Great reading about climate issues

An aggressive investment company achieved a shocking victory at ExxonMobil. But can the new directors really put the oil giant on a cleaner path?

Credit... Illustration by Jon Han

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On the day the small investment company Engine No. 1 learned of the results of its agency battle for ExxonMobil, its San Francisco office was still unfurnished. Since the company was founded in the spring of 2020, almost everyone has worked from home, so when founder Chris James walked into the office on a rare occasion on May 26 this year to watch the results at ExxonMobil’s annual shareholder meeting, he supported His computer is on the rented desk. As an activist investor, he bought millions of dollars worth of ExxonMobil stock and recommended four candidates to the board of directors. His candidates need to be in the top 12 out of 16 candidates, and he is very nervous. Since December, James and the company’s head of active participation, Charlie Penner, have been proving that America’s most iconic oil company needs new directors to help it thrive in an era of increasing climate urgency. In response, ExxonMobil expanded its board of directors from 10 to 12 members and announced a $3 billion investment in a new program called "Low Carbon Solutions." James paced around in the empty office and texted Penner: "I was practicing karate this morning, thinking that promises at gunpoint are rarely fulfilled. ExxonMobil will only make promises at gunpoint."

In his apartment in Tribeca, Penner, who has conceived and ran the event since the beginning of the event, focused on ensuring that even the last moments before the annual meeting were used strategically. For several weeks, he has been counting the people he thinks the majority shareholders will support, but because they can change their vote before the end of the vote, there is no certainty until the end. He stayed up the night before and wrote a speech. During the five minutes allocated to shareholders, he handwritten on a spiral notebook. He heard from major investors that the company is stepping up its efforts at the last minute, calling on shareholders to vote for it.

Penner took a quick shower, then sat down at his desk and started speaking. Since the beginning of the pandemic, he has been sitting in the same place and holding virtual meetings to win support for the four candidates for Engine One. As society tries to decarbonize, doubling the use of fossil fuels is just one of his criticisms of ExxonMobil; he also emphasized the fact that the company’s profitability has declined, and that when the campaign began, no one on the board had experience in the energy industry. fact. At the beginning of the meeting, Penner was the first shareholder to speak. "Instead of being open to the idea of ​​adding qualified energy experience to the board, we believe ExxonMobil has closed the team again," he said. He added that pushing humans off the cliff is no longer a good business practice, and shareholders know it.

Forty minutes after the start of the meeting, Exxon Mobil asked for a one-hour break. This is an unusual move; shareholders do not remember that the company suspended its annual meeting while the procedure was in progress. This has been a painful year for the industry. Last spring oil prices were negative and the number of shareholder votes hit a record high, forcing large listed oil companies to prepare for a zero-carbon world. Just that morning, when the meeting began, there was news that the Dutch court announced that Shell must speed up its emission reduction efforts. As ExxonMobil’s meeting is ongoing, Chevron’s meeting is also ongoing, where shareholders voted in favor of a proposal to reduce emissions from the company’s products, which would require a reassessment of the core business. ExxonMobil’s management seemed confident in the threat of militants, but in the final moments of the battle, this confidence seemed to be waning.

During the break, company management and current board members continued to call some of the largest investors. Exxon Mobil said it is explaining to shareholders how to vote. The staff of Engine No. 1 crowded around their laptops in the office, or were alone in front of screens across the country, and began to guess what was happening-they suspected that ExxonMobil executives had seen the arrival of the counting. I want to buy time for myself to try to make up for the shortcomings. Penner texted James and asked him to call a member of the ExxonMobil board of directors. "Really, tie them up if you can," he wrote. Engine One issued a statement criticizing the company for using "enterprise machines" to weaken this process. James couldn't believe it. Is this legal? He kept thinking. Can they really do it? Engine One's public relations consultant started yelling at the CNBC producer on the phone, and he didn't seem to fully realize the importance of this moment. A few minutes later, Penner started the live broadcast. "This is a typical trick," he said. "This is not the way to push this company forward."

