Oil Majors' Big Legal Fear Is Averted—for Now

(Bloomberg) -- Oil companies have for now managed to avoid the legal liability of paying potentially billions of dollars for protection against the impact of climate change. But the fight could only just be beginning.

A judge this week dismissed lawsuits from the cities of San Francisco and Oakland, California, against Exxon Mobil Corp., Royal Dutch Shell Plc, BP Plc and other oil majors, saying it was unfair to lay all the blame for climate change at the feet of companies that helped create “historic progress” in the world.

The victory is significant for Big Oil, but it could need many more as activist groups and investors turn on the pressure. The demand for the companies to play their part in tackling climate change is growing louder. While they argue they care deeply about the environment and are acting to cut emissions and build renewable energy sources, some shareholders, governments and environment groups want more.

“Litigation’s always a risk, but I think when you have a specific ruling that is such a seeming rebuke to the plaintiffs, that certainly makes you feel a little bit better,” said Jason Gammel, an analyst at Jefferies LLC. “But there’s other courts that it could play out in.”

Lawsuits are ongoing in New York City and King County, Washington. Separately, a group of U.K. investors, which together oversee about $10 trillion of funds and include Standard Life Aberdeen Plc and Legal & General Group Plc, last month urged companies to take tougher actions on emissions.

Shareholder Activism

Environmental organizations are also turning the screws. In preparation for the annual general meetings of BP, Shell and others, a group called ShareAction earlier this year trained activists to apply pressure to board members, hoping to extract commitments on climate.

“Shareholder activism in the form of resolutions and AGM interventions, by investors and ordinary citizens, has only just started to show its true potential,” said Jeanne Martin, ShareAction’s senior campaigns officer. “ShareAction will make sure oil executives continue to feel the heat.”

Oil bosses know what they are up against. BP Chief Executive Officer Bob Dudley refused to answer questions from two groups at a shareholder meeting last month, saying he believed they were setting up the company for class-action lawsuits. The British explorer faced a slew of such legal challenges in the wake of the catastrophic 2010 oil spill in the Gulf of Mexico, leaving it with more than $65 billion in legal claims.

The impacts of climate change could cost many times that amount, making it critical for the companies to fight off lawsuits aiming to saddle them with what could even be limitless liabilities.

AGM Focus

BP and Shell’s recent AGMs became a template for what the companies could expect. Climate change and the energy transition quickly became the primary focus as board members were bombarded with questions. In the U.S., shareholders filed 10 resolutions linked to carbon risk at oil companies this year, double the number five years ago, according to a database from sustainability group Ceres.

Oil Majors' Big Legal Fear Is Averted—for Now

Though many of them failed to get the votes of a majority of investors, companies have been driven to act.

“There’s clearly a lot of social awareness around much more extreme weather,” said Jake Leslie-Melville, an industry consultant at Boston Consulting Group in London. “What is important, rather than reacting, is being on the front foot, being able to say: ‘This is what we’re doing about climate change and it’s significant.”’

Breathtaking Scope

Plaintiffs in the California cases argued that the production and sale of fossil fuels were a public nuisance because they cause climate change. Judge William Alsup said the claim was “breathtaking in its scope,” and that it should be up to lawmakers to cope with a problem so vast.

“All of us have benefited” from fossil fuels, he said. “Having reaped the benefit of that historic progress, would it really be fair to now ignore our own responsibility in the use of fossil fuels and place the blame for global warming on those who supplied what we demanded?”

Together Exxon, Shell, Chevron, BP and ConocoPhillips account for about 11 percent of all carbon-dioxide and methane pollution since the Industrial Revolution, according to court documents.

The companies have said repeatedly they can’t solve the problem alone.

In a statement, Chevron said the lawyers who brought the case have filed similar complaints about climate change before, which were dismissed. Shell and Exxon said Wednesday tackling climate change requires government policy and isn’t an issue for the courts. BP welcomed the ruling.

In a response to the ruling, a spokesman for the San Francisco city attorney said he was pleased the science of global warming was no longer in dispute, and that it put publicity and pressure on the companies over their products’ role in climate change.

The debate about oil companies’ role in climate change has gone over a tipping point and executives should expect increasing pressure, said Fiona Reynolds, chief executive officer for the Principles for Responsible Investment Initiative.

“Look at some of the push-back, some of the populist movements,” she said. “People feel left behind and they feel their capital isn’t working, and companies get away with too much.”

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