ANDxxonMobil’s multi-faceted dispute with investors over the company’s stance on climate change intensified last week when CalPERS, the largest U.S. pension fund, announced it would vote against all members of the company’s board of directors. at its annual meeting on May 29.
The divergence between how Exxon and some of its investors view their financial interests demonstrates a new dynamic that is likely to grow as climate change becomes a more urgent social challenge.
The fight between Exxon and its investors dates back to 2021, when the majority of investors rejected several of the board’s nominees in favor of candidates who promised to pressure the company to take a more proactive approach to the energy transition – a historic repudiation of the attitude from the company. leadership. Since then, some investors have promoted shareholder resolutions calling on the company to do more. This year, the company took the offensive with legal action against two activist investors. Exxon’s goal is to limit shareholder resolutions.
Anyone who reads the newspaper’s business pages will know that battles between investors and corporate leadership are nothing new. Investors often look to change management in search of strategies they believe will provide better returns. In fact, finding ways to achieve higher returns is a legal obligation – known as fiduciary duty – of both company executives and investment managers.
So why do some of Exxon’s investors view their financial interests differently than the company’s management? To some extent, the gap can be explained as a simple difference in strategy. But there is a larger issue at play here that goes to the heart of what it means to be a fiduciary. In short, the risk that climate change poses to the broader economy has much greater financial consequences for investors concerned about the performance of the entire market than for individual companies that think they can continue to make profits regardless of climate change. “We’re too big to just take all of our hundreds of billions and try to find a nice, safe place for that money,” said Anne Simpson, then director of governance and sustainability on the board of CalPERS, the state’s nearly $1000 pension fund. 500 billion from California. , she told me in 2019. “We are exposed to these systemic risks, so we have to fix things.”
The story behind ExxonMobil’s current dispute began last December, when Arjuna Capital and Follow This introduced a resolution calling on the company to accelerate its emissions reduction plans. Instead of submitting the resolution to shareholders for a vote at the company’s annual meeting this month, Exxon sued Arjuna and Follow This, arguing that the shareholder resolution process “has become ripe for abuse.” Even after investors withdrew from the resolution, the company persisted in the process.
Arjuna and Follow This are relatively small players, but the litigation has angered a broader group of investors with much deeper pockets. The New York State Common Retirement Fund, which manages about $250 billion in assets, said it would vote against 10 of Exxon’s 12 board members, citing the company’s climate stance. On Monday, CalPERS, which has a $1 billion stake in Exxon, said it would vote against Exxon’s entire board in response to the company’s litigation against investors. “ExxonMobil’s real agenda here appears to be intimidation, empowering business leaders at the expense of the investors who own the company and provide capital,” CalPERS said in a letter explaining the decision. “We can’t let that happen.”
CalPERS insists its vote is a governance issue and not strictly a climate-related issue. But the two are connected. CalPERS has a legal obligation to serve the financial interests of its beneficiaries and provide consistent returns into the future. Given its enormous size, it invests across the entire market and will almost certainly suffer any economic crisis – including a climate-driven crisis. Research has suggested that global economic output could be tens of trillions of dollars lower by 2050 than it would otherwise have been as a result of climate change.
On the other hand, barring vast new regulations that increase the cost of its product, Exxon will make more money simply by continuing to produce very profitable oil and gas. Finding ways to continue to do so is in the company’s best interest – even if it contributes to long-term climate-driven economic decline.
That said, it is possible to change the way Exxon management views its fiduciary duty. New policies that clamp down on emissions, for example, would signal that your product may not be in as high demand as previously thought. And lawsuits trying to make fossil fuel companies pay for the costs of their climate damage could change the thinking of companies like Exxon. But, at least for now, all indicators suggest that the company doesn’t foresee demand for its flagship product disappearing any time soon.
Exxon may be at the beginning of this fight with investors, but investor and corporate interests may continue to diverge as the costs of climate change rise.
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