Big Oil’s Black Wednesday - what does it mean for investment?

It is not the strongest of the species that survives, not the most intelligent…it is the one that is the most adaptable to change.

Charles Darwin

On the 26^th May, 2021 – Big Oil’s Black Wednesday – Shell, Exxon and Chevron were all publicly held accountable for their contributions to the climate crisis. Exxon was defeated by a small activist hedge fund, Engine No. 1 LLC, into accepting two new ‘climate friendly’ Board Directors – which later rose to three. Engine No. 1’s proxy statement reads as follows: “Over the past decade, the Company has failed to evolve in a rapidly changing world… We believe that to address this underperformance, the Company must commit to evolve and chart a long-term strategic plan for sustainable value creation.” 1 Engine No. 1 held only a 0.02% share in Exxon at the time of the AGM.

Next was Shell, who, on the 18^th May, had its energy transition strategy approved by nearly 90% 2 of shareholders despite a challenge from campaign group Follow This. Shell declared the strategy, first released in February, was aligned with a Net Zero 2050 timetable. On the 26^th May, a district court in the Hague disagreed, citing human rights concerns 3 . The company will now have to increase its emission cuts to 45% by 2030 (compared to 2019).

One day, two major developments with two important learnings. First, we now know that size really doesn’t matter. Minority shareholders with smart, informed arguments and evidence can mobilise majority shareholders to their bidding. Second, the rule of law binds everyone in society, including shareholders and Boards, which for many investors may have come somewhat as a revelation.

So, what does Big Oil’s Black Wednesday really mean for investment? Well, two things. First, if you’re going to take a position in a black energy company, knowing all we know about the scale of the climate crisis, then you need to be prepared to fight for change. It’s taken until May 2021, and the informed strategies deployed by Engine No. 1, to take a huge first step in re-orienting the company. Additionally, to further support change across the industry, Engine No. 1 has also released their investor presentation used to gain support. 4 A gift that others may use to garner support and force those resisting change into the very change they need to survive. In lieu of divestment, this is exactly the type of engagement that is needed. Knowing we can’t turn these companies off overnight, and that within these companies is the expertise and capacity to drive the clean energy and beyond plastic revolution society and the planet needs. The lesson here is clear. Engagement needs to be fearless, committed, rooted in science, a financial reality, and leave no counter argument unaddressed. Couched in the narrative of adaptation and survival, it’s the Darwinian principle applied to investment.

Second, the rule of law is absolute. Climate change is a human rights issue. It’s a planetary rights issue. It’s no longer just a boardroom issue, and shareholders can’t abdicate responsibility or accept mediocrity. The level of transition ambition in the fossil fuel industry is still badly short of where we need it to be, even with those who declare to be leading the charge. Where investors accept mediocrity, the rule of law will inevitably and increasingly step in. As a more future-fit interpretation of fiduciary responsibility develops, that rule of law will increasingly apply to shareholders. Everything is changing, and as investors, the worst that any one of us can be is asleep at the wheel or distracted by what the kids are doing in the back seat. Some of us remember the story of the Australian swim coach (interestingly in Darwin) who put a baby crocodile in the pool to motivate his swimmers to go faster. Well, someone just put a much larger crocodile in the investment pool in the form of a Dutch district court and human rights law.

As we look to increase this transition ambition into real, tangible progress, investors need to work much harder to really understand the scale of the crisis, both scientifically and financially, and to translate that into adaptation. This is where many can learn from the impact investing community – a pioneering group of investors who have championed transition for decades, and who understand adaptability and survival. It’s the very essence of the investment thesis we have at Tribe. In the age-old dispute about divestment versus engagement. It’s clear from recent events, that there is room for both. But the stakes are high. Watch out any investor who claims engagement and who can’t evidence their adaptation activities.