May 26, 2021 was a landmark day for Big Oil. Its inner sanctums were put on notice by stakeholders that the companies must take meaningful steps now to address climate change. 61% of Chevron Corporation (“Chevron”) shareholders voted to approve a resolution seeking Chevron’s reduction of Scope 3 greenhouse gas (“GHG”) emissions. Three directors, who were nominated by a small hedge fund to make Exxon more accountable for all of its carbon emissions, were elected to Exxon Mobil’s Board of Directors at Exxon’s annual meeting. A Dutch trial court ordered Royal Dutch Shell to cut its GHG emissions by 45% by the year 2030. While these events are unprecedented for Big Oil, how they came about and their actual impact are worth a closer look. Perhaps what’s most noteworthy is the prospect that years of shareholder activism may suddenly be yielding dividends.
I. Chevron and Its Shareholders
At Chevron’s annual meeting on May 26th, shareholders approved the following resolution:
“RESOLVED: Shareholders request [Chevron] to substantially reduce the greenhouse gas (GHG) emissions of their energy products (Scope 3) in the medium- and long-term future, as defined by the Company. To allow maximum flexibility, nothing in this resolution shall serve to micromanage the Company by seeking to impose methods for implementing complex policies in place of the ongoing judgement of management as overseen by its board of directors.”
The resolution was proposed by Follow This, a Dutch activist fund. Chevron had initially sought to exclude the proposal from a vote and requested no-action relief from the SEC on the basis that (i) the proposal related to the Company’s “ordinary business” operations and sought to “micromanage the Company’s actions to direct its GHG emissions management program,” which made it excludable from proxy materials under Rule 14a-8, and (ii) the proposal duplicated a prior proposal. On March 30, 2021, the SEC denied Chevron no-action relief, indicating on its website that the SEC was “[u]nable to concur with exclusion on any of the bases asserted.”
Also considered during this stockholder meeting were resolutions (a) directing the Board of Chevron to issue an audit report discussing “whether and how a significant reduction in fossil fuel demand, envisioned in the IEA [International Energy Agency] Net Zero 2050 scenario, would affect its financial position and underlying assumptions,” and (b) seeking to convert Chevron to a Public Benefit Corporation under Delaware law, the purpose of which would have been to enable Chevron to adopt and adhere to sustainability goals consistent with the public interest. The Board of Directors of Chevron opposed all three resolutions.
Only the first of the proposed resolutions, identified as Item 4 on the proxy card, passed. What does Item 4 actually obligate Chevron and its Board to do? On its face, very little. It “request[s],” but does not mandate, that the company reduce its Scope 3 emissions. It contains no firm climate change benchmarks that the company must achieve. The timeframe for accomplishing these reductions, in the “medium and long term future,” is not specific. And furthermore, Chevron’s governance rules only commit the Board to “reconsider any stockholder proposal not supported by the Board that receives a majority of the votes cast at its Annual Meeting . . . .” From management’s perspective, Item 4 could be viewed as more advisory than mandatory.
Nevertheless, the impact of the resolution’s passage is far from illusory. It is after all the first resolution calling for any reduction in GHG emissions passed by Chevron’s shareholders, and the fact that it does not impose specific targets or requirements is due to the limitations of Rule 14a-8, which allows shareholders owing certain amounts of securities to place proposals in the company’s proxy materials for vote at shareholder meetings, subject to certain procedural requirements and substantive exclusions. One such exclusion is proposals that relate to the company’s “ordinary business operations,” which could result in impermissible micro-management of the company by shareholders. Follow This expressly limited its proposal to calling for a reduction in emissions only, appropriately leaving the specifics of accomplishing the reduction to management: “Had the Proponent not been required to draft this proposal with pointed consideration of the potential for exclusion on grounds of micromanagement, the Proponent would have requested much more specific and progressive reductions.” Going forward, should Chevron’s Board ignore the resolution, its directors could be at greater risk of being replaced over time by the same shareholders who voted for the resolution.
II. Exxon Mobil’s Three New Directors
Engine No. 1, a hedge fund with a .02% holding in Exxon Mobil, proposed a slate of four directors for election to Exxon’s twelve-member board at its annual meeting on May 26, 2021. Engine No. 1’s stated goal was to infuse the Exxon Board with people who will push the energy giant to recognize the significance of global climate change and respond constructively to the goals of the Paris Climate Agreement. Engine No. 1 succeeded in electing three of its four nominees, garnering critical support from Exxon’s three largest shareholders (and the three largest asset managers in the world) BlackRock, Vanguard and State Street, as well as major shareholders such as CalPERS and the New York State Common Retirement Fund. In fact, Engines No. 1’s three directors received the highest number of votes of all nominees.
In the case of Exxon, Engine No. 1’s success appears to have been based on excellent timing and a compelling slate of candidates. Going into the annual meeting, Exxon had faced “mounting criticism for its reluctance to invest more in renewable energy and for years of weak financial performance.” New York State’s Comptroller said investors had “received platitudes and gaslighting in response” to concerns about climate change for years. Meanwhile, Exxon’s three largest shareholders have placed themselves at the forefront of the Environmental, Social, and Governance (ESG) movement as members of the NetZero Asset Managers Alliance among other things. BlackRock in particular all but foreshadowed its vote in its 2021 annual letter to clients:
“We expect the issuers we invest in on our clients’ behalf to be adequately managing the global transition towards a net zero economy…. Where we do not see progress in this area, and in particular where we see a lack of alignment combined with a lack of engagement, we will not only use our vote against management for our index portfolio-held shares, we will also flag these holdings for potential exit in our discretionary active portfolios because we believe they would present a risk to our clients’ returns.”
