15th July 2021
They say good things come in threes, and that’s certainly the case when it comes to Big Oil’s responsibility for the climate emergency.
On May 26, a ‘trifecta’ of recent events in courtrooms and boardrooms has left three of the world’s largest oil and gas companies scrambling to take immediate steps to address their contribution to climate change.
We now expect a global shift in the responsibilities of corporations regarding the climate crisis, and growing financial and shareholder pressures on companies to take action on climate change and its risks, rather than just issuing statements.
And now pressure is mounting on corporate boards and executives to address climate-related risks, achieve immediate carbon reductions, and speed the transition to net zero by 2050.
In the first development of the day, The Hague District Court delivered a historic ruling against Royal Dutch Shell over the oil giant’s climate contribution. It marked the first time in history that a court has ordered a company to reduce its carbon pollution in line with the Paris Agreement. For Shell, this means slashing its net emissions by 45% by 2030.
The legal implications of this case go beyond Shell and are relevant to the business plans of all high-emitting companies – along with their investors, financiers, and advisers – because further lawsuits are likely against other companies that fail to align with a net zero future.
On the same day, ExxonMobil shareholders voted to replace three of the board’s 12 members with more climate-experienced businesspeople. This milestone reflects burgeoning shareholder activism for urgency on climate action. It also highlights the pressure shareholders are bringing for immediate action to disclose, mitigate, and manage climate risks to the point of replacing board members who are unable to manage their company’s transition to a net zero future.
It’s becoming clear that climate-aware board members can play a key role in ensuring companies are resilient as they transition their business. Government regulation is also adding to the pressure.
Just two months prior to the Exxon vote, the Canadian Supreme Court upheld that country’s carbon pricing law as constitutional. Under this plan, the price of carbon pollution will increase incrementally to $170 CAD (or, roughly $140 USD) per ton by 2030. What we can take from this is that well-managed companies should anticipate and integrate carbon pricing into their business plans – along with other climate-related risks.
Also on May 26, Chevron shareholders approved an investor-backed resolution calling for cuts in carbon pollution from activities associated with the company’s products – also known as Scope 3 emissions – meaning that Chevron will be responsible for disclosing and reducing cutting emissions from sources they do not own, but burn the fossil fuels it produces.
Like the Exxon board shake-up, this vote is a further thunderbolt from investors demanding greater progress on climate action.
The most authoritative guide to carbon neutrality is the recent Net Zero Roadmap from the International Energy Agency. Among its recommendations are no further approvals of new coal plants, oil and gas fields, or coal mines. Companies that continue to invest in these fossil fuels now know that these investments likely will become stranded assets. This not only further opens these boards and officers to shareholder liability, but will also negatively impact businesses and their shareholders unless they take action now.
These developments put on notice the company boards and executives whose fiduciary duties require them to monitor, oversee, and manage climate-related risks, including physical risks, transition risks, and liability risks.
Companies that fail to do so will face mounting shareholder challenges, increased regulatory scrutiny, and likely litigation.
ClientEarth wants to see investors using their power as a force for good in the fight against climate change. To avoid litigation and regulatory challenges, companies must do the following:
Paris-alignment or net zero strategies must be underpinned by basic principles – they must be (1) reasonable, (2) transparent, and (3) accountable.
ClientEarth has developed a framework to guide companies towards setting meaningful Paris-aligned or net zero objectives and clear parameters for holding companies accountable.
You can read ClientEarth’s Principles for Paris-alignment position paper here.