Big oil companies can no longer hide behind empty rhetoric about climate commitments. An upstart hedge fund convinced major shareholders to challenge Exxon and an alliance of environmental groups scored a major court victory against Shell. 

May 26 2021 was a big day for climate activists rallying against Big Oil. Major decisions were delivered against ExxonMobil and Royal Dutch Shell—the second and fourth biggest carbon emitters in the world, respectively—for their failure to respond to the climate crisis. These decisions may mark a critical turning point in the war between climate activists and Big Oil. 

First, let’s discuss the facts. 

ExxonMobil vs. Engine No. 1

The win against ExxonMobil is truly a David and Goliath story. A small activist hedge fund called Engine No. 1, which owned only a tiny fraction (0.2%) of ExxonMobil’s shares, took on the company in a so-called proxy fight that reportedly cost the oil giant $35 million to defend itself against. The activists’ aim: to get at least two of its own nominees elected to ExxonMobil’s board of directors. These nominees, who have a depth of experience in transforming energy companies, would push the company to prepare a serious energy-transition plan, disclose its political contributions, and better manage its executive compensation. 

On May 26 came the news that the hedge fund had won: Exxon shareholders had elected two of Engine No. 1’s four nominees to the board. As voting continues, Engine No. 1’s other two nominees may well also be approved.

It’s the first time in history, as far as I know, that a hedge fund has successfully beat a major corporation on the grounds that its failure to act on climate change is eroding shareholders wealth. Mark DesJardine, assistant professor of strategy and sustainability at Penn State University, and I write more about the decision here. Forbes contributor Bob Eccles summarizes the demands that Engine No. 1 made here. 

The victory is as important for what it says as what it does. To win the proxy battle, Engine No. 1 had to convince ExxonMobil’s shareholders that the company’s returns were lagging those of its peers because of Exxon’s failure to act on the climate crisis. The activists’ strong evidence and savvy negotiations convinced major shareholders, including BlackRock, to support their proposal. This gave the upstart hedge fund an outsized amount of influence. 

ExxonMobil’s board unanimously opposed the Engine No. 1’s claims and its nominees. In its Proxy Statement, the company’s directors urged shareholders in no fewer than 20 places to “discard any white proxy card sent to you by Engine” and instead “vote FOR the election of nominees proposed by the Board of Directors on the BLUE proxy card.” 

The shareholders, it seems, decided to make up their own minds.

This decision was a significant win not only for climate activists, but for advocates of sustainable finance. It shows a direct relationship between a company’s failure to act on climate change and the erosion of its shareholders’ wealth. Most activist hedge funds reserve their influence for creating short-term profits, but Engine No. 1’s success shows that this kind of activism can also be used to move companies to act on the climate emergency.

Royal Dutch Shell vs. Environmental NGOs

May 26 also saw a victory for seven activist groups that had launched a lawsuit against Royal Dutch Shell. The Hague District Court ruled that Shell must “reduce the CO2 emissions. . .by net 45% in 2030, compared to 2019 levels, through the Shell group's corporate policy.” The alliance of non-governmental (NGO) environmental groups, which included Greenpeace Netherlands, had argued that a heavy emitter such as Royal Dutch Shell needs to reduce its emissions by this amount in order to ensure that temperatures do not rise beyond a safe limit. 

On the surface, it seems like a harsh judgment for a company that has already committed to lowering its emissions by 20% by 2030 and to reach net zero by 2050. The claimants, however, argued that the problem was not simply about Shell’s target-setting, but about its plans to meet those targets. Although Royal Dutch Shell is willing to regulate its own emissions, it is less eager to regulate its Scope 3 emissions—meaning the emissions released by those who use its products. These include the utility companies and gas stations that provide us with electricity and gasoline. 

As with Exxon, Shell is standing its ground and has said it will appeal the court’s decision. 

And, like the shareholders’ defiance of ExxonMobil’s directors, the court’s decision against Shell is a significant win for climate activists. It shows that courts are willing to enforce a corporation’s “responsibility to states and society for the energy transition.” 

It also turns the spotlight on the importance of Scope 3 emissions, which often represent the largest part of a company’s total emissions. After the Shell decision, oil and gas companies will be less able to get away with talking only about reducing their own emissions and more obligated to consider the carbon emissions all along their supply and value chains. 

Shareholders Respond Positively

Flying in the face of conventional wisdom, shares of both companies rose on the news. ExxonMobil’s shares increased by 1.17% over the previous day’s closing price, and Shell’s increased by 0.38%. 

These are surprising outcomes for two companies whose boards opposed the rulings. It seems that investors are seeing the value of a low-carbon future, even when company managers do not. 

A Signal to Big Oil

Leaders at Big Oil often make strong statements about their commitments to a net-zero future. Darren Woods of ExxonMobil claims to be “a strong supporter of the Paris Agreement and its objectives of mitigating global emissions.” Shell board member Harry Brekelmans said that the company is “investing billions of dollars in low-carbon energies.” 

But it seems that both shareholders and the public are starting to scrutinize such commitments. And they are getting better at telling which statements signal authentic commitment and which ones are just hot air. (In this previous article, I outline 3 ways to tell if a company is serious about its commitments. ) More than that, they are acting on what they discern—and these actions are starting to force the hand of oil-company executives. 

As other major oil companies move to jump on the net-zero bandwagon, the decisions at ExxonMobil and Shell send a strong signal that, more than ever, commitments to low-carbon technologies need to be more than just greenwashing.