A New Climate Report Challenges Exxon and BlackRock

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It’s a coincidence that the International Energy Agency released its net-zero roadmap barely a week before a proxy showdown at Exxon Mobil Corp.’s annual meeting. Nonetheless, the report throws down a gauntlet not just to Exxon but also its largest shareholders, BlackRock Inc. in particular.

The single most important line in the IEA’s 200-plus-page report is this one:

There is no need for investment in new fossil fuel supply in our net zero pathway. 

It’s not important because the IEA has dreamed up a net-zero scenario; many others have done so already. It’s not important because the IEA’s long-term projections are bound to work out; we can’t know that, and long-term projections, especially ones this ambitious, are often wrong.

It’s important because of what the IEA is. Founded in the wake of the 1973 Arab oil embargo, encouraging more energy supply, most of it fossil fuels, is kind of the IEA’s thing.

As recently as 2019, the IEA’s central scenario projected global upstream oil and gas investment to average more than $600 billion a year this decade, rising to more than $700 billion a year in the next. Even its “Sustainable Development Scenario” had annual spending at about $500 billion in the 2020s. The new net-zero figure is $350 billion a year this decade and just half that in the next, with virtually all of it earmarked for existing fields.

The agency that spent much of the past half-century prodding companies and governments to spend money on new oil and gas fields just laid out a thesis for not doing that anymore. What’s more, that wasn’t buried in some appendix to its regular World Energy Outlook but staged as an event in its own right.

The very fact the IEA produced this report reflects increasing pressure on it to incorporate more ambitious decarbonization into its projections. Importantly, that pressure hasn’t come from just scientists and think tanks, but also investment funds. As I wrote here, part of the reason they’ve been on the IEA’s case is that its outlooks are like the Google Maps of energy projection: There are other roads to take, but most folks follow the one that’s highlighted. The IEA’s World Energy Outlook is one of only a handful of such projections that shape views on the future — and investment.

Exxon also produces long-term projections and, like the IEA, has been pushed to decarbonize them somewhat. It has also slashed spending, brought on new directors and established a low-carbon business unit. The big question for next week’s showdown is whether Exxon has done enough to fend off the four directors nominated by activist fund Engine No. 1 LLC.

There is some circularity at play here: Exxon’s shifts, which coincided with a rally in the stock, are partly due to activist pressure — a point acknowledged by advisory firm Individual Shareholder Services Inc. in its recent report recommending three of the four dissident nominees.

For big passive fund managers, who will decide the outcome, the natural tendency is toward inertia, or just backing the incumbent management. Yet Exxon’s shift in outlook is an acknowledgment that its prior worldview is no longer tenable and also recent enough that it is untested. This is where the IEA’s report is relevant: It gives a fund manager extra cover to justify voting against management, cover that isn’t provided by some call to arms from Greenpeace or the Sierra Club.

If that heightens the risk for Exxon next week, then the IEA has also raised the risk for the money managers. BlackRock CEO Larry Fink has been vocal about companies not getting  left behind by capital markets on addressing climate change. In light of that, Engine No. 1’s challenge to Exxon to essentially expand its mind on climate change is also a challenge to Fink: Will BlackRock back up its talk with action in the form of consequential votes?

The IEA’s report happened to drop the same day Brent crude oil nudged above $70 a barrel for the third time this year (it has yet to close there). The energy sector has already almost doubled since the end of October, yet still comprises less than 3% of the S&P 500 midway through a year of recovery in oil demand.

Even transition-minded money managers will weigh the near-term opportunity, especially as lower investment in new oil supply would actually tend to support longer-dated futures and fit with the zeitgeist of prioritizing dividends over capex. That doesn’t necessarily preclude voting at least some fresh blood into Exxon’s boardroom. Rather, it’s a reminder that the energy transition ultimately demands some either/or decisions from money managers more inclined to hedge their bets.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

©2021 Bloomberg L.P.

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