New Metrics
ExxonMobil, Chevron Face Shareholder Pressure to Address Risk, Adopt New Reporting Metric

Oil company shareholders are voting on resolutions today that propose to cut spending on opening new oilfields and change how they report reserves, among others. In Dallas, Texas, ExxonMobil shareholders are voting on four climate change-related resolutions, while Chevron has four such issues on the ballot for its Annual General Meeting in San Ramon, California.

The same firms that convinced ExxonMobil to report on climate change and carbon asset risk in 2014, Arjuna Capital and As You Sow, are leading the charge again with these new proposals.

Arjuna Capital is asking both ExxonMobil and Chevron to reduce spending on oilfield exploration and development in favor of higher dividends and more shareholder buybacks. “In the face of global climate change, we believe investor capital is at risk from investments in projects that may prove economically stranded,” the investment firm said in the resolution distributed to Exxon holders.

“The business model that worked for the last century won’t work this century,” said Natasha Lamb, the director of equity research and shareholder engagement for Arjuna Capital. “We simply can’t burn all the carbon that’s on reserve. We’d like to see them shrink their business and return more money to shareholders.”

This will be the first time Exxon shareholders vote on such a resolution, but Chevron investors overwhelmingly rejected the proposal at last year’s meeting with a 96.8 percent “no” vote. Both companies urged shareholder to oppose the proposal, insisting that they are adequately addressing climate change and related risks.

“The company addresses the potential for future climate-related policy, including the potential for restriction on emissions, through the use of a proxy cost of carbon,” Exxon said in a response document to the resolutions. “The proxy cost seeks to reasonably reflect the types of actions and policies that governments may take over the outlook period relating to the exploration, development, production, transportation or use of carbon-based fuels.”

“The proposed dividend policy is unwise because it is based on a flawed, if not dangerous, premise: that stockholders would be best served if Chevron stopped investing in its business,” Chevron said in its proxy response to the proposal.

Exxon and Chevron have maintained or raised dividends even as the two-year slump in oil markets eroded cash flow and forced much of the industry to curtail payouts, slash payrolls, cancel projects and tap capital markets for borrowed money to stay afloat, reports Bloomberg. Last month, Exxon was stripped of its top rating by S&P Global Ratings for the first time since the Great Depression.

“Even if the oil price recovers, the rebound in exploration spending may only be relatively modest. Business models that rely solely on exploration may face challenges for some time to come,” noted Morgan Stanley analysts in a May 20 research note.

As You Sow’s resolution addresses another issue with Big Oil’s business model and reserves, but is broaching the subject through a proposal for the company’s reporting practices. The non-profit organization filed proposals encouraging both Exxon and Chevron to report on their reserves not just in the traditional “barrels of oil equivalent,” but also in an energy-neutral metric such as British thermal units (BTUs) that applies to all energy sources, including renewables such as solar, wind and geothermal.

“We have to get beyond a barrel-based standard,” said Danielle Fugere, President of As You Sow. “Replacing every barrel of oil with another barrel of oil doesn’t make business sense in a carbon-constrained economy that’s moving away from fossil fuels.”

“Even oil companies can change—they must change. This shareholder resolution will help Exxon and Chevron decouple their financial performance from how much oil they can produce. It’s time for oil companies to think outside the barrel,” she added.

Andrew Behar, As You Sow’s Chief Executive Officer, noted, “It would be making a statement if Big Oil was to become Big Energy.”

Unsurprisingly, Exxon and Chevron do not seem interested in making such a statement. Both oil producers urged shareholders to reject the proposal, and some agree that the approach may not be ideal. Kenneth Medlock, an energy fellow at Rice University’s Baker Institute for Public Policy, explained to the San Francisco Chronicle that fuels aren’t prices according to the BTUs, so converting asserts into BTUs wouldn’t help investors gauge future revenue potential.

“I understand the rationale,” Medlock said. “It just seems incredibly convoluted.”

But others are adamant it would be an effective step in the right direction.

“What does it cost the companies to list reserves in BTUs as well as oil equivalent? It’s not a big deal,” Amy Myers Jaffe, an oil market expert with the University of California - Davis told the same publication. “When people start to have a more diverse base for their businesses, it’s natural that they’re going to start reporting things that they didn’t in the past. I would expect, over time, more and more people will learn to think in BTUs.”

Exxon shareholders will also vote on a resolution filed by 34 institutional investors that calls for the company to adopt the 2°C target accepted by 187 of the 195 nations that participated in the United Nations’ COP21 climate conference, and over 150 companies through the Science-Based Targets initiative. Earlier this year, Exxon attempted to exclude the resolution from the proxy ballot, but the U.S. Securities and Exchange Commission (SEC) ruled that it must allow shareholders to vote on the proposal. If passed, the oil producer would be required to detail how its business will be affected by government action to reduce carbon emissions.

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Update May 26, 2016: ExxonMobil and Chevron shareholders narrowly rejected the resolutions calling for the companies to further investigate and disclose the risk that efforts to curb climate change pose to their businesses: the proposals received 38.2 percent support from Exxon holders and 41 percent support from Chevron holders. Such support for a climate change-related measure is unprecedented for both companies, causing celebration among the proposal's advocates.

“Today’s strong votes at Exxon and Chevron send a powerful message that investors see climate change as a material financial risk, which underscores the ongoing momentum post-Paris and urgency to prepare for a low-carbon transition,” said Ceres Oil and Gas Program Director Andrew Logan. “Heading into the meeting, investors managing more than $10 trillion in assets voiced their support for these resolutions, placing substantial pressure on the boards of these companies to change direction as the world moves toward a low-carbon future.

“Given the significant resources Exxon spent fighting this proposal, such a strong vote is a real rebuke to company management. Investors have sent a clear message that meaningful 2 degree stress testing is the new norm for risk reporting, and companies like Exxon and Chevron can no longer act as if nothing has changed.”

At the annual meetings, Exxon holders only approved one proposal - to give investors greater power to propose director candidates - and Chevron holders did not pass any of the eight proposed shareholder measures.