Engine No. 1 is credited with forcing Exxon to own up to the risks of a transition to a low-carbon world. Many expect that Royal Dutch Shell
and the other oil majors are headed for a similar fate at the hands of climate-focused shareholder activism. We believe that this narrative conflates traditional governance issues with pure climate activism.
Exxon’s several strategic missteps in recent years and consequent underperformance makes it a relatively attractive target for an activist investor. Yet given Exxon’s size, it is difficult for an activist to accumulate a meaningful position in the company’s stock. Engine No. 1 appears to have circumvented this hurdle by coating its campaign with a green veneer, which helped it gain traction with some important institutional investors and proxy advisers.
To what extent Engine No. 1’s involvement will improve Exxon’s performance is unclear, as unlike typical activist campaigns, which recommend specific actions for the targeted companies to follow, Engine No. 1’s slide deck lacks specificity. Perhaps as a result, the market’s response seems to be muted.
Consider the data. Engine No. 1 started accumulating stock in Exxon on or after December 1, 2020, the date of its founding. Preliminary votes after the proxy-voting process were counted by May 27, 2021. Over this period, Exxon’s stock appreciated by 52%. Over the same time, oil also enjoyed a strong rally as the SPDR S&P Oil & Gas Exploration & Production ETF
rose 67% versus a 15% gain for the broad-market S&P 500
Much of Exxon stock’s runup arguably reflects a rise in oil prices. That aside, we wonder how much of Exxon’s excess return (37 percentage points) over the S&P 500 was due to classic governance concerns such as Exxon’s poor performance, inefficient capital allocation, excessive compensation and unresponsive management versus its unwillingness to prepare for a transition away from fossil fuels.
While it is difficult to answer this question precisely, we conducted two simple analyses in order to try. First, we looked at the stock price reaction to green initiative announcements issued by Chevron. We found eight such announcements on Chevron’s website in the past two calendar years. The average S&P 500 adjusted return to each of these announcements was close to zero.
Next, we evaluated the stock price reaction to British Petroleum’s
pledge on Feb 12, 2020 to achieve net-zero emissions by 2050. Again, there was no significant market-adjusted response reflected in BP’s stock returns. Why? Perhaps investors believe that these announcements are not to be taken seriously, as they involve small capital commitments. Alternatively, the net benefits to firms from the transition away from fossil fuels might be seen as uncertain.
To us, the substance of the Exxon campaign is similar to an activism campaign waged by Elliott Management against Hess Corporation
in 2013, when climate concerns were less top of mind. Elliott complained that Hess had an unfocused portfolio of assets, poor management, poor execution and an ineffective board. Its campaign was successful and resulted in substantial value creation at Hess.
Unlike traditional activist campaigns, such as Elliott’s, which provide specific recommendations to the targeted company, Engine No. 1 does not provide specific recommendations for Exxon to improve its financial or climate performance. Further, will Engine No. 1 hold Exxon stock for the decade or so it takes to accomplish a low-carbon transition? Moreover, the carbon transition investment that Exxon plans is still low at $3 billion relative to its $20 billion annual budget on oil exploration. And why is Exxon’s CEO, whom Engine No. 1 blamed for underperformance, still in charge? Also, does it make sense for current management, which has been blamed for poor performance, to lead the transition to clean energy, an area perhaps outside their core competence?
On one hand, a green dagger has allowed an activist to breach Exxon’s corporate defenses, which can be viewed as a win for climate activism. On the other hand, did the so-called Engine coup provide Exxon with a roadmap to improve its performance or address difficult questions that stymie meaningful progress towards climate objectives? We need to acknowledge the reality that private sector carbon-heavy firms are constrained to deploy capital in accordance with shareholders’ priorities, which may or may not coincide with society’s objectives.
Should oil and gas firms simply dissolve their core business? Can the transition to a low-carbon world be accomplished without active cooperation from consumers, the supply chain and governments? What role should Exxon and other oil majors play in such a transition and who will bear the costs? These questions have no easy answers for now. What is evident is that characterizing Engine No. 1’s victory as a win for climate action is akin to greenwashing when the concrete actions that oil and gas firms must take to transition sustainably, both from a financial and environmental perspective, remain elusive.
Hemang Desai is Distinguished Professor of Accounting at Southern Methodist University. Shiva Rajgopal is the Kester and Byrnes Professor at Columbia Business School and a senior scholar at the Jerome A. Chazen Institute for Global Business. Sorabh Tomar is an assistant professor of accounting at Southern Methodist University.