ImpactAlpha, April 1 – Some climate-focused investors say they have dumped shares of ExxonMobil as they purge fossil fuel companies from their portfolios.
Others are staying with Exxon, hoping to reverse the course of the U.S. oil giant. After a disastrous 2020, ExxonMobil’s shares are up more than 30% this year.
And then there’s the University of California, where the chief investment officer last year made an explicit claim to being fossil-fuel free, only to reveal in a recent SEC filing that the university’s endowment and pension funds still hold nearly 34,000 shares of ExxonMobil, worth $1.4 million.
That ExxonMobil remnants remain even in fossil-fuel-free portfolios is not surprising, given the oil company’s outsized influence in markets and politics. A UC spokeswoman pointed to a statement, illustrated by a slash mark across an oil derrick, that the university continues to de-risk its portfolio “by addressing remaining de minimis amount of fossil-fuel reserve owning companies.”
More consequential are the strategies of a new cast of activist investors who are aiming to boost Exxon’s short-term value by slashing capital and exploration costs, essentially managing its decline – and its immense cash flows – in the transition to a low-carbon economy.
From a number of fronts, the activists’ campaigns are converging ExxonMobil’s annual general meeting next month. The range of strategies presents major asset owners and managers with a “stewardship” challenge, as such votes are now closely watched. Critical to the outcomes: BlackRock, Vanguard and State Street, which together own about 20% of Exxon shares.
One group of activist investors, led by Engine No. 1, is pressing for the replacement of at least four members of Exxon’s board with climate change experts and advocates, but has indicated its patience is limited if change does not come quickly. Another environmentally-minded fund manager, Inclusive Capital’s Jeffrey Ubben, has himself joined Exxon’s board to press for change from within.
And many climate change advocates have already written off Exxon, even as the oil company has itself written down tens of billions of dollars in oil and gas assets.
“The ESG world screens carbon out. I go find carbon, because I think I can find a new investment opportunity around reducing it, because carbon is going to get an explicit price over the next five to 10 years,” Ubben said in a February interview, just before he joined Exxon’s board. Ubben had earlier identified a similar opportunity at BP, which under new CEO Bernard Looney last year announced an about-face on climate strategy.
“The carbon is a liability today, but the carbon creates an opportunity to turn it into an asset, if you’re carbon emitting, to reduce or avoid it. I think there’s a whole new investment opportunity for these mature businesses.”
Time horizon
The fight to shake up ExxonMobil’s board is being led by Engine No. 1, a new activist investment firm that aims to create long-term value. In a recent filing, Engine No. 1 disclosed it expects the proxy fight to cost approximately $30 million, more than half the value of its current stake in the oil major. The replacement slate of directors, all with track records in transitioning energy companies and increasing value, has the backing of the $287 billion California State Teachers’ Retirement System, or CalSTRS.
“Given that this is a company with a long history of not being responsive to shareholder concerns, and of seeking to fend off material changes to its business strategy, [Engine No. 1] felt like a greater level of change was needed,” said a person familiar with the fund’s strategy.
After ExxonMobil reported a loss of $22 billion last year, CalSTRS wrote “incremental changes are not enough to restore investor confidence and position the company for the global energy transition.” The company’s stated intentions to invest in carbon-capture technology, CalSTRS said, “do not demonstrate a long-term energy transition strategy.”
The seriousness of such statements will become clearer after the upcoming proxy votes when investors and asset managers will have to decide whether to stick with ExxonMobil or join the growing divestment movement. In 2019, Legal & General Investment Management, one of the U.K.’s largest asset managers, attracted attention when it divested some holdings in ExxonMobil because of the oil giant’s inadequate response to climate change.
“Even if we don’t divest every dollar, the message is being sent to companies that are lagging” through LGIM’s “engagement with consequences” approach, John Hoeppner, head of stewardship and sustainable investments for LGIM America, told ImpactAlpha. The firm gives Exxon a score of 5 out of a possible 100 for its environmental performance. Last year, LGIM voted against the re-election of Exxon’s chairman and CEO Darren Woods. The Church of England and the New York State Common Retirement Fund urged shareholders to boot the oil giant’s entire board. An effort to split the chairman and CEO roles received just a third of shareholder votes.
Things may be different this year. The urgency of the climate crisis has led to growing calls by investors ranging from BlackRock to the New York State pension fund for companies to decarbonize. Investors are coordinating their efforts, as with Climate Action 100+ and the recently launched Net Zero Asset Managers initiative. And global governments, including a new climate-focused U.S. administration, are pushing more muscular policies.
If investors don’t approve major board changes this year, then it’s not clear they ever will, said the person close to Engine No. 1.
“Any one who is concerned about Exxon’s lack of leadership will have some sympathy for Engine No. 1,” Timothy Smith of Boston Trust Walden told ImpactAlpha. The firm’s Exxon campaign, he said “is seen as a serious challenge to the company to rethink and redirect itself toward climate change.”
Redirecting ExxonMobil is a worthy effort, agrees CarbonTracker’s Mark Campanale, who pioneered the concept of “stranded assets” that has now achieved conventional-wisdom status. “But what do you do if a) it’s not possible, as other shareholders don’t support you and b) the company you’re trying to take control of is in an industry that is being competed away due to, for example, technological changes? Is it worth taking the effort to control a fossil fuel company which will rapidly decline?”
Cash cow
Activist investors and environmentalists may find common cause in a strategy to wind down Exxon’s oil exploration activities – and milk it as a cash cow. The market has already written down the oil majors as growth stocks and values them mostly as sources of shareholder dividends cash cows.
A few years ago, the Democracy Collaborative’s Carla Skandier suggested a “51 Percent Solution for the Climate Crisis.” With the government taking a majority stake in fossil fuel firms, she said, the public could vote in boards that oversee the winding down of production while giving 1.6 million oil and gas workers a path to new opportunities, rather than mass unemployment in a crashed economy.
In part to sustain shareholder dividends, ExxonMobil this year has indeed cut its budget for capital expense and exploration to $16-19 billion this year, from $21 billion last year, which was itself cut from a planned $33 billion as the COVID pandemic cratered oil demand and prices.
“That’s the new lever,” Ubben said in February. “If I can go in and change the capital allocation prices, and use what I think will be stable hydrocarbon cash flows for a number of years…there is an opportunity to make a (company with a) stock price at an all-time low, with predictable cash flows over 10 to15 years, a very different company. That’s an idiosyncratic return I want to go get.”
The proposition will become even more attractive if governments intervene to bail out oil companies by buying up and retiring oil and gas assets – to keep the fossil fuels in the ground.
Such a managed decline, however, is different from taking leadership in the carbon transition, as European oil majors such as BP, Shell, Total and Equinor are trying to do. In a paper commissioned by Engine No. 1, UC San Diego’s David Victor, co-director of the university’s Deep Decarbonization Initiative, said U.S. oil and gas companies, appear to be content to be on what he calls “a commodity death march to be the last man pumping.”
At its investor day last month, Exxon CEO Darren Woods boasted of its carbon capture and storage investments. Victor dismisses the projects as “optical.” “In a world where the strategy is not known, you have to work multiple fronts to learn what’s feasible. You can’t just wait,” Victor told ImpactAlpha. “And that is the core failing of Exxon.”