When the meeting resumed, Darren Woods, ExxonMobil's chief executive, had a hoarse and tired voice. He answered questions for nearly an hour, and then suddenly stopped talking in order to announce the results of the election. Almost all the people on the first plane held their heads and stayed while looking at the list. One of their candidates, Greg Goff, is an oil worker who led a smaller refinery company to achieve legendary profitability and believed that mitigating environmental hazards was part of corporate responsibility. Goff was elected. The same goes for Kaisa Hietala, the former vice president responsible for renewable energy at the Finnish oil company Neste.

But Penner started shaking his head angrily—what about the other two candidates? Energy entrepreneur Andy Karsner is still in the race; the vote is too close. Former wind power CEO Anders Runevad (Anders Runevad) is out. Penner has no final statistics, but it is now clear that at least two seats have been taken away from management. Engine One was able to gain a foothold on ExxonMobil’s board of directors mainly because of its persuasive argument that failure to plan for the effects of climate change could mean the demise of the company. Penner, usually subdued, raised his clenched fist.

In the corporate world, a successful proxy battle is equivalent to a shareholder uprising. Often out of dissatisfaction with the management, the company’s radical investors can put forward proposals, including board candidates, for voting at the company’s annual meeting. At least since a shareholder named Isaac Le Maire started complaining about the Dutch East India Company's money management in 1609, investors have taken a radical stance in their company. But this practice was weaponized in the United States in the 1980s, when a group of ambitious money-makers carried out what was eventually called a corporate raid, aimed at increasing the value of the company’s stock, even if it meant splitting the business.

There are more fascinating stories here that you can't help but read to the end.

Well-known activist investors, such as Carl Icahn or Bill Ackerman, are usually seen as predators, but they are good at deciphering company weaknesses and mobilizing shareholder dissatisfaction. However, because recruiting and recommending candidate lists is expensive and time-consuming, investors often try to engage with the company behind the scenes before launching a proxy battle for board seats. "As far as American companies are concerned, it is very aggressive," said Jeff Gramm, author of the book "Dear Chairman: Board Struggles and the Rise of Shareholder Radicalism" published in 2016. As we all know, companies will respond with similar aggressions, holding annual meetings in remote areas or abruptly adjourning them to suppress dissent.

Although aggressive investments usually focus on the financial health of the company, socially conscious investors have used the levers available to them to promote fairer business practices. Shareholders only need to hold a small number of shares in a company to propose resolutions, but disputed proposals must be approved by the Securities and Exchange Commission, whose rules limit the shareholders’ influence on daily business operations. However, depending on the company's management, sometimes even a small amount of shareholder anxiety is enough to change the company's behavior. In 1969, a civil rights organization composed of doctors and nurses submitted a proposal to The Dow Chemical Company to stop selling napalm bombs used as weapons; the US Securities and Exchange Commission supported the company's decision to block the proposal from being submitted to the annual meeting. That year, Dow stopped producing napalm for the US military.

In the past few years, more and more proposals have been aimed at putting pressure on large companies, especially oil and gas companies, to combat climate change; since 2010, more than 1,600 such proposals have been submitted. Among them, less than half were put to the vote, and only a small part received majority support; even successful resolutions are not binding, so the company can still cancel them after the fact. But when activists win seats on the board, the company must suppress their dissatisfaction and accept their new directors.

Since the rules for submitting shareholder proposals are different in Europe and usually require holding larger shares in the company, but do not rely on regulatory approvals, investors have already submitted more ambitious climates to the major oil companies there proposal. In 2015, Dutch activist Mark Van Barr began to raise funds to buy Shell shares. The following year, he walked in front of shareholders and asked the company to invest profits in renewable energy, "taking the lead in creating a world without fossil fuels."

The resolution only convinced 2.7% of Shell shareholders, but Van Barr once again proposed to make the company's development trajectory in line with the goals set in the Paris climate agreement-the 2015 global agreement promised that countries are committed to keeping the global temperature below temperature Increase by 1.5 degrees Celsius and not allow them to rise by up to 2 degrees Celsius from pre-industrial levels-this is supported by 6.3% of shareholders. Van Baal sees his approach as gradual and slow burning; as his proposal gains more support at each annual meeting, the company has no choice but to respond and adapt. Last year, many major European oil companies, including BP, Shell and Total, stated that they intend to reduce carbon dioxide emissions to zero by 2050.

