By Sarah McFarlane and Christopher M. Matthews
Exxon Mobil Corp. and Royal Dutch Shell PLC suffered crushing
defeats Wednesday that will force the oil industry to confront the
growing threat that climate change poses to its business.
In a first-of-its-kind ruling, a Dutch court found that Shell is
partially responsible for climate change, and ordered the company
to sharply reduce its carbon emissions. Hours later in the U.S., an
activist investor won at least two seats on Exxon's board, a
historic defeat for the oil giant that will likely require it to
alter its fossil-fuel focused strategy.
The back-to-back, watershed decisions demonstrated how
dramatically the landscape is shifting for oil-and-gas companies as
they face increasing pressure from environmentalists, investors,
lenders, politicians and regulators to transition to cleaner forms
"The events of today show definitively that many leaders in the
oil-and-gas industry have a tin ear and do not understand that
society's views and the legal and political environment in which
they operate are changing radically," said Amy Myers Jaffe, a
professor at Tufts University's Fletcher School who has advised
The Shell ruling, issued by the district court in The Hague,
found that Shell must curb its carbon emissions by 45% by 2030
compared with 2019 levels -- and that the company was responsible
not only for lowering its own direct emissions from drilling and
other operations, but also those of the oil, gas and fuels
eventually burned by consumers.
The target is in line with United Nations guidance for member
states aimed at preventing global temperatures rising more than 1.5
degrees Celsius above preindustrial levels. Under the 2015 Paris
climate accord, which the U.S. rejoined earlier this year,
governments agreed to limit global temperature increases to 2
degrees Celsius, and preferably to 1.5 degrees.
"This judgment will not only send shivers down the collective
spines of the oil industry, but of all the other industries that
significantly contribute to the greenhouse gases," said Martyn Day,
a lawyer at Leigh Day, a London-based law firm that has been
involved in other pollution cases against Shell.
Lawyers and consultants said the ruling could set a precedent in
other Western jurisdictions, particularly in Europe, opening oil
companies to new legal jeopardy over their carbon emissions.
Companies in other heavy polluting industries could also face
greater environmental scrutiny, they added.
"This case does open the door for challenges to other
energy-intensive sectors," said Liz Hypes, an analyst at risk
consultancy Verisk Maplecroft. Other industries that could face
lawsuits include agriculture, transport and mining, all of which
are already being targeted by regulators and civil society over
their emissions, Ms. Hypes added.
The civil suit against Shell was led by the Dutch arm of Friends
of the Earth, an environmental organization. It alleged Shell's
production of oil and natural gas contributed to climate change,
violating a so-called duty of care to those affected by it and
failing to meet the company's human-rights obligations.
The activists brought the case in The Hague because that is home
to one of Shell's dual headquarters. Rather than seek damages, they
asked the court to force Shell to reduce its carbon emissions.
Shell's current emissions-reduction targets are based on intensity
-- the amount of carbon in any unit of energy -- which means it
could still see its overall emissions rise.
The court said that Shell wasn't in breach of its obligation to
reduce carbon emissions but there was an "imminent breach," and it
therefore set the reduction requirement. It didn't stipulate how
the reductions should be achieved, or how it might monitor or
enforce its ruling.
Exxon's humbling loss came at the hands of Engine No. 1, an
upstart hedge fund owning only about 0.02% of the oil giant's
stock. It had waged an aggressive campaign challenging the
company's energy transition strategy and response to climate
change, depicting it as a corporate dinosaur.
The vote at the company's annual meeting capped a pitched,
monthslong battle between the company and the activist to persuade
Exxon shareholders, that turned into one of the most expensive
proxy fights ever.
Engine No. 1 called for Exxon to gradually diversify its
investments to be ready for a world that will need fewer fossil
fuels in coming decades. Exxon defended its strategy to expand
drilling, saying demand for fuels and plastics will remain strong
for years to come, and pointed to a new carbon capture and storage
business unit as evidence it is taking climate change
The Texas oil giant said Wednesday that a preliminary vote count
showed shareholders backed at least two of Engine No. 1's four
nominees, with some votes untallied and the final outcome of
several seats on the 12-member board still unclear.
The defeat was a stinging blow to Exxon Chief Executive Darren
Woods, who personally campaigned against Engine No. 1. Many viewed
the vote as a referendum on Mr. Woods's performance.
Exxon lost a record $22 billion last year and was struggling to
regain its status as an industry-leading profit engine, even before
the coronavirus pandemic crushed global demand for oil and gas.
Both sides feverishly made their case to investors until the
last minute. Exxon delayed the closing of the voting by an hour
Wednesday morning, and Engine No. 1 said the company was calling
investors to ask them to change their votes. In a message sent to
shareholders, the fund urged them "not to fall prey to any such
"With almost 3 million shareholders, it's not surprising we
heard a wide range of views, and many supported the work that we're
doing to improve earnings and cash flow capacity, as well as the
work to advance the company to a lower carbon future," Mr. Woods
said in a statement following the vote. "Today, we heard
shareholders communicate a desire for Exxon Mobil to further these
efforts. We're well positioned to do that."
The hedge fund got a big boost from some of Exxon's largest
shareholders. BlackRock Inc. backed three of Engine No. 1's
candidates, The Wall Street Journal previously reported, and some
of the largest U.S. pension funds also supported the activist's
Asset managers are, themselves, under pressure to exert
influence on their portfolio companies to do more about climate
change. Many institutional investors, including BlackRock, have
signed a pledge supporting goals to reach net zero carbon emissions
by 2050 or sooner.
BlackRock and other asset managers' have called for companies to
prepare for disruptions from climate change. Critics of the world's
largest asset manager have said that BlackRock shouldn't veer into
areas that should be tackled by policy makers, but the firm's chief
executive, Larry Fink, has maintained that "climate risk is
BlackRock signaled earlier this year that it would be increasing
its support for shareholder-led environmental, social and
governance proposals, a move that could embolden other asset
managers to take on companies.
BlackRock said in a statement that it voted for Engine No. 1's
candidates in part because it believes Exxon and its board need to
further assess the possibility that demand for fossil fuels may
decline rapidly in the coming decades.
"We continue to be concerned about Exxon's strategic direction
and the anticipated impact on its long-term financial performance
and competitiveness," BlackRock said.
Jenna Telesca contributed to this article.
Write to Sarah McFarlane at firstname.lastname@example.org and
Christopher M. Matthews at email@example.com
(END) Dow Jones Newswires
May 26, 2021 18:04 ET (22:04 GMT)
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