Exxon’s Carbon Emissions Plan Is ‘Nowhere Near’ Good Enough, Says Activist Investor
A new impact investing firm founded by hedge fund veterans is fighting to add climate change experts to the oil giant’s board.
Engine No. 1, the new impact investment firm that is trying to force troubled oil giant ExxonMobil to make a “clean break” with its fossil fuel past, said Monday that the company’s plans to reduce its carbon emissions don’t go far enough.
The San Francisco-based fund, which has taken an activist approach by recommending four new directors with clean energy expertise to join Exxon’s board, is pushing the world’s largest oil producer to commit to a net-zero carbon emissions goal by 2050. Engine No. 1 was founded in late 2020 by Chris James, a tech investor and veteran of Partner Fund Management, with others from firms like Bain Capital and JANA Partners, the activist hedge fund.
The impact firm claims that Exxon’s efforts to show progress on carbon emissions are deceptive — and inadequate.
“ExxonMobil has now gone from dismissing emissions reduction goals as a ‘beauty competition’ to claiming repeatedly this month that its emissions reduction plans are ‘consistent’ with the Paris Agreement,” Engine No. 1 wrote in a letter sent to Exxon’s board Monday.
The activists argued that Exxon’s “true trajectory is nowhere near Paris consistency, and that a clear understanding of ExxonMobil’s claims underscores the long-term risk facing the company in a decarbonizing world.”
Exxon’s changing posture on carbon has come amid shareholder pressure at a time that the oil company’s belief — and investment — in the continued demand for fossil fuels puts it at odds with other energy giants that are taking steps to diversity into renewables, according to investors. “Everyone knows it’s the worst actor in the field,” said an Exxon investor familiar with the campaign.
But Exxon’s contrary position — reportedly accompanied by a $37 million climate denial lobbying effort, according to Engine No. 1 — is no longer working. Last year, the stock fell more than 40 percent, got booted from the Dow Jones Index, and was the most profitable short in the market. In fact, short sellers made $1.28 billion on the oil giant, as the Covid-19 pandemic stopped the world economy and travel in its tracks, and the price of oil plummeted.
That’s when the new activist fund, with the support of the California State Teachers’ Retirement System and the Church Commissioners for England, began putting on the pressure, focusing in part on traditional metrics like the company’s poor stock performance compared with its peers, low return on capital investment, and a heavy debt load that has led to several credit ratings downgrades.
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Engine No. 1, which owned 917,400 shares of Exxon as of Dec. 31, is the only shareholder taking the steps to launch a proxy campaign to change Exxon’s board, which the investment firm believes is the only way real change will occur.
The investor familiar with the campaign said other shareholders that have been supporting climate change initiatives at Exxon and elsewhere are likely to support the activist’s efforts. These include Exxon’s top two investors, Vanguard and BlackRock, as well as Alliance Bernstein and D.E. Shaw.
Following the first Engine No. 1 letter, dated Dec. 7, Exxon stated that its greenhouse gas emissions had declined 6 percent since 2016. The oil firm is planning for an 11 to 13 percent reduction by 2025, according to Engine No. 1.
But while Exxon claimed that its reductions would be consistent with the Paris Agreement on climate change, the figure reported by the firm “excludes [about] 90 percent of ExxonMobil’s total emissions,” Engine No. 1 said in Monday’s letter.
Most of the excluded emissions are so-called “Scope 3 emissions,” which come from such products as natural gas and gasoline used by Exxon’s customers and account for about 83 percent of the company’s total emissions, according to the letter.
“ExxonMobil of course argues that such emissions simply reflect societal ‘choices,’ which is certainly true to an extent, even if it ignores ExxonMobil’s long-time role in influencing such choices,” the activists wrote. “We believe, however, that this makes little difference to the many long-term investors who recognize that Scope 3 emissions are a proxy for product risk, and that ExxonMobil’s business model is under fundamental threat given that such societal choices regarding energy are in fact rapidly changing and are likely to continue doing so.”
According to Engine No. 1, “this is not consistent with, but rather runs directly counter to the goals of the Paris Agreement.”
Exxon did not return a request for comment by press time.
Engine No. 1 plans to file its preliminary proxy within the next few weeks. Exxon’s annual meeting is in May, and if new climate-change experts are voted in, they could pressure the the world’s biggest oil producer to prepare for a carbon-free future.
“If you need 35 to 40 percent of the vote, this should be pretty doable,” the knowledgeable investor said. “It’s not as much of a David versus Goliath battle as it might appear.”