In Engine 1, Penner was sensitive to being an exciting activist investor during the ExxonMobil campaign. But the core of his argument is to use classic radical strategies to mobilize shareholders: pay attention to the company's financial situation, emphasize its sluggish profitability, and provide arguments on how to increase the value of the company's stock through smarter spending. His goal is not necessarily to weaken the core business; instead of urging ExxonMobil to give up all oil and gas, he hopes that the company will implement what the financial staff like to call "capital discipline", which basically just means Don’t spend a lot of money. He also believes that given the increasing pressure from society and governments to decarbonize the global economy, ExxonMobil is strategically wiser to become part of the energy transition, rather than allowing other companies to innovate to meet low energy consumption needs. Carbon power. Oil may still have money, but Penner and James want to convince shareholders that the key to profitability lies in a longer-term view of the health of the company.

This argument reflects the changing nature of investments and the increasingly powerful role played by large funds in corporate decision-making. The three major asset management companies BlackRock, State Street Bank and Pioneer Group own nearly 20% of ExxonMobil. Large pension funds including California and New York State funds also hold shares in the company. New York State Auditor General Thomas DiNapoli (Thomas DiNapoli) said that the foundation of his fund's cooperation with ExxonMobil is to ensure that its investments maintain a sound financial position for the next 100 years. Once the investment portfolio is large enough, some of the increased risks may also begin to threaten other positions. "Diversification aims to be one of our risk management tools," said Annie Simpson, investment managing director of the California State Pension Fund. "But if you face systemic risks, you can run away, but you can't hide. In other words, we can decide not to own companies that produce emissions-this is a case of divestment. But if emissions continue, we still face the climate The risk of change."

In many ways, ExxonMobil has set itself as an ideal goal. Before the battle for agency rights began, the company's directors were mainly former CEOs in other industries such as pharmaceuticals and insurance. The company plans to increase oil and gas production by 25% in the next five years, which seems to be out of touch with the market. Profitability has been declining for a decade. Exxon Mobil achieved the largest annual profit in U.S. history in 2008 and almost exceeded that record in 2012; it lost $22 billion last year.

Part of the reason for the loss was a historic write-down of US$19 billion in the value of its assets. This assessment may still be too optimistic; a whistleblower reportedly told the SEC in January that Exxon Mobil had overvalued its assets by at least $56 billion, partly because of pressure on employees to exaggerate In anticipation of the drilling schedule for the Permian Basin in Texas and New Mexico, the basin is still the company’s American cash cow. (ExxonMobil calls these statements "obviously wrong.") Although it manages to keep shareholders’ dividends unchanged—mainly by cutting costs, including announcing thousands of layoffs—the company’s stock is valued in 2020. It plummeted by 40%, and its market valuation fell at US$12 billion. The company has more than $60 billion in debt and borrowed funds to buy its own stock to boost its price and pay dividends to shareholders. Despite the repurchase and the significant improvement in the value of the stock since the end of last year, it is still nearly 30% lower than it was five years ago. Nearly a century after the Dow Jones Industrial Average, the company derived from John D. Rockefeller's Standard Oil Company was replaced by a technology company in August last year.

The 51-year-old founder of Engine 1 was slender and energetic. Chris James didn't set up the company to pursue ExxonMobil. James is a technology investor who speaks with Silicon Valley’s start-up culture. He decided to abandon his hedge fund in 2019 and sought to reconcile what he thought was the consequences of work and his voluntary service for the homeless in San Francisco. Uneasy tensions with non-profit organizations. While hunting near a ranch near Jackson, Wyoming, James decided to enter the field of impact investing and start a new company dedicated to reimagining the concept of value. The company will create an ETF or exchange-traded fund and then actively vote for the positive measures taken by the companies included. It will also have a private product. For James, the goal is to build something that can convey his belief that the company's impact on society will determine its long-term success. He was influenced by a paper published in 2017 by economists Oliver Hart and Luigi Zingales, which refuted Milton Friedman’s classic argument published in the journal in 1970 that companies should focus on making money; instead, they assumed Shareholder benefits include more than market value.

