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Big Oil has learnt it needs to listen on climate change

A couple of years ago, Bernard Looney, chief executive of energy giant BP, did something unusual. After watching protesters hurl angry criticisms at the 2019 annual general meeting in Aberdeen, he asked to meet one, and subsequently spent many hours quietly listening, trying to understand her point of view.

“I don’t agree with all or most of what she said. But I do want to hear her, to see the world through her eyes,” he told me. “She has definitely changed some of my views.” 

This “listening” exercise has not shielded BP from criticism or mistakes. Although Looney unveiled bold climate targets last year, its share price still tumbled, because investors fret about falling oil and gas revenues. Some green activists argue that it is unclear whether Looney can implement his bold pledges.

But meeting with an alien tribe does at least appear to have allowed Looney to see how the zeitgeist is shifting. And this week’s events surrounding ExxonMobil, where shareholders backed an activist investor who warned that the company faces an “existential risk” because of its focus on fossil fuels, have shown why this matters.

It has been clear for a while that some investors and citizens are becoming increasingly exercised by climate issues. The Exxon leadership made belated efforts in recent months to respond, putting the head of a sustainability fund, Jeff Ubben, on its board and pledging more investment in carbon capture. 

However, this smacked of tokenism. A recent study by Harvard academics alleges that the group used tactics reminiscent of Big Tobacco to suppress dissent. Exxon dismisses that parallel. But it is clear that this deafness has cost it dear. This week a tiny hedge fund, Engine No 1, managed to persuade shareholders to back the election of at least two board directors. It holds a mere 0.02 per cent stake (or $54m) in the company.

That is remarkable, given that Exxon used to be one of the biggest companies in the world. And, as such, it should act as a wake-up call for other executives with a bunker mentality, particularly since there are now at least two factors which could make attacks on environmental, social or governance grounds doubly potent in the coming months.

The first is that activists are becoming increasingly adept at allying money with morals. A decade ago, the shareholders who submitted climate resolutions tended to be earnest groups such as America’s Grey Nuns of the Sacred Heart, who worried that it was sinful to ignore environmental degradation.

Engine No 1, however, describes its mission in terms of “economics”: it argues that Exxon has been so slow to recognise the need for a transition away from fossil fuel that its revenues will crumble, destroying investor capital.

This argument enabled it to win support from state pension funds, like that of New York state, and mighty asset managers such as BlackRock, Vanguard and State Street. BlackRock, for example, argues that it has a fiduciary duty to shield investors from risks of declining demand for fossil fuels.

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Thus the new activists are not just trying to save the world; they are also trying to save their own portfolios in a world where regulators are enforcing green standards. Indeed, just as the proxy battle was under way at Exxon, a Dutch law court backed climate activists’ demands that Shell slash carbon emissions faster than planned. Expect more of this.

Second, digital transparency is becoming a crucial spur in this fight. Once, green warriors illustrated their campaigns with photos of smoke stacks or baby seals. Now they are wielding cyber tools that scrape data from numerous sources to monitor corporate activity in real time. 

Some observers question the validity of this data. Ubben, the Exxon board director, for example, says that the statistics behind the type of “net zero” targets that companies including BP wield are flawed.

But imperfect or not, surveillance by regulators, investors and citizens is also set to rise, not least because accountants are racing to finalise new sustainability accounting frameworks before the COP26 meeting in Glasgow this autumn. 

Some countries such as the UK have already indicated plans to make sustainability frameworks, including the Task-Force for Climate Related Financial Disclosures, mandatory in the future. I suspect Joe Biden’s administration may follow suit.

And while these accounting debates might seem geeky, the key point is that the more companies are forced to disclose under such standards, the easier it will be for activists and investors to monitor them. This process of surveillance will enhance demands for change.

Many companies still seem woefully unprepared for these new accounting demands, particularly in the US. However, it is no accident that a key activist demand at this week’s AGM at Exxon and Chevron was to improve “scope three” disclosure — a technical name for reporting emissions from a company’s customers and suppliers, rather than just its own operations.

Some old-style executives might view these metrics as political correctness gone mad, or mere tokenism. And such frameworks certainly need to be improved. But chief executives cannot afford to ignore activists from an alien-seeming tribe today. Especially if they come armed with smartphones and spreadsheets.

gillian.tett

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