Engine No. 1 provided a slate of qualified candidates to garner the votes, including highly regarded industry executives with success in both conventional and renewable energy transition (Gregory Goff and Kaisa Hietala) and a former U.S. Asst. Secretary of Energy and clean tech entrepreneur with expertise in energy infrastructure, R&D and policy (Alexander Karsner). Shareholders recognized that Exxon needs diversity of expertise, background and perspective on its board to move towards sustainability, and voted accordingly.
III. Royal Dutch Shell in The Hague
Potentially the most significant of the May 26th events was the decision by the Hague District Court to order Royal Dutch Shell (“RDS”) to cut its GHG emissions by net 45% by 2030 compared to 2019 levels.
There are many significant elements of the Judgment, starting with the Court’s recognition of the effects of climate change. The Court accepted as fact that mankind’s use of fossil fuels leads to the release of carbon dioxide which traps heat within the ozone layer and causes temperatures on earth to rise. It discussed the so-called carbon budget, which is the total remaining capacity of the earth to absorb GHGs, and accepts as fact the conclusions by various international organizations about the effects of climate change. In particular, the Court accepted as fact that The Netherlands generates more CO2 emissions than many other European countries and there is a direct connection between those activities and future disruptions to human existence.
The plaintiffs asserted that RDS had duties under Dutch law to prevent climate change through its corporate policies and to ensure that its carbon emissions comply with levels deemed acceptable under, for example, the IEA’s Net Zero 2050 plan. The Court concluded that RDS’ corporate policies, policy intentions and ambitions are incompatible with CO2 reduction targets prescribed in the Paris Climate Agreement, the IEA Net Zero 2050 and other global climate change policies. It ordered RDS to reduce its Scope 1, 2 and 3 emissions by a net 45% of 2019 levels by the end of 2030 through the adoption and implementation of new corporate policies that will actually enable these results.
Given the breadth and impact of the Judgment, it is likely that RDS will appeal. If so, the Hague Court of Appeal would review the case do novo, i.e. it may re-examine the facts and reach its own conclusions about the facts and the outcome of the case. While this story is not over, it remains to be seen what effect (if any) the case may have on future U.S. public policy and legislation.
IV. Measuring Progress Toward Net Zero
Much of the world now pays ever closer attention to the consequences of our reliance on fossil fuels. As the reality of climate change is now in the boardrooms of Big Oil, there is growing demand from the investor community for companies to, as Bill Gates puts it, go from emitting 51 billion tons of GHGs each year to zero.
On June 10, 2021, The Investor Agenda published a “Statement to Governments” signed by 457 investment firms and individuals representing US$41 trillion in assets urging governments to issue standards for measuring and quantifying climate risk so that investors can properly assess those risks and invest wisely. The Statement calls on all governments to take broad action in 2021, including:
- strengthening NDCs for 2030;
- committing to “decarbonization roadmaps” for carbon-intensive sectors;
- carbon pricing;
- removing fossil fuel subsidies;
- phasing out thermal coal-based power; and
- mandatory climate risk disclosure requirements.
Like BlackRock’s 2021 annual letter to clients, the Statement invokes the need for greater transparency in climate risk disclosures. The inability of investors to obtain material information about company carbon emissions impedes investors’ efforts to invest the capital required to achieve Net Zero. Extraordinary associations and statements such as these underscore the growing urgency with which climate change and ESG issues are being considered. While the full significance of May 26, 2021 remains to be seen, the day may hopefully be remembered as the beginning of a shift of consciousness in Big Oil from avoidance to constructive engagement with the forces of climate change.
 17 CFR §240.14a-8.
 “Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain.” https://www.epa.gov/climateleadership/scope-3-inventory-guidance.
 https://www.chevron.com/investors/corporate-governance (emphasis added).
 See 17 CFR §240.14a-8(i)(7). See also Exchange Act Release No. 40018 (May 21, 1998). The policy underlying the ordinary business exclusion is “to confine… ordinary business problems to management and the board…, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting,” and to consider “the degree to which the proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders… [are not] in a position to make an informed judgment.” Id.
 Exxon Mobil Defeated by Activist Investor Engine No. 1 – The New York Times (nytimes.com) and https://www.cnbc.com/2021/06/02/activist-firm-engine-no-1-claims-third-exxon-board-seat-.html. For an interesting report of the maneuvering that led to the vote, see: https://www.nytimes.com/2021/05/28/business/energy-environment/exxon-engine-board.html.
 Exxon also faces climate change exposure on the litigation front. In October 2019, Massachusetts Attorney General Maura Healey filed suit against Exxon Mobil, alleging that it deceived investors about the climate risks posed by Exxon’s activities. On June 23, 2021, a Massachusetts state court denied Exxon’s motion to dismiss. https://www.mass.gov/doc/june-23-2021-memorandum-of-decision-and-order-denying-exxons-motion-to-dismiss/download.
 A copy of the Court’s decision, referred to hereafter as the “Judgment,” can be found here: http://climatecasechart.com/climate-change-litigation/wp-content/uploads/sites/16/non-us-case-documents/2021/20210526_8918_judgment-2.pdf.
 Judgment, §§2.3.1, 2.3.2.
 Judgment, §§2.3.3 – 184.108.40.206.
 Judgment, §2.3.7.
 Gates, B., How To Avoid A Climate Disaster: The Solutions We Have and the Breakthroughs We Need (2021 Knopf), Ch. 1.