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The Missing 60%:
ExxonMobil, Forceful Stewardship and the 2°C Business Model Imperative

The Spring 2016 proxy votes supporting the 2°C stress test resolutions at last week’s Annual General Meetings of ExxonMobil (38.2%) and Chevron (41%) give cause for both celebration - and concern. These votes suggest that key asset managers are recognizing (and others seem to be willfully ignoring) climate risk inherent in the business-as-usual practices of the largest U.S. oil and gas corporations and their downstream value chains.

The Spring 2016 proxy votes supporting the 2°C stress test resolutions at last week’s Annual General Meetings of ExxonMobil (38.2%) and Chevron (41%) give cause for both celebration - and concern. These votes suggest that key asset managers are recognizing (and others seem to be willfully ignoring) climate risk inherent in the business-as-usual practices of the largest U.S. oil and gas corporations and their downstream value chains.

Celebration is justified because these first-time proposals “drew more support than any contested climate-related votes in the history of the two biggest U.S. oil and gas companies,” according to the Wall Street Journal, which added that it is “an indication that more mainstream shareholders like pension funds, sovereign-wealth funds and asset managers are starting to take more seriously the threat of a global weaning from fossil fuels.”

A resolution at the Southern Company (an electricity public utility and the 3rd largest U.S. source of Greenhouse Gas Emissions) actually goes a bit further than stress testing and asks for management to disclose a 2°C transition plan. As a first time proposal, this resolution received 34% support. For those unfamiliar with the proxy voting system, it is exceedingly rare for first-year resolutions to receive support from more than one-third of voters. Indeed, votes don’t need to cross the majority-support threshold to catch the attention of management - companies often respond to resolution requests supported by a critical mass below half of voters.

The good news aside, these results are also cause for great concern given the high number of shareholders that did not vote in favor of these resolutions. Contrast the 2016 results at ExxonMobil (38.2%) with the actual vote for very similar resolutions filed in 2015 by the Aiming for A coalition at BP (98.3%!) and Royal Dutch Shell (99.8%). The difference between these results is more than 60% — which raises the question: what accounts for this spread?

Significantly, BP’s and Shell’s managements recommended support for the resolution, while ExxonMobil not only recommended voting against the resolution, but also petitioned the SEC for permission to omit the resolution in what has been characterized as an “unusually aggressive” effort. This suggests the missing 60% essentially rubber-stamped management’s recommendation. Moreover, this 60% almost surely contains institutional investors who voted in support of the Aiming for A resolutions at BP and Shell, which raises significant fiduciary duty concerns. While there may be other explanations, the most logical and likely explanation for this confoundingly inconsistent voting would seem to be: lack of the kind of independent thinking required by fiduciary duties of care and loyalty.

Nearly as confounding as this inconsistency was ExxonMobil CEO Rex Tillerson’s statement on the continuing need for fossil fuels to provide energy necessary for modern life, with fossil fuels still projected to supply 60% of the world’s energy needs in 2040. “The world is going to have to continue using fossil fuels, whether they like it or not ... just saying ‘turn the taps off’ is not acceptable to humanity,” said Tillerson.

Consider the underlying logic of Tillerson’s statements. The CEO of the largest publicly owned fossil fuel company suggests that the desire of some individuals and corporations to continue to benefit from the sale and use of fossil fuels trumps the imperative to avoid catastrophic risks to us all. The implications of adhering to Tillerson’s views are sobering: Continuing to maintain an economy dependent on hydrocarbon combustion jeopardizes the very ecological foundations supporting humanity. Institutional investor Jeremy Grantham reminds us: “We should not unnecessarily ruin a pleasant and currently very serviceable planet just to maximise the short-term profits of energy companies and others.”

