Late May 2021 was an eventful time for ESG and the oil and gas industry, to say the least, and the dust is far from settled.
Three giants in the sector now face exponentially increased carbon reduction targets, a radically expanded scope of climate change efforts, and activists joining the board.
Though unprecedented, these developments came with warning signs. These companies are the world's largest carbon emitters. Shareholders are losing patience with insufficient progress towards environmental benchmarks, particularly as climate change strategy has been shown to positively impact business results. And investors have become more serious than ever about holding corporations accountable in areas like climate change and the environment.
Read on for a recap of these events and what they mean for boards and ESG.
Shifting Goalposts
Imagine having to meet a key business goal that suddenly more than doubles in scope, has the same target date, and incurs legal ramifications if it isn't met by that date. That's essentially what Royal Dutch Shell experienced May 26 after a landmark legal ruling by the Dutch courts, which declared the oil giant will have to reduce its carbon emissions by 45% by 2030'erasing the previous goal of 20% by 2030.
While Shell announced plans to appeal the decision, the ruling is a pivotal step in a lawsuit filed over two years ago by activist groups including Friends of the Earth and Greenpeace on behalf of 17,200 Dutch citizens. Their charges: Shell's business model is 'endangering human rights and lives' by threatening the goals of the Paris Agreement.
'The landmark ruling comes at a time when the world's largest corporate emitters are under immense pressure to set short-, medium- and long-term emissions targets that are consistent with the Paris Agreement,' CNBC wrote as it reported the news. 'The climate accord is widely recognized as critically important to avoid an irreversible climate crisis.'
'The International Energy Agency (IEA) has said investors should stop funding new fossil fuel projects if they want to cut greenhouse gas emissions by 2050.' Reuters
Meanwhile, the target also moved on Chevron's efforts to cut carbon emissions. Shareholders voted 61% in favor of a proposal to cut 'Scope 3' emissions as defined by the Greenhouse Gas Protocol, one of the most widely used accounting tools for tracking carbon emissions.
In a Diligent webinar earlier this year, Chevron Chairman and CEO Mike Wirth talked about the company's efforts to concurrently reduce emissions in the existing energy system while investing in new and novel ideas in energy technology. A Scope 3 mandate ups the ante significantly for the company's ESG initiatives.
While Scope 1 and 2 emissions cover dynamics more directly under a company's control — like fuel combustion, company vehicles, fugitive emissions, and purchased electricity, heat, and steam — Scope 3 includes indirect emissions that occur across the company's value chain. These include purchased goods and services; transportation and distribution flowing upstream and downstream; the use of sold products; investments; leased assets and franchises; and daily operations like business travel, employee commuting, and waste disposal.
'Although the proposal does not require Chevron to set a target of how much it needs to cut emissions or by when, the overwhelming support for it shows growing investor frustration with companies, which, they believe, are not doing enough to tackle climate change,' Reuters wrote in its coverage of the decision.
Sweeping Challenges to Board Composition
Then there's Exxon. In what the Wall Street Journal called 'a historic defeat for the oil giant,' Exxon shareholders backed board candidates nominated by activist hedge fund Engine No. 1.
Engine No. 1 has only a $50 million stake in the $250 billion company, but the hedge fund's public push for Exxon to move faster on carbon reduction has attracted supporters like BlackRock, which is one of the company's top three investors.
'Exxon's returns have lagged behind its global rivals, losing about 15% over the past five years,' Reuters noted. 'BlackRock, the world's largest fund manager, has a 6.7% stake in Exxon, and its vote illustrates how frustrated shareholders have become after years of having the company dismiss concerns about its strategy. Investors have grown much more serious about fighting climate change.'
Such a move during an annual shareholder meeting requires unprecedented commitment. It underscores how seriously investors and shareholders are taking climate change, and their increasing power to force change in the ESG arena.
Regulations, Resistance, and Repercussions for Disclosures
BlackRock's intensifying dedication to climate change action and the Dutch court ruling for Shell represent only one side of the coin. Entities and regions rich in oil and gas are moving to protect their interests. In the U.S. state of Texas, for example, legislation has been proposed:- Requiring state entities like pension funds and endowments to divest from firms that cut ties with fossil fuel companies
- Barring local municipalities from banning natural gas as a fuel source
- Preventing cities or municipalities from restricting the use of a utility provider
In the United States, corporations can count on both new ESG disclosure rules and legal challenges levied against them. This back-and-forth will have a significant impact on disclosures. What ESG information will investors consider material as the climate change landscape continues to evolve?
U.S. Securities and Exchange Commission (SEC) Commissioner Allison Herren Lee provided insights around disclosures, materiality, and ESG in a May 2021 speech. She explained that:
- 'Public company disclosure is not automatically triggered by the occurrence or existence of a material fact. There is no general requirement under the securities laws to reveal all material information.'
- 'The securities laws currently include little in the way of explicit climate or other sustainability disclosure requirements. In many instances, therefore, disclosure may be required only when a particular discussion of climate is collateral to something else disclosed by the company.'
- 'The same is true for many ESG matters that lack express disclosure requirements. Thus, climate and ESG information important to a reasonable investor is not necessarily required to be disclosed simply because it is material.'
'Investors, the arbiters of materiality, have been overwhelmingly clear in their views that climate risk and other ESG matters are material to their investment and voting decisions.' SEC Commissioner Allison Herren Lee
In short, boards should look to SEC disclosure requirements for ESG data and reporting guidance but shouldn't stop there. 'We must not operate under the false assumption that the securities laws already effectively elicit the information investors need,' Lee said.
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