Written By: Darren Morris – Corporate Finance
What happened at the last general shareholders assembly of ExxonMobil needs to be noticed, as it is probably marking a symbolic change in the attitude of big investors towards the changing climate. While US President Donald Trump announced the withdrawal of the United States from the Paris Agreement, on the grounds that it was threatening US jobs, large financial investors are becoming more and more sensitive to “green” strategies and on the impacts they could have on the businesses of big oil and gas companies. Investors and top asset managers are now determined to encourage US companies to address climate change in very detailed ways and to examine the impacts on their businesses.
During ExxonMobil’s general assembly, investors controlling 62.2 per cent of Exxon’s shares voted in favour of a measure pushing the ExxonMobil board to issue specific reports on the possible impacts of policies against climate change. This vote happened despite ExxonMobil’s board’s opinion, which argued that the measure was not necessary because the company’s strategic plans were already taking into account the impact of possible climate policies and technological changes.
ExxonMobil will now have to assess and publish in detail the financial impacts of public policies against climate change on its business. The vote calls on the company to report every year on “the long-term portfolio impacts of technological advances and global climate change policies”. In particular, it requests an assessment of the effects on Exxon’s oil and gas reserves and resources in the event of a scenario in which governments introduce policies to restrict greenhouse-gas emissions to try to keep the rise in global temperatures since pre-industrial times to 2°C. The Paris climate accord includes a commitment to keep the temperature rise “well below” 2°C.
What happened is a remarkable shift in BlackRock’s and big investors’ attitudes.
A similar resolution at Exxon’s annual meeting a year ago won support from only a minority of investors controlling 38.1 per cent of the shares. When BlackRock Inc. sided with ExxonMobil and against the 2016 proposal at the company’s annual meeting a year ago, it faced backlash from investors and environmental activists. During the 2017 general assembly, the proposal was submitted by New York State’s pension fund and the commissioners of the Church of England; but this time, it received BlackRock and Vanguard Group’s support. Big investors now consider that the disclosure of climate risks is among their key engagement priorities with senior executives.
But a too fast and easy interpretation is misguided; BlackRock and Vanguard are not really illustrating their engagement towards green transformation. Indeed, they show a willingness to measure the risks of oil and gas businesses, stemming from the regulations and new energy technologies. They want stress tests on the oil and gas business in case of an unfavourable regulatory environment, and information about the impacts on the values of companies’ oil assets.
Would the oil and gas industry threaten the climate? Or would it not be better to say that investors want to measure risks and threats on the oil and gas industry’s business if green policies are effective?
Investors are seeking greater disclosure of the threats that climate change or regulation around climate change could pose to businesses. “Investors are increasingly focusing on the risks and opportunities that can arise from climate issues,” said John McKinley, director of BlackRock’s impact-investing division.
The largest investors have concerns about the risks to companies with assets based on fossil fuels, which could lose significant value as climate policies and market forces reduce demand. Until now, US oil and gas companies (among them ExxonMobil) have claimed that demand for oil and gas will rise in coming decades as people in emerging economies move into the middle class and increase their energy consumption (buy cars, use air conditioning, travel).
Darren Woods, Exxon’s chief executive, said before the vote that ExxonMobil believed the risks of climate change were serious and warranted action. But he expressed confidence in the company’s reporting on its long-term financial viability, which indicates that even assuming the 2-degree- Celsius goal of the accord is met, demand for oil and gas would remain high. But the topic in the industry is now heavily debated, as some European oil companies acknowledge that there could be a peak in demand by the end of the next decade.
China’s deep involvement in reducing its coal industry and developing green energy could indeed really change the landscape. China is accepting, promoting and applying the Paris Agreement. Its impact on world oil and gas consumption could be enormous, depending on the respective speeds it attains in developing its economy and green-energy capacities.
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