ExxonMobil faces ‘winds of change’ as climate battle reaches boardroom

ExxonMobil, a titan of corporate America, faces a pivotal moment this week as restive shareholders have their say on what critics call an inadequate response to seismic shifts brought on by climate change.

On Wednesday, the most watched proxy battle in years will end in a vote to decide who sits on ExxonMobil’s board. The company is trying to fend off a challenge from upstart hedge fund Engine No.1, and after a string of recent endorsements the activists think victory is within grasp.

“This will reverberate,” said Anne Simpson, head of board governance and sustainability at Calpers, a US pension fund backing the activists. “Winds of change are blowing through companies that are reluctant, fearful or unsure about how to take action [on climate].”

The battle has been under way since December, when Engine No.1 nominated four new directors for Exxon’s board and called for “purposefully repositioning the company to succeed in a decarbonising world”.

Exxon, once notoriously aloof to shareholders, has been in listen-and-respond mode since the activist threat emerged, already appointing fresh directors and unveiling new emissions plans.

Darren Woods, the chief executive, told the Financial Times that he was ready to lead the board shareholders elected.

“We will work with whatever comes out of the annual meeting,” he said.

The vote will cap a contentious proxy season in which Shell, Conoco, BP and other fossil fuel producers have faced investor criticism over their climate strategies. Chevron’s board also faces emissions-related shareholder resolutions at its annual meeting, starting just after Exxon’s on Wednesday.

Calpers, Calstrs, and the New York state retirement fund, the US’s three biggest pension funds, will all back Engine No.1’s proposals, as will Legal & General Investment Management and the Church Commissioners for England.

By contrast, Norway’s huge sovereign wealth fund, which has talked extensively of companies’ climate risk, said it would withhold its vote for Woods but back the rest of the management’s board slate.

The vote will hinge on BlackRock, Vanguard, and State Street — the big three funds together hold more than 20 per cent of Exxon’s stock — and the supermajor’s huge retail investor base, accounting for almost half of its outstanding shares.

The big three funds have not said which way they will vote but all emphasise the rising importance of climate change to their investment decisions.

BlackRock’s chief Larry Fink warned chief executives earlier this year that companies not preparing for the shift to cleaner fuels “will see their businesses and valuations suffer”.

Campaigners have been glued to a fight they depict as a David and Goliath battle that will reveal Wall Street’s true climate colours.

Fred Krupp, president of the Environmental Defense Fund, urged shareholders to “meet the moment” by backing the campaign, arguing that “massive shifts in clean technologies, government regulations and consumer preferences . . . demanded a stronger strategic response”.

But even Wall Street equity analysts have seen the activist campaign as plausible, citing the fund’s four board nominees with energy industry experience, and Engine No.1’s pedigree.

“This isn’t just your average $200m hedge fund,” said Sam Margolin, managing director at Wolfe Research, referring to its backing from big pension funds. “The reputations of the people [it] nominated are very strong.”

Earlier this month, the two biggest US proxy advisers, Institutional Shareholder Services and Glass Lewis, respectively endorsed three and two of Engine No.1’s board nominees.

While the activists have talked of the “existential” risk to Exxon posed by its focus on oil and gas, they have also tapped investor frustration with Exxon’s financial performance in recent years.

Exxon, the world’s most valuable company just a decade ago, was booted from the Dow Jones Industrial Average last year, when it also lost its gold-plated AAA credit rating and endured four consecutive quarterly losses.

The company has shown rare flexibility under investor pressure this year, slashing capital spending plans, paying off some debt, and reining in the sector’s most aggressive oil output growth plans.

The implied dividend yield has almost halved since spiking above 11 per cent last year, when the market priced in a cut to one of Wall Street’s most cherished payouts.

Exxon’s share price, up this year by about 40 per cent, has outperformed rivals, although some analysts attribute this to the activists’ engagement.

In response to the climate pressure, the company this year began reporting its “scope 3 emissions” from the products it sells, announced a low-carbon business line and new upstream emissions targets, and recently floated a $100bn carbon capture and storage (CCS) concept in Texas.

The supermajor has also appointed three new board members, including activist investor Jeffrey Ubben. On Sunday, Exxon sent a letter to shareholders pledging to add two new board members over the next year, including one “with climate experience”, although it did not put forward any potential names for those posts.

Woods told the FT that the board was focused on developing a strategy to “address a lower carbon future and the challenges associated with that” while also “providing the products that society needs”.

But Exxon will not follow European supermajors in committing to net-zero emissions, targets that Ubben recently described as “irresponsible”.

For some financial analysts, the moves Exxon has made have been too little, too late.

Jason Gabelman, a director at Cowen, argued that Exxon still needed to do much more to “future proof their business” and its carbon plans remained too modest.

Glass Lewis argued in its proxy recommendation that CCS, a technology critical to Exxon’s plans, did not have the “scale and economic viability” to serve “as the centrepiece of an energy transition strategy”.

Meanwhile, the company’s faith that an increasingly prosperous global population would always need more Exxon oil was challenged this week by the International Energy Agency, a forecaster frequently cited by the supermajor.

The agency said no new oil and gas projects would be necessary if the world were to reduce emissions sufficiently to prevent global overheating.

“Long-term risk continues to grow, threatening the company’s existing business model”, said Glass Lewis.