A few months later, at the end of 2019, James met Penner, 48, in his office in New York City, who was introduced to him through a common acquaintance. The hardworking and analytical Penner just ended a radical campaign he led as a hedge fund partner and pressured Apple to improve its parental control over smartphones. He also led an effort to solve privately and persuade McDonald's to provide plant-based burgers. As a determined candidate, he knows what the right action is. Penner has set his sights on ExxonMobil, and he is talking with investors who may be interested in acquiring the oil company. James told Penner that he should join his new company that has not yet opened and take the lead in agency competition. Penner left his job at Jana Partners, a hedge fund in New York, and joined James in the spring of 2020. They will look for candidates for the board of directors by December and articulate strategies to persuade shareholders. Penner has felt that ExxonMobil is an outsider in the industry. He is less willing than others to admit that if the emission reduction measures promised by governments around the world are implemented, listed oil companies will not be able to conduct business within 30 years.

When they were planning the campaign, James retreated from San Francisco to his ranch and spent the summer learning what it means to realign the way society powers him. His discovery surprised him. As a technology investor, he was accustomed to innovation that grew with an S-curve, and a long list of early adopters suddenly became mainstream. Through dialogue with experts, researchers, and grid operators, he began to see potential energy sector S-curves everywhere. For example, the power grid usually relies on natural gas to help overcome peak energy consumption, but James talked to experts and they said that battery technology is advanced enough to replace natural gas by storing renewable energy for later use. The internal combustion engine in a car wastes approximately 75% of the energy produced by burning gasoline. James began to believe that because electric cars can use energy more efficiently, they will beat all other products on the market. He was initially optimistic that in the next two decades, half of the cars on the road might be electric; he now revises it to at least 80%. "At a certain price point in the energy transition," James said, "adoption may explode."

One of the most difficult parts of building a non-hydrocarbon-powered system is that it is not clear which technology will surpass other technologies on the market; from the perspective of oil executives, this means that any particular road is full of potential costs High mistakes. Compared with agreeing to reduce absolute emissions, companies such as ExxonMobil are more willing to reduce emissions intensity by reducing carbon emissions per unit of natural gas or oil. Nevertheless, in order to control global warming below a certain threshold, more carbon dioxide can only be emitted into the atmosphere. Most experts believe that annual carbon emissions must start to decline in the next few years, halve by 2030, and reach net zero by 2050 in order to stay within the budget. However, in transportation, construction, industrial manufacturing, and power generation, which consume the most fossil fuels, there are still unresolved problems in how to decarbonize.

Since the cost of wind and solar energy has dropped so much in the past 10 years that they can compete with natural gas and coal, converting the grid to renewable energy and then electrifying as much as possible is one of the most popular ways to zero carbon. . If electricity and heat pumps are used to systematically replace gas and oil-consuming equipment and heating systems, this method can be applied to the transportation of electric vehicles as well as to buildings. This will mean aiming for emission efficiency, replacing the concept of energy efficiency that ultimately still relies on fossil fuels. Ed Crooks, a researcher at the energy consulting firm Wood Mackenzie, said: "The shorthand for decarbonization is basically turning everything on and then decarbonizing the electricity." Some industrial sectors, such as steel, emit two carbon dioxide emissions from their production each year. Times, it is the most difficult to decarbonize, because the chemical reaction in the manufacturing process will produce carbon. But the use of hydrogen may reduce some of the industry’s emissions because it burns cleanly. Hydrogen can also play a role in long-distance truck transportation, but isolating it is energy-intensive, and green hydrogen produced using renewable energy currently accounts for less than 1% of the approximately 100 million tons of hydrogen produced annually.

Just a week before the proxy battle between Penner and James and ExxonMobil reached its climax at the shareholders meeting, the International Energy Agency, the world’s leading energy policy organization with a huge influence on government plans, issued a copy The report calls for global investment in new energy. Gas and oil fields stopped immediately. In the assessment, the agency outlined a net carbon-free future, in which solar and wind energy will double in four years, the grid will be net zero by 2040, the sale of internal combustion engine vehicles will be stopped by 2035, and half of the world's heating will be provided by 2045. The pump realizes power supply. By 2050, more than 90% of heavy industrial manufacturing will be converted to low-emission processes. In addition to formulating programs that rely mainly on clean electricity, the agency has also reduced the role of fossil fuels. After many years of predicting the increase in oil demand in the next ten years, the International Energy Agency stated that the world now has 20 years to reduce it by half.

