Almost everybody is angry about ExxonMobil these days. Everybody, that is, except Exxon’s executives because they are swimming in cash like Scrooge McDuck. Exxon’s 2022 profit was more than Amazon, Procter & Gamble, and Tesla combined.
“Of course, our results clearly benefited from a favorable market,” said Exxon CEO Darren Woods, by which he meant that price-gouging helped pad their profits, setting an industry record for the West of $56 billion for 2022.
The Biden White House voiced its displeasure, stating, that instead of increasing production, companies “plow those profits into padding the pockets of executives and shareholders.“
Remember that bit about increasing production because we’ll come back to it. CEO Woods went on to explain why Exxon outperformed its peers due to investments during and before the pandemic that went against conventional wisdom. “We chose to invest countercyclically. We leaned in when others leaned out.”
However, shareholders have become the enemies, not only the activist ones who are making a big stink about Environment, Social, and Governance (ESG) scores. In general, due to a significant consolidation of institutional investors resulting in so-called “horizontal shareholding,” the same funds own large stakes in competing firms and that reduces competition, which seems to be especially true in the oil & gas sector, and it’s giving industry executives, especially at Exxon, a gnarly headache.
An ESG Coup
A year earlier in 2021, a San Francisco-based activist hedge fund, Engine No. 1 flabbergasted the world by successfully supplanting three directors on Exxon’s board.
Engine No. 1 was largely unheard of prior to these events and achieved this shocking result while owning a mere .02% of Exxon’s stock.
Nevertheless, the hedge fund was able to convince powerful investors like Blackrock, Vanguard, and State Street, which own more than 20% of S&P 500 companies, that the bottom line and social good were not mutually exclusive.
In a novel strategy, the hedge fund didn’t focus explicitly on environmental issues, but rather on a risk assessment arguing that shareholder value is threatened by exposure to fossil fuels.
An expert in corporate governance told Disruption Banking in an email, “My understanding is the activists simply ran an excellent campaign for those dissident board seats; unsure it is any kind of bellwether.”
Consider the prospects of a group like Climate Action 100+, which consists of more than 700 global investors representing $68 trillion dollars of assets. It’s a titanic powerhouse and its strategy is to cut emissions to net zero using companies’ own corporate strategies. This group is just one of many, all focused on environmental activism.
Enemies at the Gates
Exxon had been coasting along, pretending that it was embracing “sustainable” solutions that would “transition” to “low carbon” alternatives to “solve” climate change for “society as a whole.” It was a bunch of twaddle, of course.
According to CEO Woods, setting targets and selling assets to reduce the carbon footprint of their portfolio is just a “beauty competition.” And the numbers back this up: between 2010 and 2018, the company spent just 0.2% of its capital expenditures on renewable sources like wind and solar.
Activists call this “greenwashing.” You say all the right words, and your annual corporate governance reports portray your Corporate Social Responsibility (CSR) in glowing terms with glossy photos, but it’s just window-dressing.
But then, in May of 2022, at the company’s annual shareholder meeting, two-thirds of Exxon investors rejected a proposal to require the corporation to align its climate strategies with the Paris Agreement. The proposal was made by an activist group based in the Netherlands called “Follow This.”
Mark van Baal, the founder of Follow This, started the group with the intent of changing the environmental practices of oil companies from the inside out by becoming a large enough shareholder to be able to propose resolutions at shareholder meetings.
While not totally successful in May of 2022, Follow This’ proposal did receive the support of 28% of investors, an impressive accomplishment considering these kinds of proposals were DOA just a few years ago.
CEO Darren Woods defended the rejection of the proposal: “We do not believe it’s in the best interest of our shareholders or society for ExxonMobil to reduce the supply of critical products needed by society, which is the intent of your proposal.”
In December, Engine No. 1 filed another round of resolutions with BP, Chevron, Shell, and Exxon to set targets for absolute reductions in Scope 3 emissions by 2030, a goal of the Paris Agreement.
Shareholder activism is on the rise, with 235 campaigns aimed at corporate boardrooms. In the U.S. alone, 135 new campaigns were undertaken, representing a 41% increase from last year.
While perhaps short of a total revolution, they’re making an impact, but the energy industry mostly isn’t listening.
Horizontal Ownership and the Prisoner’s Dilemma
Something strange happened when fuel prices spiked in 2022. Whereas observers expected that companies would react by drilling new wells to increase production, the largest industry players did not. After all, if everyone starts drilling at the same time, equipment prices go up, so the price of increasing production goes up.
However, if one big firm drills and another doesn’t, it creates a prisoner’s dilemma. So, the question naturally arises, was this a coordinated decision, which is illegal, and the firms are unfailingly respectful of the law, so conscientious researchers scratched their heads, wondering what must have enabled this coordination?
The answer seems to be, according to Barclay’s, common shareholder ownership. This is because institutional investors have an outsized amount of clout in corporate boardrooms, owning about 80% of the stock of the S&P 500 companies.
This explains the persistent refrain of energy companies, that their “large equity holders are favoring free cash flow to investors rather than increasing production.”
Why do compete with other firms, when you can just have your big institutional shareholders coordinate and everybody makes money hand-over-fist?
It’s not illegal, yet at least, so it made sense to sit back and let scarcity drive the prices even higher. People complained, but they always ignorantly or cleverly scapegoated Joe Biden or the war in Ukraine, instead of the companies that obviously benefitted.
