Out-Law Analysis 3 min. read

Institutional shareholders push for climate change commitments

Oil production companies in both Europe and the US are coming under increasing pressure from their shareholders on their future direction and targets for reducing their contributions to climate change.

There have already been several significant shareholder votes in both Europe and the US during the 2021 AGM season on climate change matters, with enough support received to trigger public dialogue. Momentum around climate change issues continues to grow, and observers now keenly await responses from the relevant boards in the coming months.

In the UK, Shell found itself under pressure at its recent AGM, as a court in the Netherlands ruled that it is obliged to reduce the CO2 emissions of the group’s activities by net 45% by the end of 2030 relative to 2019, in an action brought by a Dutch activist shareholder. A shareholder requisitioned resolution (24-page / 10.3MB PDF) supported the board in its attempts at tackling climate change, but asked for the setting and publishing of targets that are consistent with the Paris Climate Agreement goal to limit global warming to well below 2°C above pre-industrial levels and to pursue efforts to limit temperature increase to 1.5°C.

Significantly, the resolution was supported by Legal & General, which publicly committed in its 2020 Climate Impact Pledge to put pressure on the companies in which it invests to speed up their responses to climate change. Blackrock, too, chose to support a resolution brought by oil industry activist group Follow This (32-page / 1.7MB PDF) at BP’s 2021 AGM, in which the company was similarly asked to commit to the Paris targets.

Although both resolutions were defeated, they received significant support in addition to the big names, with total votes of 30.47% and 20.65% in favour respectively. This not only demonstrates there is substantial, albeit minority, support for alignment with the terms of the Paris Agreement, but also requires a formal response from each company under the UK Corporate Governance Code (‘the Code’).

Activism in this area is no longer the domain only of environmental charities and NGOs. These challenges and resolutions have received backing from major institutional investors

Provision 4 of the Code requires that when 20% or more of votes have been cast against the board’s recommendation in respect of a resolution, the company should explain, when announcing voting results, what actions it intends to take to consult shareholders in order to understand the reasons for the result. It should then publish an update on the views received from shareholders, plus actions taken, no later than six months after the shareholder meeting.

The boards of both companies will therefore need to report within six months on how they have engaged with shareholders on these issues, and the resulting outcomes. This guarantees further public discussion of what the “right” approach should be – and additional pressure on the board to justify its decisions, particularly around target setting. Investors will also expect that any such public debate will go on to inform the company’s next section 172 statement, published as part of its annual report and accounts, providing yet more insight into each board’s engagement with shareholders and response to their concerns.

In the US, oil company Chevron recently faced a rebellion by shareholders who voted, by a very significant 61% majority, in favour of a proposal from Follow This requiring the group to cut its total greenhouse gas emissions, including customer emissions and its own and supply chain emissions.  Follow This has reportedly also succeeded recently in pushing through resolutions on the same terms at two other US oil companies, ConocoPhillips and Phillips 66.

Similarly, Exxon is likely to see three board seats taken by shareholder nominees after an activist campaign led by Engine No. 1 that came to a head at its recent AGM. The shareholders’ position (104-page / 8.8MB PDF) is that Exxon’s climate change strategy is a major risk to the company’s future, and therefore that outside expertise are required on the board; something that is available, the shareholder group posits, through its nominees who are all highly experienced in the energy and renewables sector.

What is striking about this activity is the nature of the players involved. Activism in this area is no longer the domain only of environmental charities and NGOs. These challenges and resolutions have received backing from major institutional investors – in Blackrock and Legal & General, two of the very largest. At Exxon, Engine No. 1’s slate included two former chief executives and significant energy sector experience. If there has been any doubt previously, it is now clear that concerns about climate change are firmly mainstream and a focus of powerful institutional investors. The same issues arise time and again: are corporates moving quickly enough; and will boards align with activist shareholders’ calls to meet the Paris obligations or, despite some heavyweight support for those positions, continue with their current strategic approach, which retain at least for now majority investor support.  

Regardless, setting and communicating the company’s strategy and engaging with key stakeholders in doing so is a fundamental obligation of the company’s board. Responsibility, at least in part, for any significant shareholder dissent therefore lies with the board.

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