Among the world's major listed oil companies, ExxonMobil has occupied a unique position. Before the agency battle for the No. 1 engine began, as other oil companies announced plans to reimagine their business models, Exxon Mobil had consolidated its position by formulating its own zero-carbon road in 2050. In October last year, Bloomberg obtained leaked internal Exxon Mobil documents showing that the company's preliminary assessment of its investment plan includes that by 2025, its annual emissions are expected to increase by 17% to 143 million metric tons of carbon dioxide. The company’s own operations; it does not include “Scope 3” emissions from consumers burning ExxonMobil products. The company’s plan is based on expectations of continued growth and was formulated before the pandemic, but it shows how executives intend to plan for the next few decades. Although the coronavirus caused countries around the world to shut down early last year, Woods, the CEO and architect of the company's growth plan, promised that Exxon Mobil will continue to "tilt toward this market when other countries retreat."

The company pointed out that one of the things that is a sign of its commitment to addressing climate risk is its carbon capture and storage project, which the oil company advertises as leveraging its expertise in underground mining. Most scenarios that reduce global carbon emissions to zero by 2050 include some form of carbon removal; for example, Shell’s plan for the company’s development path includes offsetting 120 million tons of carbon per year by 2030, mainly through planting Millions of trees. The carbon capture that currently exists separates and removes molecules at the point of production. For decades, ExxonMobil has been removing carbon dioxide as a by-product of natural gas extraction; its most important carbon capture facility is located near Labaki, Wyoming, which separates carbon from the main final product gas and helium, which is produced from below the surface Extracted from at least 15,000 feet of limestone. Most of the carbon dioxide is provided to other oil companies for enhanced oil recovery, which means it is injected into other oil wells to recover more oil. The carbon dioxide used for oil extraction is usually left underground, but since this is not the ultimate goal, there is almost no leakage monitoring.

If the market is not strong enough to be worth selling the carbon dioxide, the company will reinject it into the ground, injecting it deep into the pressure that forces it to be liquid and keep it sealed. Researchers have also developed methods to store carbon in saltwater layers, which are areas of porous rock deep in the earth's surface that are filled with saltwater. Most of the carbon stored for environmental reasons is kept in these aquifers, not in old oil fields. According to Steve Davis, a former employee of ExxonMobil and a researcher currently affiliated with Stanford University, of the approximately 40 million tons of carbon dioxide captured globally each year, only about 5 million tons are intentionally stored in saline aquifers So it will not enter the atmosphere. The rest is injected to extract more oil.

During the campaign, Engine One relied on public information about ExxonMobil, but the company has historically obscured its knowledge of climate change. There are also signs of internal conflict. Enrique Rosero, a scientist, publicly stated that he was ousted after criticizing the company's climate strategy last summer, and he doubted the sincerity of ExxonMobil's so-called environmental efforts. "My personal view is that most solutions are public relations efforts, and some prominent technologies and partnerships may not be available on a large scale," Rossello said, citing the company's hyped algae biofuels. And direct carbon capture. The oil company’s long-term carbon capture strategy depends to a large extent on establishing commercial viability, either through publicly funded incentives or through setting a carbon price; without government support, it’s not clear how the process will be Makes financial sense.

Other current and former employees said that ExxonMobil's rigid hierarchy has weakened the potential for innovation, and some of them declined to be named for fear of losing their jobs. Other oil companies have announced plans to acquire renewable energy companies, invest in alternative fuel infrastructure, and collaborate with other industries to study how to remove carbon from their processes. But ExxonMobil largely rejected its traditional bread and butter adventure.

A global asset manager who had met with ExxonMobil more than a dozen times before the proxy vote said that although the management still firmly believes that this is correct, the company has also solved the problem with an engineering mindset. This kind of thinking The way is unwilling to promise to be like net zero, without a detailed implementation plan-this is a reasonable concern, but other companies have seen it as a challenge that will take 30 years to solve. Some shareholders said the company has shown a unique stubbornness in responding to increasing demand. After more than 60% of ExxonMobil investors voted in favor of writing a report on business risks in response to climate change in 2017, the company released a demand forecast that relies on reducing emissions intensity and improving efficiency. "We found that the reports they produced were not sufficient," said New York State Comptroller DiNapoli (DiNapoli). Among them, the company expects that the global temperature will rise by 2.4 degrees.

