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Exxon Mobil feels heat from all sides

Anne Simpson said asset owners want company directors who have ‘expertise and experience’ with climate change.

Investors, attorneys general confront firm on climate change

Exxon Mobil Corp. is facing pressure on climate change from asset owners and governmental investigators, as well as challenges affecting the entire oil and gas industry.

Asset owners, along with regulators, international banking organizations and signatories of the Paris climate conference agreement — all alarmed by the environmental risks of fossil fuels and the impact on companies — are seeking a transformation of the energy sector.

The $293.6 billion California Public Employees' Retirement System, Sacramento, is working with the $178.3 billion New York State Common Fund, Albany, and the New York City Retirement Systems, with combined assets of $154 billion, on campaigns for two proxy proposals at Exxon Mobil aimed at climate risk. The company's annual meeting is scheduled for May 25 in Dallas.

A climate proposal sponsored by the New York state fund was co-filed by the London-based Church of England, whose assets total 6.7 billion ($9.5 billion); the $51.7 billion University of California Retirement Plan, Oakland; the $4 billion Vermont State Retirement Systems, Montpelier; and other institutional investors.

The proposal seeks an annual assessment of long-term impacts of climate change policies on the company's oil and gas reserves, resources and other operations under a scenario that assumes a global rise in global temperatures of 2 degrees Celsius by 2100.

A proxy access proposal filed by the New York City systems would enable a shareholder or shareholders as a group that holds a combined 3% of the company's shares for three years to nominate up to 25% of Exxon Mobil's 14-member board of directors.

“The case for proxy access is sound and the need for climate risk reporting is urgent,” said Anne Simpson, investment director, global governance, at CalPERS.

Also, Eric T. Schneiderman, New York state attorney general, initiated an investigation of Exxon Mobil in November over alleged misrepresentation on climate change risks disclosures.

Since then, his effort has been joined and expanded by the attorneys general of 16 other states, the District of Columbia and the U.S. Virgin Islands, initiating an investigation into the broader energy industry on “whether fossil fuel companies have misled investors about how climate change impacts their investments and business decisions,” according to a March 29 news release from Mr. Schneiderman.

Suzanne McCarron, Exxon Mobil vice president of public and government affairs, said in a March 29 statement that allegations the company “reached definite conclusions about anthropogenic climate change ... and then withheld it from the broader scientific community” are “preposterous.”

“Exxon Mobil recognizes the risks posed by climate change, and we believe that everyone should be engaged in meaningful action to reduce greenhouse gas emissions,” she said.

Climate-reporting challenge

Earlier this year, Exxon Mobil failed in its challenge to the Securities and Exchange Commission to exclude the climate-reporting proposal from this year's proxy statement. Last year, the company successfully excluded a similar climate-reporting proposal, Ms. Simpson said.

Exxon Mobil recommends shareholders vote against the climate proposal, saying in its proxy statement it already reports on climate change policy and carbon asset risks, including “how the company integrates consideration of climate change risks into planning processes and investment evaluation.”

On proxy access, and at Exxon Mobil in particular, the asset owners want “directors who have experience dealing with some of this (climate) risk modeling in this new world that is in front of them,” Ms. Simpson said. “We really want to make sure we've got people on the board who have got expertise and experience to be able to address this (climate risk) positively.”

Proxy access would “enable us to trigger board refreshment when companies' (directors) have been entrenched and failing,” Ms. Simpson said.

Last year, a proxy access proposal at Exxon Mobil filed by the New York City systems, for which CalPERS campaigned, won 49.4% of the vote in favor.

Exxon Mobil also is recommending shareholders vote against the access proposal, saying in its proxy statement that company directors “do not believe that there is any meaningful evidence that proxy access would improve corporate governance or enhance market capitalization. Perhaps most concerning is the potential risk for the proposal to increase the influence of special interest groups and lead to single-issue participants on the board.”

Broad impact

What affects Exxon Mobil on the climate change issue could reverberate with other fossil-fuel companies.

“You do have that domino effect, obviously, once you start zooming down in a sector,” said Mamadou-Abou Sarr, Abu Dhabi-based global head of environmental, social and governance investing, Northern Trust Asset Management. “You might end up finding more companies that could be in breach of a convention or regulation. ... There will be more scrutiny (of) oil and gas companies.”

