Billion-Dollar Funds Tried, and Failed, to Force Oil Majors to Disclose Climate-Change Plans

On Wednesday, activist investors representing some of the world's biggest funds tried, and failed, to change how two of America's largest oil companies approach climate change. This time, the activists pushing for action on climate change from Exxon Mobil and Chevron weren't just in the street, as has happened often before. They had seats in the companies' shareholder meetings — and that's because they are some of the biggest money managers in the world.

Over the last year, Exxon Mobil and Chevron have faced mounting pressure from large shareholders about the risks posed to their business by a changing climate, and by increased regulation around carbon emissions. And at Wednesday's meetings, institutional investors with billions in company stock attempted to force the oil giants to disclose more about how they are preparing to operate in a world that's trying to burn less fossil fuel and forestall rising temperatures.

They failed, as 62 percent of Exxon shareholders and 59 percent of Chevron's went with the company's recommendation, and voted down resolutions to release climate impact reports. The companies had suggested that doing so would make them less competitive.

But the issue isn't going away. According to those institutional investors, action on climate change is a simple matter of financial responsibility.

"This is an issue that has become more of a mainstream issue, a business issue really, as opposed to just an advocacy issue," said a spokesperson for the comptroller of the state of New York, which holds just under $1 billion in Exxon shares through the state employee pension fund.

While many climate activists might relish the possibility of oil companies' profits declining as the world consumes less oil, activist investors need them to continue to profit even as the energy market changes.

The growth and profitability of companies like Exxon and Chevron rely heavily on increasing global demand for oil. But after 175 nations, most of the world, committed themselves to capping carbon emissions following the Paris climate summit, long term demand is being increasingly questioned. That is happening as oil prices remain depressed compared to the earlier part of this decade — a barrel of oil goes for $30 now compared to the peak of $150 it briefly hit in 2008, but the Organization of Petroleum Exporting Countries is continuing to flood the market with cheap oil, chiefly at the behest of Saudi Arabia. That is hurting American oil majors, as well as oil companies everywhere.

Exxon projects that global demand for oil will rise roughly 20 percent through 2040, largely on the back of growing economies and populations in India and China, while demand in more developed countries will flag. But the International Energy Agency forecasts more modest growth, or even possible decline, if measures to stop rising global temperatures are rigorously implemented.

The certainty of some regulatory change and uncertainty of demand has massive shareholders — including the California Public Employees' Retirement System (CalPERS), Norway's sovereign wealth fund, the Church of England — putting forth shareholder resolutions that would have Exxon and Chevron publish risk assessments around climate and regulatory change, and grant shareholders greater sway in company decision-making.

"If global warming gets past 2 degrees [above present average temperatures], you're going to cause catastrophic damage," said Anne Simpson, investment director for CalPERS, a $290 billion fund with over $1 billion invested in Exxon. "That's the tipping point for global melting of the ice caps … and you'll have very dramatic sea level rises that will have an impact on our portfolio regardless of where it's invested."

In public statements, Exxon — the fifth-biggest oil company by 2015 revenue — has expressed deep concern with climate change, and a commitment to addressing it as both a fiscal and social responsibility. "We have the same concerns as people everywhere — and that is how to provide the world with the energy it needs while reducing greenhouse gas emissions," reads the company's policy position. Likewise, Chevron — the 14th biggest oil company in the world, with revenues of $130 billion — has stated that greenhouse gas considerations are already baked into their business plan.

Exxon also fought to block shareholders from voting on climate change resolutions, with a request to the Securities and Exchange Commission (SEC) that the US market regulator declined in March.

And the company's record on climate change has become a matter of public concern. The attorneys general for 16 US states and the US Virgin Islands are investigating Exxon's funding of groups that denied the scientific evidence for rising global temperatures, even while the company's own scientists have been warning of the link between man-made carbon emissions and climate change since as early as 1977.

Both Exxon and Chevron have also rejected previous climate change-related proposals brought by activist investors. For instance, last year, Exxon shareholders voted down a motion to appoint an environmental expert to the board of directors by 79 percent. But investors see the tides turning on how oil companies approach climate change.

Large European oil producers — including BP, Royal Dutch Shell and Statoil — have responded to investor requests by disclosing the risks posed by climate change and pledging to seek opportunities in renewable energy. Even Suncor, the dominant player in Canada's oil sands, which have been particularly hard hit by the drop in oil prices, has begun to adopt such measures.

"With peers such as BP and Shell agreeing to report on climate risk, the company is in danger of being increasingly out-of-step with the mainstream on this issue," Edward Mason, the head of responsible investment for the Church of England, said of Exxon. The Church has tens of millions invested in the oil industry and lobbied the SEC, along with New York State, to allow shareholders to vote on climate change resolutions at the Exxon meeting.

Institutional investors suggest the the recalcitrance of American oil majors is linked to corporate incentive structure and how the SEC manages the relationships between owners and company directors.

Simpson of CalPERS said that because executive pay is tied to metrics like expanding proven oil reserves, companies are discouraged from shifting investment to renewable energy sources. One of the failed resolutions CalPERS supported would have change the measure of company output from barrels of oil to British thermal units, a source-neutral measure of energy, in the hope of spurring greater exploration of oil alternatives.

While the American oil companies' shareholders once again blocked the array of climate change resolutions this year, Simpson argued that the the long-term goals committed to in Paris necessitate corporate change.

"We've already agreed politically to an agreement that envisions a profound transformation of the global energy sector from the fossil-fuel dominated supply today," she said, "to fossil fuels playing very much a sideline role in 30 years' time."

Follow Jake Bleiberg on Twitter: @JZBleiberg