after Wednesday’s developments. Oil companies “now have to very seriously say, ‘are we moving in the right direction on climate change?’”

For the first time, the industry may need to own up to all the pollution its products cause

Don’t expect the industry to transform in an instant. But investors and courts are finally making an important distinction: They’re telling oil companies to take responsibility not only for their production processes, but also the dirty products that they sell.

For decades, when oil companies have touted their efforts to address climate change, they focused on a narrow slice of their impact. For instance, the entirety of Chevron’s promises on climate change focus on lowering the footprint of its operations, meaning the fossil fuels they burn just to extract, transport, and refine their products. Chevon and other companies have not taken responsibility for the bigger share of their climate problem — the burning of their products, for example in cars and natural gas power plants. Richard Heede of the Climate Accountability Institute has found in his research that the products of top polluters account for 90 percent of the world’s greenhouse gas emissions.

Chevron and ExxonMobil shareholders and the Dutch court rejected the oil industry’s narrow view of its emissions, which adds new pressure on companies to own up to their larger impact. Tweaking their operational footprint requires relatively small changes, but reducing their larger, downstream impact would demand entirely new business models that are not dependent on pulling fossil fuels out of the ground.

To be clear, it’s unlikely we’ll see any shifts right away. “Existing board members have to see that this vote was really a rejection of the company’s current approach to climate change,” Andrew Logan, oil and gas director of Ceres, a nonprofit focused on business environmental solutions, said of the ExxonMobil vote. “[But] it doesn’t oblige them to do anything different.”

Still, there are a few other reasons the oil companies will want to listen.

The ExxonMobil board coup was radical because it marked the first time climate activists succeeded in winning seats on a major oil company’s board. The victory adds a new layer of credibility and accountability when shareholders call on companies to be more aggressive on climate change: Executives’ jobs could be on the line. “This demonstration that investors are willing to run a full campaign for the board, and essentially fire directors and companies that ignore the will of investors, is certainly going to be seen as a warning sign to companies to not ignore those votes,” Logan said.

Meanwhile, the Shell case demonstrates that companies are starting to face a “very tangible idea of legal risk,” Logan said. That’s bound to grab the attention of Wall Street.

It’s not clear yet whether the Dutch court ruling — that Shell has to slash 45 percent of its greenhouse gas emissions by 2030, compared to 2019 levels — will have staying power. Shell has already announced its appeal. But it is just one of more than 1,800 examples of climate litigation around the world, so it could be the first of many cases that requires companies to follow through on emissions reductions commitments. There are 1,300 cases in the US alone, and many mirror decades-old tobacco litigation by alleging that oil companies purposely misled the public about their products.

Next year, climate activists will have new targets

One way to achieve deeper accountability in the fossil fuel industry will be to repeat these results at other oil companies. Risks to board seats may make executives more likely to address investors’ expectations for climate reform, for example by setting more aggressive emissions targets for their products, or by limiting their anti-climate lobbying. If you’re Chevron, you don’t want to face a boardroom campaign like the one Exxon just lost.

That will take more pressure from the investment giants like BlackRock, Vanguard, and pension funds that have adopted climate targets.

Ben Cushing of Sierra Club, one of many environmental groups that played a role in Wednesday’s events, said the next stage of activism will pressure investment firms like BlackRock to turn against even more of Exxon’s current leadership. While BlackRock and Vanguard supported some of Wednesday’s climate measures, they rejected another ask of Sierra Club’s — to attempt to vote ExxonMobil CEO Darren Woods off the board.

“Starting now, in 2021, [the industry] can’t be investing in new fossil fuel projects,” Cushing said. “For BlackRock and Vanguard and other investors, they need to hold the leadership of those companies accountable, and vote against their top management.”

Revolutionizing the industry’s business model — ultimately to produce less gas and oil — will require more constant pressure. Activists will have to deliver many more days like Wednesday. “The real test now will be what comes of this in response,” Logan said.

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