Exxon Mobil’s board has historically resisted pressure to address the impact of climate change on its business and the negative effects of its operations on the world. In my book, Exxon’s intransigence and unwillingness to address climate risk put the firm at increasing risk of being stranded in the transition to a low carbon economy, creating risk for shareholders if they continued to pursue a strategy at odds with the market.

Here’s the story of how Engine No. 1, with only 0.02% of Exxon shares, managed to force the company to change…

Why is this so significant?

Here are some facts about Exxon Mobil to underpin why this change is so significant:

• One of the top 5 global carbon emitters.
• Have been accused in the past of denying climate change science.
• Have no medium or longer-term targets to reduce emissions.
• One of the most significant entries on the Climate Action 100+ ‘hit list’.

In short, Exxon Mobil are heavily exposed to climate risk and do not have a long-term plan to address it. Ultimately, the resultant risk is borne by shareholders and the beneficiaries they represent. This includes pension scheme members.

Exxon has faced significant pressure from shareholders and other groups

There has been significant shareholder pressure for the company to change over the years, including:

• Legal & General have divested from Exxon under their climate pledge.
• Climate Action 100+ demonstrated that the company is not meeting investor expectations according to its benchmark.
• The Transition Pathway Analysis of management quality shows that the company still has work to do to embed strategic level assessments of climate change.

26 May 2021 - the day that a small voice had a big impact

The board of Exxon Mobil will now include three directors, each with energy sector expertise, thanks to support from a majority of shareholders and lobbying from the activist fund Engine No. 1. There is now the distinct possibility that Exxon Mobil will begin to address climate risks and begin a process of adapting to a lower carbon world, assuming the new additions to the board can help to drive change in their business model.

How was this achieved?

Engine No. 1 managed to rally a majority of shareholders to support their nomination of four alternative directors, each with significant experience in the energy sector, on the board of Exxon Mobil. BlackRock, along with some other large US-based asset managers, have in the past been criticised for not supporting climate-related resolutions proposed by shareholders, often favouring to engage with the board of management to drive change. This time was different. Engine No. 1 successfully managed to lobby for change, with support from BlackRock instrumental.

In his annual letter to investors issued earlier this year, BlackRock CEO, Larry Fink, committed to take tougher action to address climate change. It appears that the manager is walking the walk.

What can we learn from this?

Investor and shareholder pressure really works, no matter how big the voice is. BlackRock have listened to their investors, and taken tougher action to address climate change. Engine No. 1, despite owning only 0.02% of Exxon shares, successfully managed to achieve change on the company’s board. This proves that investors such as pension scheme trustees can really make a difference if they really believe in change, and are prepared to use their voice. That voice can be strengthened by collaborating with other like-minded investors, for example, through investor initiatives.

Engagement and shareholder pressure needs to be thought of as a long-term process, but can deliver positive outcomes even with the toughest boards. Let’s not pretend that this is now “job done”. To deliver change requires continued pressure from asset owners and asset managers to ensure that the promise of change takes place.

If you would like to discuss further, please get in touch.