ExxonMobil sets ‘chilling’ precedent after suing shareholder climate proposal out of existence

Dutch investment activist group Follow This and investment adviser Arjuna Capital have withdrawn a shareholder climate proposal after ExxonMobil filed a lawsuit against them

Experts have warned of the “chilling” precedent set by ExxonMobil after its lawsuit against Dutch investment activist group Follow This and investment adviser Arjuna Capital forced the withdrawal of a shareholder climate proposal against the oil major.

The shareholder resolution called on ExxonMobil to accelerate the pace of its Scope 1, 2 and 3 emissions reductions. The oil major says it is aiming to achieve net zero Scope 1 and 2 greenhouse gas emissions in its operations by 2050. But it does not have Scope 3 targets and its existing 2030 objectives are “significantly below” the Intergovernmental Panel on Climate Change’s recommendation of 50 per cent absolute emissions reductions by 2030, the resolutions read.

In response, ExxonMobil filed a lawsuit against Follow This and Arjuna Capital in a US district court in Texas, in January. The oil giant accused the proposal of seeking “to directly interfere with management’s business judgement and micromanage ExxonMobil’s core business”. 

ExxonMobil pointed to a similar proposal filed by Follow This and Arjuna Capital at its 2023 annual meeting, which was rejected by 89.5 per cent of votes cast and backed by 10.5 per cent of votes.

The legal action prompted Follow This and Arjuna Capital to announce on February 2 that they were pulling their proposal. “Given Exxon’s preference to fight a battle in court rather than allow shareholders the freedom of a vote at its annual meeting, we decided to withdraw the climate proposal,” said Follow This founder Mark van Baal in a statement. 

“Now that we have withdrawn and promised not to refile the proposal with Exxon, the company has no reason to continue the lawsuit,” he continued. 

But the oil major seems set on pursuing its legal action. “Because the proposal was withdrawn, it’s no longer critical to expedite the hearing,” said an ExxonMobil spokesperson in a statement. “However, we believe there are still important issues for the court to resolve. There is no change to our plans, the suit is continuing, and we’re evaluating our options.”

‘A really worrying precedent’

In the US, the Securities and Exchange Commission previously gave companies the ability to exclude shareholder resolutions, including those seen as interfering with a company’s “ordinary business” and “micromanagement” proposals applying to areas where shareholders were deemed incapable of making an informed decision.

But in 2021, the SEC relaxed its policing of shareholder resolutions, leading to a boom in the number of proposals on companies’ proxy statements.  According to a briefing note by law firm Kirkland & Ellis on the SEC’s change of approach, one company was unable to reject a request on ordinary business grounds, having successfully blocked a similar request a year prior, which sought a report on the public health costs of certain products. However, others were still able to make use of the micromanagement exemption and to reject proposals demanding the publication of employee-training manuals. 

Given Exxon’s preference to fight a battle in court rather than allow shareholders the freedom of a vote at its annual meeting, we decided to withdraw the climate proposal

In its lawsuit, ExxonMobil said it was appealing to the courts to “stop this misuse of the current system”.

The proportion of resolutions passing has fallen steadily since 2021 — only 3 per cent of 2023 environmental and social shareholder resolutions assessed by non-profit ShareAction received majority backing, compared with 14 per cent in 2022 and 21 per cent in 2021, respectively. Furthermore, some of the world’s biggest asset managers, including BlackRock and Vanguard, have publicly criticised the quality of some of these proposals.

ExxonMobil’s decision to take Follow This and Arjuna Capital to the courts represents “an attempt to get back to the ante status and push the SEC to actually police much more vigorously again”, says Paul Lee, head of stewardship and sustainable investment strategy at investment consultancy Redington. “It’s a really worrying precedent,” he tells Sustainable Views. 

“To be honest, I don’t understand why companies are so nervous about shareholder resolutions,” he adds, noting that few of these resolutions pass and most that do are not binding on companies. Shareholder resolutions are “more an indication of mood and where the investor base is on a particular issue”, he says. “That seems to me to be useful insight for a board.”

Antoine Argouges, founder of impact investor Tulipshare, warns that ExxonMobil’s actions represent a growing trend in behaviour by companies towards shareholder proposals.

“They are using the legal system as a scare tactic to break down shareholder advocacy and silence investors like us,” he tells Sustainable Views. “This is a very chilling effect. What you’re seeing is shareholders refrain from engaging with companies, because they are scared of receiving a backlash [via] the legal system.”

A case for divestment?

ExxonMobil’s peers face similar resolutions from Follow This, with Shell facing an equivalent shareholder proposal having received the backing of 27 investors, which own around 5 per cent of the oil major’s shares. The threat of legal action could also undermine the case for holding stocks such as ExxonMobil, one expert argues.

“What happens now, if people say that they’re trying to engage Exxon?” Georgia Stewart, chief executive of voting platform Tumelo, tells Sustainable Views. “Can you hold Exxon in your portfolio and say you’re trying to engage with them when they’re obviously taking their other shareholders to court for doing something that last year was a normal course of action?”