The next front in the ESG wars is governance
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ExxonMobil's ongoing litigation against two investors over a shareholder proposal is the latest attempt to politicize climate change's risk to businesses.
Why it matters: With culture wars burning hot, successfully leveraging the "E" and the "S" of environmental and social governance enables opponents of the investing philosophy to get that much closer to doing the same with the "G".
Driving the news: This week, ExxonMobil's board of directors got overwhelming shareholder support at the company's annual meeting, despite vocal opposition from big names like CalPERS and the New York Common Retirement Fund over its lawsuit.
Flashback: In January, ExxonMobil sued Arjuna Capital and Follow This over their shareholder proposal for the company to set more aggressive emission-cutting targets.
- The oil giant argued that the investors are trying to push their own agendas that have nothing to do with maximizing shareholder value, and in fact seek to shrink the company's business.
- It also takes issue with the shareholder proposal process itself, noting that it's being increasingly abused.
Catch up quick: The shareholder proposal process was established as part of the Securities Exchange Act of 1934, enabling shareholder proposals that meet certain requirements to be included on the ballot.
- On the flip side, companies can also ask the SEC to be allowed to leave a proposal off the ballot, though the agency in 2021 narrowed the rationales under which a proposal can be excluded.
What they're saying: "Our investors sent a powerful message that rules and value-creation matter," ExxonMobil said in a statement.
- "We are pleased that Arjuna has again withdrawn its improper proposal.… However, we continue to evaluate this withdrawal as it is not clear that Arjuna has conceded that their proposal violated SEC rules," the company added. (Note: Arjuna on Monday told Exxon and the court that it will not file any more proposals related to climate change or emissions.)
The other side: "The intention of creating transparency or putting a spotlight on this litigation wasn't really to unseat the Exxon board," CalPERS CEO Marcie Frost said in a statement following this week's shareholder meeting.
- "It was more a very clear communication that we say this is an absolute failure in governance, and governance is the responsibility of the entire board."
Zoom in: A few dynamics are at play. "Corporations don't like to be embarrassed by these votes" even if they don't get majority support, says Tulane University law professor Ann Lipton. She emphasizes that the proposals also aren't binding.
- Engine 1's victory: Just three years ago, ExxonMobil lost a proxy fight with an activist investor, resulting in three climate-minded directors joining its board. (But they unanimously supported the company's acquisition of Pioneer Natural Resources last year.)
- Climate change's trendiness: At least for now, some economic environments are more favorable to prioritizing decarbonization than others — leading to many investors' changing mood on the topic.
The bottom line: Right now, it's easy for companies to complain about proposals focused on "political" issues like climate change or workforce diversity — but stymieing the process could rid them of proposals that take issue with governance.
- And that is the real threat, says Lipton.
- "You can definitely say that the oil and gas industry has an incentive to get as much case law on the books that says that being concerned about climate change is not a financial issue, it's just a culture thing."