In January of this year, shortly after the proxy battle for the No. 1 engine began, Penner and James had a video call with Woods and the lead independent director of Exxon Mobil Ken Fraser. The encounter was tense, but everyone tried to maintain a friendly and obedient appearance. Once, Fraser flashed a peace sign in front of the camera, acknowledging that shareholders were frustrated by the decline in profitability over the past decade, and also explained that the board of directors has criteria for reviewing new candidates-choosing the chief among companies with important markets The experience value of executive level-the nominee of Engine One is not satisfied. Woods talked about how the company will play an important role in meeting the energy needs of the growing global population and improving living standards. He said that ExxonMobil supports the idea of ​​addressing climate change, but does not know what competitive advantage the company can have in areas such as renewable energy.

"Many investors think it makes sense to set long-term goals," Penner said midway through the conference call.

"Hey, Charlie, do you know how someone will achieve the 2050 goal today?" Woods replied. "Have you asked any CEO who promised this?"

"Do you know how to complete your business plan without burning the earth?" Penner asked.

"If only ambition is needed," Woods said, then stopped. "We support this ambition."

"Have you done anything, when you started, you didn't know how you would complete it?" Penner replied. For Penner, it is better to reach the net-zero goal even without an accurate map than planning to continue producing oil and gas in a decarbonized world.

In the conference call, executives and activists indicated that they will continue to seek solutions to avoid a deadlock. They did not speak any more.

Less than two weeks after the conference call, ExxonMobil’s management announced that it would add a director to its board of directors, the former head of Malaysia’s National Petroleum and Natural Gas Corporation. A month later, the company said it would add two more, an activist investor and the CEO of an investment company, to temporarily increase the board of directors to 13 directors, although the term of one director is about to expire. It spent more than $35 million to call on shareholders to reject activists and stick to management. It announced a US$3 billion investment in its new low-carbon solutions company, mainly focused on carbon capture projects, including many projects that the company has announced. It lowered its production growth target. Just days before the proxy vote began, Exxon Mobil announced that it would add two unnamed directors, one with "climate experience" and the other with experience in the energy industry. But the company’s efforts to appease human rights defenders did not work. One week after the annual meeting, it became clear how much; the company announced that Andy Karsner, the energy entrepreneur, had also been elected to the board, giving Engine No. 1's candidates a quarter of the seats.

Last summer, a few months before Engine No. 1 went public, Penner and James traveled to Texas to meet with Greg Goff. They are considering nomination for ExxonMobil's board of directors. It was the middle of the pandemic, hurricanes were forming, and travel seemed to be rash. But the 64-year-old Gove was well-respected in the oil industry during his tenure as CEO of the oil refinery company Andeavor, during which time his stock price rose from $12 to $153. As we all know, he is not afraid to break tradition. An analyst recalled that he avoided the magnificent St. Regis Hotel adjacent to Central Park, where stockbrokers' industry events were usually held, and instead hosted a dinner at a wood-paneled steakhouse in Midtown. Penner had talked with James and Goff a few times, and he seemed to be warming up to them. Involving Goff will prove that they are not just a group of Wall Street types trying to destroy the company without knowing the industry. Perhaps it also shows that even dedicated oil executives can see the business case for change.

They flew to Texas on a private flight. Gove drove a truck with a shotgun in the back of the cab and picked them up. The plan was to go out and photograph some clay birds while they were discussing business. Instead, they spent the day on the porch outside a hunting lodge in the middle of the hilly area in the August sun. They eat together. They drank alcohol. They talked about what the future of the energy industry will look like and how to adapt to a world where the consequences of burning fossil fuels are no longer acceptable. Goff does not like to talk about the energy transition because it means that there will be no fossil fuels in the future, and he is not sure if this is feasible. But this oilman, who started his career at ConocoPhillips and has worked in the industry for 40 years, knows that there will always be gains—and there is potential there. "The world is changing, and many stakeholders have different needs and expectations," Gove said. "This change is mainly about business."

Jessica Camille Aguirre is a writer from California. The last article she wrote for the magazine documented conservation efforts in Australia.