What oil majors' climate battles tell us about shareholder democracy

Exxon: board meetings promise to be fun

(Image credit: © Alamy)

published 3 June 2021

Last week was a tough week for Big Oil, with ExxonMobil, Shell and Chevron all losing climate-related battles with varying consequences.

Perhaps not coincidentally, the last couple of weeks have been rather positive for the oil price itself. A barrel of Brent crude will now cost you more than $70. This is partly due to growing confidence in the strength of the recovery, as well as ongoing caution on the part of the Opec oil cartel about pumping more oil.

But I suspect it’s also got something to do with the fact that if you make it harder for big oil companies to produce more oil, then eventually you’ll get less of it coming to market. And as our cars don’t yet all run on hydrogen or solar power, that might be a bit premature.

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It rather backs up the argument that investors should see Big Oil companies

in a similar light to Big Tobacco – an unpopular, controversial sector whose long-term growth prospects are limited or non-existent, but which still has a decent medium-term horizon ahead of it during which it will throw off buckets of cash to be harvested by shareholders, and which might surprise on the upside if it turns out that oil demand hasn’t quite peaked yet.

An interesting wider point is what this all says about shareholder democracy, a topic that Merryn has been writing about a lot recently. Many people in the finance industry – some more self-interested than others – have raised the alarm over the impact of the growth in passive investing over the past few decades.

Passive ownership has been accused of everything from encouraging monopolistic behaviour to driving bubbles. There are varying degrees of merit in these arguments, but one thing is very clear: the big three passive players – BlackRock, Vanguard, and State Street – own an awful lot of stock.

They are the top shareholders for the vast majority of companies in the S&P 500 index. That gives them a lot of power in theory, and – as it turns out in Exxon’s case – in practice.

For example, Tiny activist investor Engine No. 1 owned just 0.02% of Exxon’s shares. But with the backing of the big three passive players alongside US pension funds, it managed to get two of its own climate activist candidates elected to the board.

In effect, it’s acted as a Trojan horse for passive owners to turn active. You may or may not agree with the idea that Big Oil should be doing more to cut its carbon emissions.

But I’m pretty sure that not everyone who owns Exxon via a passive index tracker shares your view either way. We’re only going to see this happen more often, and as it does, it’ll be ever harder for passive funds to maintain the illusion that they are just neutral, cheap tracker funds.

One solution is for big passive asset managers to embrace digital shareholder democracy to allow end-owners to tell them how to vote on key issues. Alternatively, it might

be a good time for a new wave of “vice” funds to allow those with different views

to take the opposite side of the passive trade.

And if you’re still enamoured of expensive technology firms with potential lottery- ticket style pay offs, David Stevenson thinks you might be interested in the ultimate futuristic bet – investing in space

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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.