Let’s look at some facts. These climate risk resolutions do not require “turning off the taps” - at least not instantly. In ExxonMobil’s case, the resolution asks for a stress test of the company’s business model against the 2°C scenario supported by the peer-reviewed science and policy recommendations of the COP21 Paris Agreement on climate. In ExxonMobil’s case to the SEC for omitting the resolution, the company essentially argued that “national and world leaders will not have the backbone to restrict carbon sufficient to keep temperature increase down to 2°C,” according to attorney Sanford Lewis, who defended the resolution for its filers in the SEC process.

Actions of the missing 60% ignore the fiduciary responsibility to consider the potential implications of current fossil fuel business models functioning to undermine legitimate public policy and the interests of asset owners to address climate risk. Indeed, it now seems imperative that all companies conduct a 2°C stress test of their business models. Most importantly, when stress tests reveal business models are deficient, companies need to prepare transition plans. Such action is likely needed for 93% of US listed equities that are impacted by climate change, according to the Sustainability Accounting Standards Board (SASB) research.

Preventable Surprises advocates Forceful Stewardship by investors in order to leverage their ownership positions to address climate risk. This stewardship approach combines scientific evidence (i.e. IPCC Assessment Reports and Science-Based Targets initiative for sector-wide emission reductions) with financial evidence on material risk (both systemic and transition risk for companies) to provide a path to a vibrant low carbon economy while keeping planetary warming below 2°C. The fact that the SEC rejected ExxonMobil’s bid to omit the resolution from the company’s proxy ballot validates the case for 2°C stress tests and the Forceful Stewardship approach.

Convening online and in person dialogues for positive mavericks — individuals who are willing to stick their necks out to push beyond the status quo of incremental change to achieve the required transformative change - is how progress is being and will be made. This is not just about asset owners and managers: even the most progressive organizations often have institutional constraints that conflict with advocating and implementing the structural changes required to address both the systemic and transition risks of climate change.

Preventable Surprises has a three-level strategy for how investors can work with companies to address climate risk. At each level, investors actively engage with companies (either directly or through the proxy process of shareholder resolutions) to explicitly require:

  • 2°C Stress Tests (Level One)
  • 2°C Transition Plans (Level Two)
  • 2°C Business Models (Level Three)

A “failed” 2°C stress test (Level One) prompts the need for a 2°C transition plan (Level Two) that results in a 2°C business model that mitigates systemic climate risk and addresses transition risk. This strategy provides companies with opportunities to create value for both shareholders and stakeholders in the transition to a low carbon economy that keeps planetary warming 2°C. And Preventable Surprises is not alone in this “next generation” evidence-based advocacy - the Reporting 3.0 Platform pursues a similar transformative approach, including the future launch of a Working Group to create a New Business Models Blueprint.

The missing 60% are key to bringing about the transformational change civil society needs to address climate risk and prevent irreversible climate change. But in order for the missing 60% to vote the right way in 2017, others - including NGOs, asset owners and policy makers - also need to act. And to help persuade them to do so, we invite you, the reader, to add your name to this call to action.

NB: If you would like to be a signatory to a set of 3 principles based on the concepts laid out in this article and listed as such on the Preventable Surprises website, please see the principles here and send your name and title to [email protected].


This article was originally published on The Huffington Post on June 2, 2016, and was written by the following co-authors:

  • Bill Baue is Co-Founder of the Sustainability Context Group and Convetit
  • Robert G. Eccles is Professor of Management Practice at Harvard Business School
  • Julie Gorte is Senior Vice President for Sustainable Investing at Pax World Management LLC
  • Carolyn Hayman is Chair of Preventable Surprises
  • Stephan Lewandowsky is Chair in Cognitive Psychology in the School of Experimental Psychology at the University of Bristol
  • Thomas O. Murtha is a Senior Advisor to Preventable Surprises
  • Naomi Oreskes is Professor of the History of Science and Affiliated Professor of Earth and Planetary Sciences at Harvard University
  • Rich Pancost is Director of the Cabot Institute at the University of Bristol and a boardmember of Preventable Surprises
  • John Rogers is former CEO of the CFA Institute and a Boardmember of Preventable Surprises

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