Exxon Mobil has been an outlier, Ms. Simpson said, as other major oil companies have embraced climate reporting. Last year, BP PLC and Royal Dutch Shell PLC “faced similar proposals and in both cases the companies' management supported” them, she said.

Since then, Anglo American PLC, Statoil ASA and Suncor Energy Inc., among other companies, have adopted shareholder proposals on climate reporting, Ms. Simpson said.

“The game changer is the Paris agreement,” endorsed by 196 nations including the U.S. and China and signed April 22 at the United Nations, Ms. Simpson said. The agreement developed a framework for limiting worldwide “temperature rise to well below 2 degrees, maybe even 1.5” degrees Celsius by 2100, according to a U.N. statement about the signing ceremony.

“We are essentially saying this is the new normal,” for companies and investors, Ms. Simpson said. “You've got a target for limiting global warming. That means we now have a budget for global warming emissions and from there is a new constraint on business and a new opportunity.”

One reason asset owners are pressing for more corporate disclosure is that they themselves face pressure on climate change.

Since the Paris accord, France adopted a law requiring asset owners and investment management companies to report on their climate risk exposure, Mr. Sarr said. That reporting includes how they integrate ESG factors into their investment processes. Sweden and the Netherlands are considering similar laws, Mr. Sarr said.

Earlier this year, Ontario enacted legislation requiring pension plans in the Canadian province to disclose whether they incorporate ESG factors and if so, how.

Global discussion

“There are some pretty credible institutions talking about risk in fossil fuels, the ( International Monetary Fund), the World Bank ... the G-10 ... the Bank of England, the Bank of Canada, raising questions. Those are big, very credible financial institutions,” said John Willis, London-based portfolio manager, equities, with Sustainable Insight Capital Management LLC.

In addition, the Financial Stability Board, made up of financial system regulators worldwide, created a task force in December to develop voluntary standards for climate-related disclosures by companies for investors.

“What I think is absolutely fair at a minimum, even if you are a great energy proponent, (a) believer in fossil fuels, you have to admit all this discussion about fossil fuels has led to a focus on the financial risks ... of owning fossil fuels,” Mr. Willis said.

“The ultimate (pricing) of risk is the financial markets,” Mr. Willis said. “So the financial markets are still trying to make up (their minds) ... Look what's happened to the coal companies. (They) became so worrying that the financial markets effectively said, "We are not going to finance you anymore.' Once that happens, what do you do?”

Peabody Energy Corp. and Arch Coal Inc. — the two largest coal companies by production, according to the Energy Information Administration — filed for bankruptcy protection in April and January, respectively.

“I'm not saying it has got to the oil companies at this stage,” Mr. Willis said. “I'm not saying that the big banks aren't going to finance. But (oil and gas companies) are beginning to sweat a bit. ... This (issue) is not going away.”

In a 2015 report, “Investing in a Time of Climate Change,” Mercer LLC projected a potential impact of climate change on market sectors over 35 years.

The oil sector's expected annual returns could fall to 2.5% from 6.6%.

“This would negatively impact unprepared investors,” the Mercer report said. The renewable energy company sector has “the greatest potential for additional returns: depending on the scenario, average expected returns may increase from 6.6% (per annum) to as high as 10.1%.”

Ramifications include “how big a risk/return impact could climate change have on portfolios and when that might happen,” Mr. Sarr said. Asset owners need to begin “quantifying the carbon footprint they have in their investments,” he said.

“We've seen an increase in climate-related (proposals) at annual general meetings,” Mr. Sarr said.

For 2016 as of April 29, shareholders have filed 89climate-risk proposals, up 30% from 68 in 2015, according to Institutional Shareholder Services Inc.

Jeff Finkelman, research associate, Athena Capital Advisors LLC, Lincoln, Mass., said: “The investigations (of Exxon Mobil) are at the very least a signal that those are risks that are real and have to be taken into consideration.”

Ms. Simpson said adding climate “risk reporting helps (investors) get a handle on understanding capital allocation decision” by companies. “We want capital to be deployed productively.” n

This article originally appeared in the May 2, 2016 print issue as, "Exxon Mobil feels heat from all sides".