Taylor Gray, Ph.D.
The world is a better place when companies are good corporate citizens. I remain focused on developing meaningful and actionable insights from empirical data in pursuit of a better world.
The latter half of May, 2021, was quite decisive for integrated oil companies and their positioning--or lack thereof--with climate action. A shareholder resolution at Chevron pushing the company to reduce its carbon emissions passed with a clear majority of votes, a court case in the Netherlands held Shell accountable to reducing its emissions by 45% by 2030, and at least two directors at the board of ExxonMobil have been replaced with more sustainability-oriented individuals following pressure from activist shareholders.
The importance of these events should not be underestimated. These are all initiatives which proponents have been pushing for over two decades to simply be turned away time and time again. For so long, integrated oil and the financial interests that support it appeared to be immune to accountability...until all of a sudden they aren’t.
Fundamentally, these outcomes are victories of consumer agency.
One of my earliest academic publications investigated the context of ESG-oriented shareholder resolutions from 2000 to 2009. Back then, shareholders filing climate-oriented resolutions never actually expected them to be accepted, in fact most received far less than five percent of votes in support. These shareholders were not delusional, rather the objective was to force a conversation--to force management to file a response stating explicitly (and to put it on record) why they did not feel it was required for the company to meet such-and-such climate actions. And now in 2021, not only are these types of resolutions gaining majority support, but they are doing so within some of the most climate-inactive and protected companies in the world.
It's About Consumer Agency
So much has been written this past week in all major media outlets (see here, here, here, and here for just a few examples) about the significance of these events for the oil and gas industry and for climate activists that there is little for me to add in this regard. But what I have not seen is how, fundamentally, these outcomes are victories of consumer agency.
The case of the proxy battle at ExxonMobil is perhaps the clearest example. A hedge fund, Engine No. 1, owning just a 0.02% stake in the company, mobilized other institutional shareholders to support it’s play to replace up-to four members of the board with more sustainability-oriented individuals with deeper experience in clean energy. Their case was that ExxonMobil had been underperforming financially because it was not adapting to a world increasingly interested in decarbonizing and that longer-term performance would benefit from a more sustainability-minded board of directors.
What were once considered the intangibles of businesses are now the competitive differentiators of businesses.
Engine No. 1 had explicitly tied corporate profitability to sustainability, and succeeded in gaining the support of many other larger institutional shareholders, including the three largest U.S. pension funds (the California Public Employees’ Retirement System, the California State Teachers’ Retirement System, and the New York State Common Retirement Fund) and BlackRock, one of the largest investment managers in the world. As much as this proxy battle is a feel good story and one which breathes new life into flagging corners of the climate activist movement, it is one born from a clear pursuit of profit--it’s not about pushing a company to be sustainable because it is the ‘right’ thing to do, but rather in pushing it to be sustainable because it is the profitable thing to do.
Sustainability is Profitability
It's not that this relationship had not been made before within countless other attempted shareholder resolutions and proxy battles which ultimately failed. That sustainability is a cornerstone of long-term profitability was never in question by those taking a rational and impartial interest in market dynamics, but it was a relationship always doubted by those with vested interests or short time horizons. What is different now is that sustainability is also clearly a cornerstone of immediate profitability--it is no longer an element of markets-to-come but rather of the market today. Engine No. 1 and supporting shareholders know this...and now so do all other public companies with upcoming AGMs.
Sustainability is a cornerstone of profitability because we have all collectively made it so. By making decisions based on the issues we care about we have moved markets.
Sustainability is not about ‘the feel-goods’, or goodwill, or social license; sustainability is about market risks and rewards...and hence profit. And we got to this point because of intentional shoppers, because all the people who want to be intentional in the impacts of their shopping have been making decisions for months, years, or decades which reflect the issues they care about. There are now as many values-based shoppers as there are value-based shoppers--as many people who consider a brand’s impact on the issues that matter as there are people who simply consider price-tags.
Sustainability is a cornerstone of profitability because we have all collectively made it so. By making decisions based on the issues we care about we have moved markets. Markets are not just based on price and availability but rather on price, availability, and impact. What were once considered the intangibles of businesses are now the competitive differentiators of businesses.
We All Built This
This isn’t the emergence of the ‘green’ economy, or the ‘caring’ economy, it is simply the economy...and it is transitioning. Consumers are concerned about sustainability and so issues of sustainability are now inextricably internalized into markets and, by extension, into the expected profit streams of businesses operating within these markets. Sustainability is profitability. Intentional shoppers have always known this and have always acted on this...and now more and more of the largest investment and asset managers are catching on.
What happened in late-May with ExxonMobil, Shell, and Chevron are clear victories for both shareholder activism and climate activism. This should be celebrated, but do not lose sight that these victories are built on a foundation of Intentional Shopping--sustainability is profitability because we all made it so.
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