28th May 2021. Environment | Exxon
An environmental duty of care; fighting Exxon in the boardroom
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I’m interested in the ways that activists use existing institutional frameworks to bring about change. We’ve has two striking examples in the last two days, so there’s a bit of a theme to todays’s newsletter.
#1: An environmental duty of care
An Australian Federal Court has ruled that the Australian Environment Minister, Sussan Ley, has a duty of care to protect children from the future personal harm caused by climate emissions, in a case brought by eight schoolchildren trying to stop the expansion of the Vickery coal mine in New South Wales.
Vickery is a vast opencast coal mine, although it’s hard to see this in the coal company’s site promoting the scheme. The expansion has already been approved by the New South Wales Independent Planning Commission.
Vickery coal mine
The judge stopped short of awarding the children an injunction against the expansion, but there are still some notable elements in the case.
The first is, that according to the news report on SBS, no-one was arguing that climate change wasn’t real. (In Australia this has been known, even recently).
The second is that—in typically precise legal language—the judge made it clear that the impact of the expansion will have a measurable effect on climate change:
The relevant sections of the legal judgment say:
The Minister denies that injury to the Children from the approval of the Extension Project is reasonably foreseeable and says that the relevant salient features point overwhelmingly against the recognition of the novel duty of care contended for by the applicants. ...
Justice Bromberg—after a long and detailed journey through both the history of climate change and environmental law—then observes that the case turns on this element of ‘foreseeability’:
I need to be satisfied that a reasonable person in the Minister’s position would foresee that a risk of injury to the Children would flow from the contribution to increased atmospheric CO2 and consequent increased global average surface temperature brought about by the combustion of the coal which the Minister’s approval would facilitate. That the combustion of 33 Mt of coal from the Extension Project will contribute to an increase in atmospheric CO2 is both obvious and foreseeable.
And because the risk is foreseeable he then links the case to the duty of care.
(Image on climate change in the legal judgment)
Finally, although he did not award an injunction, he instructed both sides to talk to each other and respond to the court’s judgment within a week. I’m not a lawyer, but I’m not surprised by this. Anglo-Saxon systems depend a lot on common law judgments, and judges who are aware that they may be extending common law tend to tread carefully, especially when government ministers are involved in the case.
For the legally inclined, the judgement is here. It’s worth spending time on if you’re interested in how the climate change debate is unfolding.
It’s also possible that even if the Australian government pushes on with approval, the mine project will not get funded. Whitehaven’s share price has fallen “massivley” over the last decade, and it is dependent on Asian investors to finance the extension.
#2: Fighting Exxon in the boardroom
The phrase “activist investor” has chilled the soul over the last decade—it has almost always meant well-funded investors fighting their way onto boards to demand more share buybacks, higher dividends, and other value-destroying behaviour.
But this week an activist hedge fund, Engine No.1, which believes that Exxon is not taking climate change seriously, got two directors voted on to the Exxon board. (They may win a third place when all the votes are counted). This is despite the fact that they are tiny ($40 million) and only created in December. Exxon has a market cap of $250 billion.
I started my career in financial journalism and used to have attend company AGMs. It’s fair to say that as a general rule, large businesses never lose votes on electing directors to the board.
So it’s worth making some quick notes on what just happened here, drawing on a good Reuters’ piece.
One, Engine No. 1 played the hand it had well. It targeted investor concerns about both climate change risks and Exxon”s relatively poor performance. It also played on concerns that Exxon had no energy industry expertise on the board, apart from CEO Dave Woods.
Two, having noted this lack, it took seriously the task of recruiting some credible candidates, amplifying the issue by talking about Exxon’s lack of a credible transition plan. (Exxon added a director from the sustainable investing sector in response).
Three, Engine No. 1 gained the support of some of America’s biggest pension companies who invested in Exxon, starting with the $300 billion CALsters teachers’ retirement fund, then building from that with New York's $255 billion Common Retirement Fund.
Four, it got support from Blackrock, the world’s biggest investor, Blackrock’s been talking a good game for a couple of years on climate change—CEO Larry Fink writes an annual letter about the need for long-termism—but its behaviour had been patchy. In 2021, it seems to have got more serious about following through.
For its part, Exxon seems to have wholly underestimated the shift in the mood in the investment community on climate change, and also pursued a strategy on “defending investor returns” that lacked credibility given the company’s towering losses last year and increasing pile of debt.
The challengers also benefitted from a scathing report on Exxon that came out two weeks before the vote, from an independent shareholder advisory firm:
“Investors have regularly highlighted concerns about preparedness for an energy transition, yet the board did not take action decisive enough to prompt recognition from the market until after launch of the dissident's campaign," ISS said.
There’s good reportage at the environmental newsletter on the events around the vote. There’s some question as to whether Exxon’s abrasive CEO Dave Woods will survive as a result of the dissident directors being elected. As I said at the top of the piece, this almost never happens. When it does, it says that investors are sceptical about the strategy and have lost confidence in the leadership.
j2t#107
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