Now that the COVID-19 pandemic has provided proof that air and water quality can be substantially improved by significantly cut back fossil fuel consumption, expect increased shareholder actions on environmental, social and governance matters. Activists will likely use improved air quality in cities like Los Angeles, Paris and Mumbai as well as reports of clear water in the Venice canals to push for adding “climate-friendly” directors to the board, new proposals calling for environmental sustainability efforts and annual climate impact reports among other things.
Companies in and connected to the fossil fuel industry have already been targeted, but the list of companies approached in some way by activists is likely to grow. ExxonMobil is bracing for actions by The Church Commissioners for England and the New York State Common Retirement Fund that include voting against the re-election of the entire ExxonMobil board and calls for regular reports on industry lobbying efforts at the upcoming annual shareholder meeting on May 27. Chevron, which also holds its annual meeting on May 27, may have to face a shareholder proposal asking the oil giant to produce a report analyzing the effects its chemical division has on climate change that was submitted by social responsibility activist group As You Sow. And on April 24, New York City Comptroller Scott Stringer sent Berkshire Hathaway, American International Group, and Liberty Mutual letters on behalf of three pension funds asking the companies to divest from the coal industry.
While some corporate boards will have a more urgent need to address shareholder concerns about climate change, all boards will have to consider how climate change affects their stakeholders. Now that stakeholders may have more negative opinions about fossil fuels because of what has happened during the pandemic, boards may consider developing strategies for:
• Shareholders launching proposals to oust board members or force governance changes. While it is unlikely many directors will lose board seats over climate-related shareholder proposals, boards should prepare detailed responses to such issues before their annual meeting. Boards that have defeated climate change related proposals in the past will need to present arguments to contend with new evidence that suggests limiting fossil fuel consumption can have meaningful impacts on the environment. Additionally, shareholders will want to know how the company will be affected if stricter environmental laws are passed, if the company has plans to increase its use of green energy, and whether the company can reduce its carbon footprint while maintaining profitability. If the board does not have individuals with respected experience dealing with climate related matters, recruiting at least one director with that skillset might help in building environmental strategies going forward.
• The impact of the price of oil on profitability. As the pandemic caused the world to shelter in place, oil consumption plummeted and the price of oil dropped into negative territory. Calls to limit oil consumption from shareholders and environmental activists are likely to continue. Companies that rely on using or producing mass quantities of oil should proactively reach out to shareholders. Oil and energy exploration companies will need to disclose their strategies for dealing with oil prices remaining low and potentially going negative and what that will mean for business operations and profitability. Since many companies in the airline, trucking, chemical and transportation industries that rely on oil are taking massive losses during the pandemic, their boards will need to explain to shareholders how they intend to operate effectively if oil prices roar back toward $100 a barrel when the pandemic subsides.
• Stakeholder climate change related protests. Whether it’s shareholders asking companies to divest from the coal industry or communities lobbying companies to meet carbon emissions standards, boards should consider strategies to deal with potential protests over climate related demands. While protests with picket signs and large crowds of people are not an option during the pandemic, protest votes during annual meetings are still an option for shareholders. The Church Commissioners for England’s move to oust the ExxonMobil board is in large part a protest vote. Its letter to investors stated, “It is crystal clear to us that ExxonMobil’s inadequate response to climate change constitutes a broad failure of corporate governance and a specific failure of independent directors to oversee management.” Boards should want to avoid dealing with shareholder campaigns like that.