IEEFA Update: Shareholder Vote on Exxon Mobil’s Climate-Risk Transparency Suggests a Larger Opening

Fiduciaries Who Embrace Their Responsibilities Will Look Beyond Fossil Fuels

A shareholder vote today on a proposal that would require Exxon Mobil to be more open about the climate risks facing the company is an exciting moment in activist-investor history.

Mainstream institutional investors are joining with climate activists in a call for more truth in how Exxon Mobil manages—or mismanages—climate risk.

Shareholders are asking specifically for a stress test to serve as a barometer of where the company stands in managing evolving energy markets and the rising risks associated with climate change. Exxon management is plainly under siege on this point; whether executives will be responsive or continue to brush aside concerns remains to be seen.

Investors are free to do as they please too.

One front on which Exxon Mobil shareholders can move now is to consider bucking the tradition of relying on hidebound stock analysts and investment managers for guidance and decision-making. Investment-management firms and analysts tend to come cloaked in self-reinforcing and often self-serving cocoons of data—“quantitative analysis”—that serves mostly to sustain the status quo. Advice is given, advice is taken, the zombie ritual is repeated.

What’s often forgotten is that the real decision makers for institutional investors are supposed to be the boards of trustees whose duties include engaging wisely and sensibly on what’s going on.

Such engagement requires an open recognition of the peril in fossil-fuel investments. The coal industry is in structural decline, after all. Oil-and-gas industry returns are persistently low, the industry itself is mature and its outlook is negative. Fossil-fuels holdings, frankly, contribute far less to the financial well-being of pensioners and other traditional fund beneficiaries then they used to—and they are much riskier than they were.

The real opportunities are elsewhere, and fiduciaries should be pushing for creation of portfolios that are fossil-free. The first step on that journey is to instruct investment managers in no uncertain terms to draw up blueprints on how such a portfolio would be constructed.

The debate today is over how to divest, not whether to divest.

A fossil-free portfolio indeed can be built on existing asset-allocation strategies, and it can serve as the basis for divestment-reinvestment decision-making going forward.

Boards of trustees, working in concert with senior management, are perfectly capable of plotting a wise course so long as they are given informed advice on how to break the old, increasingly irresponsible portfolio molds and make new forward-looking ones.

Prudent reinvestment strategies will embrace investment in energy-sector innovation and diversification of capital into renewables and new forms of transportation. They will take seriously the task of reorganizing asset-allocation strategies in a time of significant market change.

Stock analysts and money managers who go against this grain will be misusing their expert-advice responsibilities. Activist investors and companies who acknowledge it will be rising to the occasion.

Tom Sanzillo is IEEFA’s director of finance.

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