What does a Paris-compliant climate change strategy look like?
Shareholders are asking oil majors to implement climate change risk management strategies that align with the Paris Agreement. What could that entail? Read More

As the 2019 proxy-voting season begins, shareholders have proposed climate change resolutions at seven oil majors — BP, Exxon Mobil, Chevron, Anadarko Petroleum, Hess, Equinor and Shell — asking them to set long-term targets for their operations and products that align with the Paris Agreement. After significant growth in the last two years of shareholder support for climate change resolutions, companies seem to be taking these matters more seriously. But how would a Paris-compliant corporate strategy look? We consider some possibilities here.
But first, a little background. Shareholders in publicly traded companies have the right to vote on certain corporate matters. As most people cannot attend companies’ annual meetings, corporations offer shareholders the option to cast a proxy vote by mail. While most proposals up for a vote originate with company management, a growing movement uses shareholder proposals or resolutions to promote more sustainable business practices, and is becoming increasingly difficult for corporate boards to ignore.
According to the Sustainable Investments Institute (PDF), 2017 was a bellwether year for shareholder activism on climate change. A record number of companies received high votes on climate change proposals, and for the first time, three resolutions received a majority of votes in favor. This unprecedented development came about in no small part because major institutional investors, including BlackRock, Vanguard and Fidelity, threw their support and weight behind the proposals. 2018’s vote results continued in a similar vein, with five climate change resolutions garnering majority votes.
By far the most significant vote on shareholder resolutions in 2017 was the 62 percent result for a climate risk proposal at Exxon Mobil. The company has been a high-profile focus for activists for many years, but the highest vote until 2017 had been 38 percent for a climate strategy resolution in 2016. In recent years, Exxon Mobil has announced agreements to publish reports in keeping with shareholders’ requests, only to fall short of shareholders’ expectations and see the cycle of resolutions resume.
This year, investors are focusing their efforts on key carbon emitters that account for two-thirds of global industrial emissions, through the new Climate Action 100+ (CA100+) initiative with backing from 310 institutions that have $32 trillion in assets under management. They join other investors’ efforts to push for meaningful corporate climate change strategies.
At Chevron, Exxon Mobil and Hess, one proposal seeks a report “on how the company can reduce its carbon footprint in alignment with greenhouse gas reductions necessary to achieve the Paris Agreement’s goal of maintaining global warming well below 2 degrees Celsius.” An additional proposal at Chevron and Exxon Mobil (PDF) asks that the companies disclose “short-, medium- and long-term greenhouse gas targets” aligned with the goals laid out in the Paris Agreement, specifying that these should cover both operations and products. At BP, Royal Dutch Shell and Equinor, shareholders are similarly asking the companies to set Paris-aligned targets, both immediate and long-term, that cover their Scope 1, 2 and 3 emissions from fuels sold to customers around the world. At Anadarko Petroleum, the proposal suggests the requested report should explain the pros and cons of low-carbon energy investments, reduced investment in high-carbon resource development and operational diversification to cut carbon emissions.
Current progress
Chevron published a report (PDF) in March 2017 on its climate change risk management, with the primary conclusion that its risk exposure in a greenhouse gas-restricted scenario is “minimal.” In March 2018, Chevron published a follow-on Climate Change Resilience (PDF) report, updated (PDF) in February. These offer greater insight into the company’s thinking and scenario analysis approach, and were the first in the industry to reach down to the asset level, although they still lack many details the proponents seek. Notably, Chevron rejects setting targets associated with the use of its products.
In December, Royal Dutch Shell became the first energy company to link executive pay and carbon emissions. The company said it would set carbon reduction goals that cover periods of three to five years out to 2050. The CA100+ said in a joint statement with Shell that it strongly supported the company in taking “these important steps.” While Shell’s move includes an industry-leading commitment to reduce its Scope 3 emissions relative to output, it has not committed to absolute reduction targets.
Chevron’s latest climate change report announced for the first time that the company would include methane and flaring reduction targets in its workforce bonus calculations. Similarly, BP announced in February that it would link the bonuses of 36,000 employees to greenhouse gas reduction targets, and BP’s board of directors said it supports a more general shareholder resolution asking it to delineate how its strategy is consistent with the Paris Agreement. However, BP opposes the resolution asking it to set targets for Scope 3 emissions. Last year, Exxon Mobil announced its first greenhouse gas emissions target to reduce methane leaks by 15 percent, but has not indicated any plans for more comprehensive targets going forward.
What’s missing?
Danielle Fugere, president of As You Sow, one of the shareholder proponents, explained:
To be aligned with Paris goals means adopting fundamental changes in the way business is done across the full scope of a company’s activities — including reducing operational emissions, invested emissions and product emissions. To align with Paris, oil companies would have to diversify into clean energy production, shrink current investments in oil and gas development, or otherwise reduce their full range greenhouse gas emissions.
A critical element the proponents seek and the companies reject is a corporate strategy to reduce greenhouse gas emissions from the end use of oil and gas products. It is the burning of fossil fuels that accounts for most of their lifecycle emissions — 85 percent for a barrel of oil. As Carbon Tracker notes, efforts to reduce scope 1 and 2 emissions “cannot be considered the whole answer in themselves when they ignore so much of the problem.”
Additionally, a Paris-compliant strategy necessarily must be based on the global carbon budget, or the total amount of carbon dioxide that can be emitted into the atmosphere while keeping average global warming well below 2 degrees Celsius, and preferably below 1.5 degrees Celsius. Carbon Tracker suggests this can be achieved in one of two ways. The first is to compare the global carbon budget to the total emissions of a company’s projects. Alternatively, the company can “compare its potential production volumes to the demand/supply pathways implied by models based on particular climate outcomes to assess which of those potential projects would be the most economic options in that demand pathway.”
To that end, the Task Force on Climate-Related Financial Disclosures (TCFD) recommends that all companies “describe the potential impact of different scenarios, including a 2 degrees C scenario, on the organization’s businesses, strategy, and financial planning,” and provides more specific guidance for companies in the oil and gas, coal and electric utilities sectors due to the unique vulnerabilities of these industries.
Implications for other companies
As the current shareholder resolutions and the TCFD gain traction, they are likely to put pressure on other companies to expand their climate risk analysis and reporting. An issue to watch in 2019 and beyond is what progress companies make toward implementing the TCFD recommendations, and whether policymakers decide they have to force the pace. While that seems unlikely in the current U.S. regulatory climate, the European Union’s High-Level Expert Group on Sustainable Finance has suggested that the TCFD recommendations be implemented by revising legislation on non-financial reporting.
In September, the TCFD published a status report showing that companies often fail to disclose the financial implications of climate change risk. In the first comprehensive analysis of climate risk reporting across multiple industries and sectors of the global economy, a December study in Nature Climate Change found companies’ climate change plans to be largely inadequate to the scale of the challenge.
According to the study, companies tend to underestimate the magnitude and potential cost of climate risks and generally fail to consider broader risks, such as projections that climate change will reduce people’s income and thus drive down global demand for goods and services. Few companies calculate the return on investment of climate change adaptation measures, the relative cost effectiveness of different strategies, or the cost of doing nothing. Most companies also make the mistaken assumption that climate change risk is linear, neglecting growing scientific support for tipping points.
“Companies’ disclosures on climate risk reveal a preference for incremental or reactive adaptation strategies,” the researchers wrote. Companies cling to the language of risk management and “too often translate the complex challenge of climate change into solutions that align with business-as-usual practices.” Investors are increasingly unwilling to ignore the shortfall.
