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Why Large Oil Ought to Be Involved After a Day of Reckoning

Three of the largest oil companies in the world faced a major settlement on Wednesday about their contribution to climate change.

First, a Dutch court asked Royal Dutch Shell to cut greenhouse gas emissions by a whopping 45 percent by 2030 in response to a lawsuit filed by seven environmental groups. On the grounds that Shell adheres to an "unwritten standard of care" for human rights and the Paris Climate Agreement, the court ruled that Shell has a responsibility to "help prevent dangerous climate change". While the judge's decision will not be the final word on this matter, her words could influence other ongoing climate disputes around the world.

The second settlement came at Chevron's unusual general meeting, where 60 percent voted in favor of a resolution recommending that the company reduce its emissions – not just in its manufacturing process, but in the products it sells to consumers. The vote is not binding, but follows a trend from other general meetings this year. A similar resolution was passed at the recent ConocoPhillips meeting in May, and another resolution by Philips 66 called on the company to prepare a report on its lobbying activities.

Finally, there was an even more improbable development. At ExxonMobil's annual shareholders meeting, a small investment firm called Engine No. 1, which owns just 0.02 percent of the company, performed a coup by winning at least two seats on Exxon's board of directors. (Third place is still a mistake.)

Activists won seats despite last minute concessions from Exxon to add a director who had "climate experience" and warned that choosing the climate-conscious candidates "would hurt our progress and jeopardize your dividend." According to the company's website, the board of directors had a total of 13 seats as of May. However, the company's directors have recruitment and dismissal powers. The vote signals that oil managers could find their jobs on the line if activist shareholders strengthen their powers.

These developments would have been implausible a year ago, and so activists and others who strive for climate protection see this moment as a turning point.

For example, a California teacher retirement fund threw its weight behind the engine # 1 nominees and issued a statement that could be interpreted as a warning to the rest of the industry. "While the ExxonMobil board election is the first of a major US company focused on the global energy transition, it won't be the last."

Every Wednesday event is significant in itself. Together, they are a signal that fossil fuel companies may now be legally held responsible for their role in climate change – and that they risk losing their jobs if oil managers do not act on the climate.

Why is there finally a certain accountability?

The reason companies now face some accountability when many climate-friendly resolutions and lawsuits have previously failed has to do with the turbulent past few years for Big Oil. In a world where attempts are made to reduce net zero greenhouse gas emissions by mid-century, investors have become increasingly suspicious of companies that rely on fossil fuel burning for profit. BlackRock, the giant investment firm led by Larry Fink, said in early 2020 that it would base its shareholder votes on climate change commitments. As the world's largest wealth manager, he threw his weight behind the game of Engine No. 1 for three nominees for the board.

The coronavirus pandemic, which froze air traffic and plunged oil prices into negative territory, also helped make this a business model Focused on oil cannot be sustained. A report from the International Energy Agency, a fairly conservative body, was added to the debate in May calling for no investment in new fossil fuel supply projects with immediate effect in order to meet the commitments of the Paris Agreement.

"It's a different world," said Danielle Fugere, president of the activist-shareholder group As You Sow, after the developments on Wednesday. Oil companies now have to say very seriously: are we moving in the right direction with climate change?

For the first time ever, industry may need to get a grip on all of the pollution their products cause

Don't expect the industry to change right away. But investors and courts are finally making an important difference: they are asking the oil companies to take responsibility not only for their production processes, but also for the dirty products they sell.

When oil companies touted their efforts to combat climate change for decades, they focused on a small portion of it their effect. For example, all of Chevron's promises on climate change focus on reducing the footprint of its operations – the fossil fuels they burn just to extract, transport, and refine their products. Chevon and other companies have taken no responsibility for the greater part of their climate problem – the burning of their products, for example in cars and natural gas power plants. Richard Heede of the Climate Accountability Institute found in his research that the products of the top polluters account for 90 percent of global greenhouse gas emissions.

Chevron and ExxonMobil shareholders, as well as the Dutch court, opposed the oil industry's narrow view of its emissions, which puts pressure on companies to capitalize on their bigger impact. Optimizing their operational footprint requires relatively small changes, but reducing their larger downstream impact would require entirely new business models that don't depend on fossil fuel extraction.

To be clear, we are unlikely to see any change right away. "Existing board members need to see that this vote was really a rejection of the company's current approach to climate change," said Andrew Logan, oil and gas director of Ceres, a non-profit organization focused on corporate environmental solutions, of the ExxonMobil vote. "(But) it doesn't oblige them to do anything else."

There are several other reasons the oil companies want to listen.

The ExxonMobil coup was radical because it was the first time climate activists won seats on the board of directors of a major oil company. The win adds a new level of credibility and accountability when shareholders urge companies to take a more aggressive stance on climate change: executive jobs could be at stake. "This demonstration that investors are ready to run a full campaign for the board, essentially firing directors and companies that ignore the will of investors, is certainly seen as a warning sign for companies not to ignore those voices," Logan said.

Meanwhile, the Shell case shows that companies are beginning to face a "very tangible notion of legal risk," Logan said. This is going to get Wall Street's attention.

It is not yet clear whether the Dutch court ruling that Shell must cut 45 percent of its greenhouse gas emissions by 2030 compared to 2019 will hold up. Shell has already appealed. However, it is just one of 1,800+ examples of climate disputes around the world. Therefore, it could be the first of many cases in which companies have to meet their emission reduction commitments. There are 1,300 cases in the U.S. alone, and many reflect decades of tobacco disputes alleging oil companies deliberately misled the public about their products.

Next year climate activists will have new goals

One way to achieve deeper accountability in the fossil fuel industry is to replicate these findings with other oil companies. Seating risks can make executives more likely to meet investor expectations for climate reform, for example by setting more aggressive emissions targets for their products or reducing their anti-climate lobbying. If you're Chevron, you don't want to face a boardroom campaign like Exxon's just lost one.

This will take more pressure off of investment giants like BlackRock, Vanguard, and pension funds that have adopted climate targets.

Ben Cushing of the Sierra Club, one of many environmental groups that played a role in Wednesday's events, said the next phase of activism will pressure investment firms like BlackRock to turn against even more of Exxon's current leadership. While BlackRock and Vanguard endorsed some of the climate action on Wednesday, they turned down another request from the Sierra Club – to try to elect ExxonMobil CEO Darren Woods from the board of directors.

"As of 2021, (industry) will no longer be able to invest in new fossil fuel projects," said Cushing. "For BlackRock and Vanguard and other investors, they have to hold the leadership of these companies accountable and vote against their top management."

Revolutionizing the industry's business model – ultimately to produce less gas and oil – requires more constant pressure. Activists still have to deliver many days like Wednesday. "The real test now will be what comes out of that in response," Logan said.

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