Sure, there was some bellyaching when the profits were announced, but after the umbrage died down, oil executives can go quietly about buying mansions, receiving awards for their acumen, and buying more influence in Washington.
Greenwash Allegations: True or False?
So, are the companies really greenwashing their contribution to climate change, as activists allege, or are they making good-faith efforts to meet climate goals? Welp, if it’s not greenwash, you could have fooled me because methane emissions, the reduction of which is regarded as the easiest, most efficient way to counter climate change, continue to smash their own previous records.
Methane accounts for almost ⅓ of rising global temperature since the 1850s, and the energy industry contributes about ⅓ of human-induced methane. Funny enough, Exxon just got busted lying about a massive methane leak over New Mexico. The company only came clean once confronted with satellite imagery showing the cloud of methane over their facility. It wasn’t even the first time.
The International Energy Agency (IEA) has recommended that oil & gas giants should use their windfall profits to reduce the contaminants currently endangering the planet, but Exxon isn’t interested in changing the business model that has served its shareholders so well. And Exxon is not without allies.
There is a counter-revolutionary movement against ESG that is trying to reverse and undermine every action that activist investors have undertaken.
Conservatives are up in arms about ESG activism because they think it’s completely irrelevant to profitability, and they are attempting to coerce asset managers and institutional shareholders not to pursue ESG in any way, shape, or form. And of course, these so-called “small government conservatives” are leveraging the organs of the state.
The Republican Party v. ESG
After having lied for decades about climate change, Republicans are now forced to admit it is in fact real, but they’ll be damned if they are gonna admit that it actually matters. Even with the scintillating example of the train derailment causing massive toxic waste contamination in Ohio, Republicans somehow can’t see why environmental protection should be part of how corporate risk is calculated.
To them, ESG is not a thing that is good for everybody, much less the planet; it is a political agenda of the hated Democratic Party, and that’s okay. After all, this is representative government, and both parties do the bidding of their billionaire campaign donors. Let’s not fool ourselves.
So, for Republicans, it’s no ESG disclosures, no ESG voting, and no ESG engagement with the leaders of public companies! The company runs the company how the company sees fit, without regard for anybody, not the community where the company operates, not the land or natural resources it uses as inputs, nor even the shareholders, if they be libs.
To this end, they have commandeered state governments in Florida, Kentucky and Texas, among others, to participate in the pressure campaign. Laws have been passed to punish any bank or investment firm that has engaged in an “energy company boycott” and make them cough up documents having to do with “climate” or “environmental.”
In Kentucky, the biggest U.S. banks are all fighting back in court against the state AG’s attempt to subpoena them regarding any involvement in the United Nations Net-Zero Banking Alliance.
The Republican Party has proven itself as a cultural force to be reckoned with, but Republican state governments may not be able to wrench control away from institutional shareholders, not even by leaning on conservative investors to divest from ESG-associated funds.
The Republican vendetta against ESG is not based on a strong business case with numbers to back it up; it’s a political agenda masquerading as one.
That’s because the economy is not red or blue. The economy is green, and money doesn’t have a political party. Institutional investors are merely responding to lackluster long-term numbers in the energy industry.
For example, McKinsey noted that energy prices have faced an extended period of declining prices, so that between 2008-2018, the net internal rate of return was at 3.3%, a last-in-class performer for Private Equity (PE) funds.
The Institute for Energy Economics and Financial Analysis, a private Cleveland-based think tank, wrote recently that “decarbonization strategies are coming with a lot of promises and small cash flow allocations.”
Without much higher allocations for transition to renewables, the energy industry just doesn’t do it for PE funds focused on long-term profitability. It doesn’t seem colored by politics, but rather, by arithmetic.
What’s Next for Exxon
Exxon now sits on huge profits amid rising uncertainty. An unseasonably warm winter in Europe and the U.S. has led to a 70% crash in the price of natural gas from its high in 2022. Therefore, Exxon is plowing its profits into massive stock buybacks and hoping the conditions created by the war in Ukraine persist and Saudi Arabia’s MBS gives Biden the cold shoulder.
Meanwhile, surprise, surprise, Exxon doesn’t want to pay taxes, complaining about a “windfall” tax of $1.5 billion from the European Union (EU) in the fourth quarter. Although it’s a mere 2.6% of its global profits, the company is suing the EU, arguing that the levy exceeds its legal authority.
CFO Kathryn Mikells claimed that windfall profit taxes are “unlawful and bad policy.” She went on to say that imposing new taxes on oil earnings “has the opposite effect of what you are trying to achieve,” insisting that it would discourage new oil and gas production.
Wait, what? Did she mean to suggest that taxes are discouraging Exxon’s development of new energy sources?
That seems odd because Forbes reported that Exxon’s oil and gas reserves have been falling steeply in the past few years, and the company “is apparently not investing in adequately replenishing its oil and gas reserves.”
Why is that?
According to CEO Woods, “We are underinvesting as an industry,” an oblique admission that many oil fields are becoming depleted. “We see the potential for continued tight markets.”
Translation: “We are Scrooge McDuckin’ it with artificial scarcity, and all our competitors are rollin’ in it with no plan or incentive to stop.”
Make hay while the sun shines, with no thought for the morrow, and well they should because it’s the American way.
Author: Tim Tolka, writer, journalist, and BI researcher
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organizations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
what a great article. Refreshing tone and candid.