Exxon proxy suit highlights divide between ESG investing and activism

Amy D. Roy and Robert A. Skinner are Partners at the Ropes & Gray securities litigation group in Boston. This post is based on their Ropes & Gray memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli‐Katz; Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver Hart and Luigi Zingales.

On January 21, Exxon Mobil Corporation initiated litigation against two activist investors, asking a Texas federal court to declare that Exxon may properly exclude the activists’ climate-related shareholder proposal from the company’s 2024 proxy statement.

The challenged proposal is co-sponsored by Arjuna Capital, a sustainability-focused U.S. wealth management firm, and Follow This, an Amsterdam-based non-profit organized to force oil company shareholder votes on climate issues.  The proposal calls for Exxon to “go beyond current plans, further accelerating the pace of emission reductions in the medium-term for its greenhouse gas (GHG) emissions across Scope 1, 2, and 3, and to summarize new plans, targets, and timetables.”

Exxon’s pitch

Exxon argues that the relevant SEC proxy rule authorizes the exclusion of this proposal for at least two reasons.  First, the substance of the proposal “deals with a matter relating to the company’s ordinary business operations” (an excludable category under the rule) because the activists seek to have Exxon “change its day-to-day business by altering the mix of – or even eliminating – certain of the products that it sells.”  According to Exxon, the “overarching objective is to force [Exxon] to change the nature of its ordinary business or go out of business entirely.”

Second, the 2024 proposal is effectively a do-over of proposals submitted in 2022 and 2023, which Exxon’s shareholders overwhelmingly rejected – and the proxy rule only authorizes resubmission of previously-defeated proposals under certain conditions, which Exxon insists have not been met here.

But why has Exxon taken this to court, rather than following the typical path of requesting SEC staff guidance on excludability?  In a not-so-subtle criticism of how the current SEC staff has been responding to such requests on climate-related proposals in recent years, Exxon asserts that the “plain language” of the proxy rule supports excluding the 2024 proposal, “but current guidance by the SEC staff about how to apply the rule can be at odds with the rule itself.”

It has been widely reported that the staff in the current administration has shifted its approach away from granting companies requested “no action” relief authorizing exclusion of such proposals.  Not surprisingly, Exxon’s court allegations underscore that the SEC staff guidance about its own rules is not legally binding and thus should not drive the court’s interpretation.

ESG investing vs. activism

What are the broader implications of this action?  ESG critics will no doubt applaud Exxon for standing up to so-called “woke” activist investors like Arjuna and Follow This, who in fact concede that they are pursuing a climate-focused agenda when investing in oil company shares.  But those critics can also be expected to go a step further, and tout the action as being a wholesale attack on ESG investing practices generally.  This characterization goes too far, however, as the complaint does not make such a broad attack or provide a basis to do so.

Exxon’s complaint takes pains to clarify that “Arjuna and Follow This are not like most shareholders.” This is because they “become shareholders solely to campaign for change through shareholder proposals that are calculated to diminish the company’s existing business.”  As activist investors, they do not purchase oil company shares to achieve returns on behalf of clients, but only to hold enough shares to be allowed to submit shareholder proposals.

By contrast, Exxon explains that “[m]ost shareholders invest in companies to help the companies grow and see a return on their investment.”  And this aptly describes the vast majority of asset managers that integrate environmental, social and governance (ESG) considerations into their investment processes.  As made clear in disclosures across the industry, the incorporation of ESG factors to assess companies’ investment risks and opportunities is done in pursuit of maximizing financial returns – not to further climate or other social agendas.

ESG-integrated asset managers frequently hold substantial investments in fossil fuel companies, rather than the nominal amounts held by activists like Arjuna and Follow This.  These traditional managers have every incentive – consistent with their fiduciary duties – to exercise their proxy voting rights in support of the companies’ long-term financial performance, in order to maximize the investment returns of the portfolios they manage for their clients.

Critics of ESG investing rely upon a fundamentally false premise to the contrary:  that ESG-integrated investment and proxy voting practices are necessarily in pursuit of social agendas rather than investment returns.  This false premise has been consistently rebutted in other recent litigation, and it likewise finds no support in Exxon’s complaint.

Indeed, nowhere does Exxon allege or even suggest that the many traditional asset managers who hold Exxon stock and engage with Exxon’s management on ESG-related topics are pursuing any goal other than investment returns.

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