ExxonMobil Needs to Serve Its Shareholders on Climate Risk

There is still time for the oil and gas giant to engage with its shareholders over climate risk, but the clock is ticking down.


The Paris Climate Agreement, which China and the U.S. formally approved the weekend before last, marks the beginning of a new era in the capital markets. Nearly 200 countries have committed to take steps to limit global temperature rise to “well below 2 degrees Celsius,” 180 of which provided detailed plans for starting down that path. The agreement also requires signatories to present progressively stronger reduction plans every five years.

This news represents a powerful shift in the number of parties and level of coordinated action to protect our climate. Markets and businesses are clearly responding. Unfortunately, ExxonMobil Corp. and its board of directors seem to have underestimated just how important this landmark agreement is and what it means for the energy sector.

Before Paris, doubt remained about whether nations could come together to address climate warming. Now there’s a clear expectation from investors and financial markets that companies should be adapting to a clean energy transition that’s already under way. Financial analysts from UBS and Barclays have quickly moved to quantify the financial risks to utilities and the fossil fuel sector. Barclays identified more than $22 trillion in revenue that could be at risk for the oil and gas sector alone. The Financial Stability Board convened a Task Force on Climate-Related Financial Disclosures, Moody’s is integrating key points of the Paris Agreement into its credit and ratings determinations, and mainstream investors are calling for new disclosures and transition plans.

Oil and gas companies such as ExxonMobil face heightened scrutiny as oil prices continue to languish below $50 per barrel and losses continue to mount. This past year ExxonMobil lost its triple-A credit rating and reported its lowest profits since 1999. Changes in demand, new market dynamics and disruptive innovation are already reshaping the oil and gas industry. The risks and opportunities presented by the energy transition envisioned by the Paris Agreement highlight the need for corporate boards and executives to ask themselves whether their business models are still fit for purpose.

In our recent report, Ceres reiterated that boards play a critical role in identifying emerging risks, including those from environmental and social initiatives, and ensuring effective risk management. Indeed, Ernst & Young has noted how important it is for boards to ask key questions, such as:

• Did we validate assumptions using independent market data?

• What if our market assumptions do not materialize?

• Am I comfortable that we have properly challenged information and assumptions provided by management?

Among boards of oil and gas majors, ExxonMobil’s stands out for its silence, despite calls from its major investors to take action. The boards of Shell, BP, Statoil and BHP Billiton were not only willing to meet with investors to discuss low-carbon scenarios, but they were also already starting to provide research reports on the topic. ExxonMobil, in contrast, chose to wage a pitched battle at the Securities and Exchange Commission to prevent investors from voting on a shareholder proposal calling for a 2-degree scenario analysis. Notably, even after the SEC unequivocally concluded that “it does not appear that ExxonMobil’s public disclosures compare favorably with the guidelines of the proposal,” the oil and gas giant continued — and continues — to claim that its current disclosures regarding climate risk are sufficient.

ExxonMobil’s management is betting on a future in which demand for oil and natural gas continues to rise. But the board has an obligation to challenge that assumption and question whether the company is keeping pace with its peers in adopting leading risk management practices, such as scenario analysis and disclosure of that analysis to investors.

One key missed opportunity for ExxonMobil’s board is stakeholder engagement. Board accountability to shareholders, including direct interaction between directors and shareholders, is a well-established principle. It is one of the key corporate governance policies established by the Council of Institutional Investors, as well as the International Corporate Governance Network. Ceres has found that leading companies are moving toward more stakeholder engagement with directors to better inform decision making. As one interviewee in Ceres’s View from the Top report explained, “Boards are sometimes isolated. It is important for directors to consider new, unusual and diverse sources of information as they make decisions on sustainability.”

ExxonMobil clearly recognized in its July 2015 corporate governance guideline that “[t]he directors’ fiduciary duty is to exercise their business judgment in the best interests of ExxonMobil’s shareholders,” and yet, even when major, long-term investors, such as the California Public Employees’ Retirement System (CalPERS), seek to discuss their concerns with directors, they are told that as a matter of policy the board does not meet with shareholders. ExxonMobil’s board is clearly isolated not only from investors but also from the broader trends and best practices emerging around the need to prepare for the energy transition. Even BlackRock, among ExxonMobil’s top five largest shareholders, has become frustrated with this policy and appears to have withheld support from two prominent directors in protest.

Last fall, before the Paris Agreement but after the May shareholder meeting, ExxonMobil’s board could have engaged with investors to open a constructive dialogue around the changing landscape of energy and climate policy. Instead, the company’s refusal to come to the table resulted in a major revolt at this year’s annual general meeting, at which more than 60 percent of its shareholders voted for proxy access, and 38 percent called for a 2-degree scenario analysis, even against management’s recommendations.

The window of opportunity for engagement from ExxonMobil has not yet closed, though time is running short. Its board should move now to engage with investors on the importance of integrating scenario analysis consistent with the Paris Agreement into its capital planning and business strategy. Moreover, it is time that ExxonMobil change its policy of cloistering the board away from investors and begin a process of reaching out to stakeholders so that company officials can become better informed of emerging risks, especially those related to sustainability.

Shanna Cleveland leads oil and gas company engagement as part of the Carbon Asset Risk Initiative at Ceres, a nonprofit sustainability organization in Boston.