'Point of maximum pain': How far can green activists push big oil?

Fresh off a string of victories against fossil fuel giants, climate-minded activist investors are brimming with confidence like never before. The largest institutional money managers are adding serious weight to their push for companies to do more to address climate risks. Now, experts are questioning how much influence they will actually wield.

David and Goliath-like showdowns between activists and big oil and gas firms were plentiful last week. Small funds, shareholder groups and environmental organizations used proxy campaigns and courts to score big wins against some of the world's largest oil and gas companies.

In a landmark ruling, a Dutch court ordered Royal Dutch Shell (RDS-A)(RDS-B) to deepen its planned emissions cuts. Exxon Mobil (XOM) shareholders voted to replace at least two members of the company's board, according to preliminary results, with new directors seen to be better suited to fight climate change. At Chevron's (CVX) annual general meeting, 61 per cent of shareholders supported a resolution calling for targets to reduce emissions, including those of the company's customers. A separate resolution asking Chevron to forecast the business impact of reaching net zero emissions by 2050 was supported by 48 per cent of voters.

On Wednesday, Exxon acknowledged the pressure it faces on climate issues. Company director Ursula Burns called the successful campaign by activists to gain board seats a "tidal wave" at a virtual event, adding "the timing was perfect." At a separate conference that day, Chevron's CEO said he would consider selling the company's 20 per cent stake in an oil sands mine in Alberta, a region often targeted by activists for its emissions-heavy production.

What activist shareholders want from big oil

California-based shareholder advocacy group As You Sow led the net zero-based resolution at Chevron's annual meeting on May 26. It specifically asks the company to spell out "how a significant reduction in fossil fuel demand, envisioned in the IEA Net Zero 2050 scenario, would affect its financial position and underlying assumptions."

In a report released in May, the International Energy Agency (IEA) said the transition to its Net Zero 2050 scenario would create opportunities for oil and gas companies to develop cleaner fuels and technologies at scale. It also calls for "a major contraction of oil and gas production with far‐reaching implications for all the companies that produce these fuels," adding "this represents a clear threat to company earnings."

"What shareholders want to do is avoid mass failure of oil and gas companies at the same time. We want an orderly transition, and we want them to tell us how they are planning for that transition," As You Sow president Danielle Fugere told Yahoo Finance Canada in an interview. "If you are not responding [to climate change], we don't think you are doing your jobs or fulfilling your fiduciary duty to investors."

Shareholder resolutions are non-binding, but Fugere says the 48 per cent vote her organization achieved sends a strong signal to the oil giant's management. It's one she admits would not have been possible without backing from investment industry heavyweights.

"Those larger votes are coming in now, because the large asset managers are starting to support them," Fugere said.

"I know BlackRock and Vanguard have said... they prefer to engage [with companies] rather than vote. But at some point, it became clear that the companies weren't responding, even to the largest asset managers who held their stock."

Interest in environmental, social and governance-focused (ESG) investments is on the rise. Sustainable investment funds have seen record inflows for four consecutive quarters, attracting US$185.3 billion in the first three months of 2020, according to Morningstar. The data provider said in April that the sector's total assets hit a fresh high of US$2 trillion in the first quarter.

BlackRock, the world's largest asset manager, openly backed last week's green activism at ExxonMobil and Chevron. While Fugere is encouraged to see CEO Larry Fink's full-throated acknowledgment of climate risk being put into practice, she sees smaller shareholder activists continuing to play a critical role in raising climate risk issues.

"I don't think that we will become unnecessary," Fugere said.

You have to wonder if we've hit that point of maximum pain now.Greg Taylor, chief investment officer at Toronto-based Purpose Investments

Greg Taylor, chief investment officer at Toronto-based Purpose Investments, says shareholder activism is cyclical, and clearly on the rise at the moment. He echoes Fugere's call for energy companies to tackle climate risk sooner rather than later.

"You want to get ahead of the curve, and not be the last one that makes these changes. It's going to be harder for companies to raise capital if they are under constant attention for being behind on ESG," he said. "If the big guys are using that as an investment criteria, that will start to impair companies who aren't doing it. That will stunt growth and impair business models."

Taylor says while the oil and gas industry is proving to be an easy target for climate activists, many companies in the sector should be acknowledged for the environmental progress they've made in recent years.

"You have to wonder if we've hit that point of maximum pain now. These companies have really changed in the last few years to become better businesses," he said. "Other sectors are going to look at how the energy sector has responded to the ESG attention."

Darren Sissons, vice-president and partner at the Toronto-based wealth management firm Campbell, Lee & Ross, is less convinced that shareholder activism will meaningfully sway the largest energy firms. However, he shares Fugere's concern that faltering energy firms will have far-reaching economic consequences.

If all of a sudden the energy industry is going to be significantly impaired, how many people are going to lose their jobs?Darren Sissons, vice-president and partner at the Toronto-based wealth management firm Campbell, Lee & Ross

"If all of a sudden the energy industry is going to be significantly impaired, how many people are going to lose their jobs? That's a big consideration that people aren't talking about," he said.

In its latest annual Financial System Review, the Bank of Canada warned that debt and equity tied to carbon-intensive industries fail to adequately factor in the risks of climate change, leaving investors exposed to the potential "sudden losses in the value" of such assets.

"Shareholder concern has become broader," Fugere said. "Most large investors hold across the entire economy. We've seen the projections for what happens in an economy fully ravaged by climate change. What we see are massive costs and a decline in GDP. From an investor standpoint, you can't predict where those impacts occur."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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