Exxon and Climate Change Risks – 11/3/16

At ExxonMobil’s annual shareholders meeting in May, Rex Tillerson, CEO and chairman, addressed climate change directly for the first time in years.

Still, it’s not as though he had much choice.

With Exxon under investigation by New York’s attorney general for allegedly misleading the public on climate change and the ratification of the Paris agreement on climate change, shareholders wanted answers. With governments in all major economies committed to reducing carbon emissions, institutional investors are asking what the oil industry plans to do.

Of the 11 proxy items Exxon shareholders put forth for a vote this year, six dealt with climate risks. None passed, but the votes they attracted demand attention. A proxy asking that Exxon assess and report on the potential impact that climate-change policies on its business reached a surprisingly high 38%.

Big oil companies are often seen as solid investments. Oil products fuel most transportation and transportation is the backbone of the economy, not to mention there seemed to be an inexhaustible amount of oil to find. Those facts haven’t changed, but there are important issues that get glossed over: Greater fuel efficiency (or electric cars depending how far ahead you look) mean less oil demand, extracting oil is getting more expensive as exhausted sources of crude oil in accessible areas force exploration of the Arctic and beneath the oceans, and environmental regulations are adding even more of a burden. If you toss in shale oil and low oil prices, then existing business models look shakier than ever.

exxon-profits

The combination of the myriad of problems facing them raises the question of how major oil companies will respond as the ground shifts underneath them. Few companies have more to lose than Exxon and investors pushing it to take better account of those risks.

To achieve the goals of the Paris accord, it is likely that a large amount of known hydrocarbon reserves must stay in the ground, barring some miraculous new carbon capture technology. Not extracting (see: not selling) that oil translates to trillions in losses for Exxon and others as their holdings become worthless. Unlike most companies, Exxon has refused to write down the value of their reserves in light of cheap oil in line with its 2014 report denying that any of its reserves were at risk of being stranded. Many are skeptical of that particular quirk of accounting, not the least of which being the SEC.

Nervous that their concerns are not getting through, Exxon’s biggest shareholders are pushing for more power over the board of directors. The one proxy that passed at May’s meeting would allow shareholders that have owned at least 3% of Exxon’s outstanding shares for at least three years nominate their own candidates for the board. In addition, Blackrock, the world’s biggest asset manager and Exxon’s second-biggest shareholder, voted against two of Exxon’s directors this year, possibly in retaliation for their reluctance to engage in a private session about climate risks.

Even if it comes grudgingly, Exxon is being forced to acknowledge that climate risks pose a very real threat to its business model. How much progress shareholder’s make between now and the next annual meeting will certainly be interesting.

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