Over the past month, campaigners have been celebrating moves to get the world’s biggest oil companies to address climate change. In the U.S., shareholders of Exxon Mobil Corp. overruled top management to appoint new board members dedicated to accelerating the firm’s transition away from fossil fuels.
At the same time, in Europe, a court in The Hague ruled that Royal Dutch Shell Plc was about to breach its human rights obligation to reduce carbon emissions, and ordered the company to adopt a much more demanding target for abatement. Last week, Shell said it expected to appeal the judgment, but nonetheless would take further “bold but measured steps” to cut its emissions faster.
Given the gravity of the challenge posed by global warming, this mounting pressure from investors and the courts is indeed to be welcomed. It pushes in the right direction. And in the Exxon case, at least, it suggests that shareholders can help guide management not just on the need to address climate change but also in judging where the company’s own financial interests lie.
Yet, something else should be noticed as well. The need for this kind of pressure attests to a failure of government policy.
The proxy fight over the composition of Exxon’s board was remarkable in several ways, but it shouldn’t be seen as a victory for climate activists over owners of one of America’s biggest and most iconic companies. The hedge fund Engine No. 1 that led the campaign against management owns just 0.02% of Exxon stock — but it won the support of major shareholders, including BlackRock Inc., one of Exxon’s biggest investors.
Its pitch was not about the need to cripple the company for the sake of the planet. It was about the company’s vital interest in seeing that investors’ capital is shifting toward support of renewable resources, which calls Exxon’s existing strategy into question. As Engine No. 1 pointed out, oil and gas producers that embraced the transition from carbon early have been doing better.
That’s entirely as it should be. When a majority of shareholders disagree with managers about what’s good for the owners, it’s right that they can impose themselves. Yet, there’s a problem for companies if managers and investors remain irreconcilably at odds and pulling in different directions — especially if that difference arises thanks to deficient government policy.
A sufficiently forceful approach to taxing and regulating carbon would put investors, managers and customers on the same page, allowing companies to be run cost-effectively and in the public interest without this kind of drama and uncertainty.
Much the same goes for the message from The Hague. The litigation route to faster carbon abatement certainly has the right goal, but it’s a needlessly expensive way to get there. Shell’s appeal could take years. Meanwhile, other legal challenges are likely to proliferate, adding to lawyers’ fees and companies’ costs while clouding the outlook for investors and customers alike.
Putting economies on the right path of carbon reduction can best be done through government policy. Set the rules, stabilize expectations about future energy demands, and then let companies of all kinds — including producers of fossil fuels — organize themselves accordingly. In this way, shareholder value and the public interest come more closely into alignment.
If governments are timid or indecisive, and leave it to companies and activists to duke it out over environmental objectives, they run the risk of needlessly harming businesses while failing to achieve rational policy goals.
As things stand, economies are not yet on a path that adequately reduces climate risks. Policy has fallen short for years, despite some progress of late.
Until governments do what they should, climate activists, investors aligned with the shifting preferences of global capital, and courts attuned to the harms that climate change will inflict are forces for good. But it’s worth remembering that faster progress at lower cost would be possible if policy makers would only do their part.