by Jamie Bonham

A combination of investor, court and corporate actions on May 26 have kicked the global energy transition into high gear.

It’s not an easy thing to identify a tipping point when you’re balancing on the apex. But it’s fair to say that along the timeline of the world’s transition to a low-carbon future, May 26, 2021 is a day that will go down as among the most important.

Here we take a look at 4 major developments and highlight some early implications:

  1. ExxonMobil board members ousted in proxy battle
  2. Royal Dutch Shell ordered by court to reduce carbon emissions
  3. Chevron shareholders vote in favour of scope 3 emissions proposal

On the proactive side, thanks in part to NEI’s longstanding engagement relationship:

  1. Suncor Energy unveils new corporate strategy and plan to reach net zero

And let’s not forget the landmark report we got from the International Energy Agency earlier in May. Net Zero by 2050, billed by the IEA as the “world’s first comprehensive energy roadmap,” is a massive pivot by the organization that had previously served as the go-to authority for fossil fuel industry players looking to shore up their traditional views and defend their business models.

Just to give an idea of what the IEA believes it would take to achieve net zero emissions by 2050, the roadmap sets out more than 400 milestones: “These include, from today, no investment in new fossil fuel supply projects, and no further final investment decisions for new unabated coal plants. By 2035, there are no sales of new internal combustion engine passenger cars, and by 2040, the global electricity sector has already reached net-zero emissions.” The IEA acknowledges that existing oilfields will still require billions of capital to stave off steep declines—it’s not like we can simply quit our oil dependency cold turkey.

One point to be clear on, the IEA’s report is not a prediction or even a forecast. It’s the detailed description of a scenario the IEA believes is plausible, and what it would take to get there.

So, if there was ever any doubt the energy transition is underway, that doubt should now be wiped out. The ground has shifted dramatically, with some (formerly) staunch proponents of the status quo crossing the aisle to stand firmly in the transition camp. That is momentum—and it’s only going to grow.

For any people still uncertain about the power of active ownership and the impact of corporate engagement, these events should make that value proposition crystal clear. For the most part, they were either heavily influenced or driven exclusively by investors.

Let’s get into more detail.

  1. ExxonMobil board members ousted in proxy battle

ExxonMobil lost a historic proxy fight with investors over the makeup of its board, losing at least 2 seats to newcomers with a more progressive climate agenda (at the time of publication it was unclear whether there may be a third). The campaign to replace Exxon’s board members was led by a hedge fund called Engine No. 1, which was seeking to replace 4 directors. Other backers included such heavy hitters as the New York Common Retirement Fund and the California Public Employees Retirement System.

Our view is that of all the major U.S. oil and gas companies, Exxon is likely the best situated to take on the energy transition successfully. They have an integrated business model, they are renowned for their R&D capabilities, and they have credible climate experts on the payroll. This has made their intransigence on moving faster all the more frustrating for investors.

Despite the much-needed infusion of new blood, we do question the efficacy of a board divided. It will be interesting to watch as the company moves forward with its transition planning. We look forward to tracking their progress.

  1. Royal Dutch Shell ordered by court to reduce carbon emissions

Shell lost a court case in the Netherlands and has been ordered to reduce its carbon emissions by 45% by 2030 versus 2019 levels. This would put the company in line with the Paris Agreement. A lawyer for the environmental group Friends of the Earth, Roger Cox, said that “worldwide, people are in the starting blocks to take legal action against oil companies following our example.”

Time will tell on that front, but the court decision certainly does suggest other multinationals in the sector ought to make a concerted effort to sharpen their pencils. The court said in its ruling that Shell’s policy was “not concrete” and had “many caveats.” Our hope is that even the threat of legal action, now that a precedent has been set, will be enough for companies to scale up their ambitions. It’s important to note that Shell is appealing the decision, so it’s not a done deal just yet.

  1. Chevron shareholders vote in favour of scope 3 emissions proposal

Chevron shareholders voted 61% in favour of a resolution asking the company to reduce its scope 3 carbon emissions. Scope 3 emissions are indirect emissions associated with the consumer use of a company’s products all the way down the value chain. In other words, when companies commit to tackling a reduction of their scope 3 emissions, it means they’re taking on the kind of transformation that could radically change their business. The proposal did not require Chevron to set a specific target, nor did it set a timeline. But it’s another clear example of shareholders’ growing desire to force change on companies they deem to be dragging their feet.

For context, consider that if you take all the climate-related resolutions passed so far this year (and the year’s not over yet), there have been almost twice as many majority votes in 2021 than in all other years combined since the very first climate resolution was filed. Something has shaken loose when it comes to investor expectations, and companies should be taking note.

  1. Suncor Energy unveils new corporate strategy, plan to reach net zero

Suncor’s presence in the news flow is importantly unique, as this is a company taking proactive steps to set itself more firmly on the path to net zero—before its investors take matters into their own hands. And NEI is one of those investors. We have been engaging Suncor for over a decade, and engaging on its transition planning in earnest for roughly 6 years. The strategy unveiled May 26 marks a high point in our collaboration.

The strategy includes a plan for achieving net-zero status by 2050, with no net growth in production, and an absolute greenhouse gas reduction target for 2030. The company is turning its focus to opportunities in hydrogen, renewables, and carbon capture, utilization, and storage. We feel the strategy is well-suited to the company’s integrated structure, in that it takes advantage of built-in strengths throughout the organization, includes capital spending commitments, and identifies key technologies for near-term and longer-term projects. What’s more, Suncor has identified itself as among the largest consumers of its planned new energy sources. In other words, the company is building capabilities to satisfy itself as the primary market for its products, thus reducing the market risks associated with developing new lines of business.

We received a much-appreciated note after the company’s investor meeting, thanking us for being such an important part of the company’s evolution to date. We look forward to continuing the journey with Suncor and other companies in the sector.

Where do we go from here?

If companies the size of ExxonMobil and Chevron can no longer keep a lid on their shareholders, and if Shell can’t hire enough lawyers to beat back a court case brought by a handful of environmental activist groups, then no one can. That’s a good thing, in our view. It likely means corporate resistance to transition planning will in the worst case diminish, and in the best case, turn the defensive stance of companies in the sector to an offensive one, much like Suncor has taken.

NEI will be making heavy use of these developments in our ongoing engagements. Collectively, the events of May 26 are putting a strong wind in our sails, and you can be sure we will take advantage of the favourable conditions to encourage companies to be more ambitious in their planning for a low-carbon future.