At Exxon, a Failure of Governance on Climate Risk

May 23, 2019 4:30 PM ET

“If some companies and industries fail to adjust to this new world, they will fail to exist.”

That’s what the governors of the Banks of England and France, Mark Carney and François Villeroy de Galhau, wrote in their recent open letter on climate-related financial risks. A stark warning from two of the world’s most influential central banks, their letter underscored what many investors have been saying for decades: Climate change, and our market and regulatory response to it, has the potential to upend entire markets and sectors, and leave even the largest companies in the dustbin of history.

Yet ExxonMobil, along with other oil and gas majors, still hasn’t heeded the warnings -- leading investors to seriously question the company’s governance. Indeed, with Exxon’s annual general meeting fast approaching, New York State Comptroller Tom DiNapoli and the Church of England have declared they’ll vote against the board. They’ve also said they will vote to separate the positions of board chair and CEO, in what has become a referendum on Exxon’s paltry engagement with investors on climate risk.

When it comes to climate change and its impacts, you don’t need to look very hard to find examples of Exxon’s misalignment with its investors -- not to mention with science, the public and even the company’s peers. While Exxon’s competitors still have a long way to go, they have taken steps forward in ways Exxon has not. Shell has set short- and long-term greenhouse gas emissions reduction targets and articulated increasingly clear strategies to manage the low-carbon transition. BP and Equinor have each committed to aligning their capital spending with the goals of the Paris Climate Agreement. Exxon, on the other hand, has refused to set any business-wide emissions reduction target and is taking a business-as-usual approach to investment.

BP’s board announced that it would support a shareholder proposal to align its business practices with the Paris Agreement on climate change at its annual meeting, and more than 99% of its investors voiced their agreement by voting in favor. Meanwhile, Exxon’s board has fought to keep a similar proposal off its ballot -- even though investors representing $9.5 trillion in assets publicly urged it be allowed to go to a vote. And while peers regularly make independent directors available to meet with investors to discuss climate strategy, Exxon has refused to engage in a meaningful way with its investors on climate change. These investors include those involved in Climate Action 100+, an investor-led initiative backed by investors with more than $33 trillion in assets under management.

This is not a question of supporting a trending concern, it is about due diligence and fiduciary duty. As Shell’s CEO said recently, climate change has the “potential to disrupt our industry on...a deep and fundamental level.” If oil companies don’t take the lead, Equinor’s CEO warned, they risk being “dragged into a low-carbon future.”

At a certain point, enough is enough. When a risk becomes material to a company -- as climate risk has for those in the oil and gas sector, in particular -- it is a central role of the board to analyze it and act on it. When Exxon’s CEO and board refuse to heed calls from its investors to address climate risk, one must suspect that the governing body is failing to provide real oversight. And when a board isn’t providing real oversight, its investors have a fiduciary duty to intervene on behalf of their portfolios and beneficiaries.

It’s time investors raise their voices and cast their votes in favor of good governance, and it’s time Exxon introduce an independent party into its board leadership to ensure it can appropriately engage with and act on climate risk.