Investors get Tougher on Big Corporate Emitters.

Investors get Tougher on Big Corporate Emitters.

June 15 2020

Douglas McKeige
Summer 2020


In January 2020, Larry Fink, the Chief Executive Officer of the largest asset manager in the world, Blackrock, flipped his firm to the climate change agenda. In his highly influential annual letter he told the Chief Executives of the all the publicly traded companies that Blackrock invests in, that they must now go way beyond mandated disclosures under the United States securities laws. They must publicly disclose what their current carbon footprint is and how they will operate their businesses in line with greenhouse gas emission cuts to the Paris accord of a less than 2 degree Celsius rise in global temperature. Inasmuch as Blackrock is at least a top five holder of common equity shares of the largest emitters in the United States, this message should have a profound impact. Blackrock is the second largest holder of Exxon, the fourth largest holder of General Motors, and the second largest holder of the two largest U.S. electric utilities (Duke Energy and Southern Energy). Until now, Blackrock has taken what has been described as a behind the scene approach where it has been privately urging the companies it owns to do more. Moreover, beyond publicly jawboning for “climate” disclosure, the Fink letter goes further. He states at the end of his letter: “[W]e will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” Though not described as such, the “vote against” threat may some day morph into “regime change” at companies that do not get onboard to net zero emissions within a 20 to 30 year time frame.

Blackrock has joined a consortium of investors and institutions that have congregated over the past 10-20 years to assert their role as the ultimate owners of the corporations that dominate the world’s greenhouse gas emissions — and their responsibility for how these businesses operate. While significant progress has been made, the main producers of fossil fuels and the businesses that heavily rely on fossil fuels for their products (auto companies, utilities, airlines), have resisted change. This paper will explore the current state of public disclosure under U.S. securities laws by companies in the oil and gas arena (Exxon in particular), how more progressive oil companies make disclosures and expect to operate their businesses, what more transparent standards look like, and how large investors can force the largest emitters in the world to sharply reduce their emissions.


Action to slow down and mitigate climate change is, unfortunately, uneven and not nearly aggressive enough on a global basis. In particular, the current United States government has frustrated progress toward a less than two degree Celsius rise in global temperature. Indeed, it has reversed important policies of the previous Administration that were designed to help do that. Without any significant legislative or regulatory actions over the past few years in the U.S., efforts are increasingly being made by individuals, municipalities, U.S. states, and the world’s largest investors and owners of public companies. While Blackrock may be the most powerful investor to take up the cause, it is far and away from being the first. Around the time of the publication of the Fink letter in January 2020, Blackrock also announced that it is joining the Climate Action 100+, the premier worldwide coalition of over 400 significant investors managing over $40 Trillion of assets (of which Blackrock is $6 Trillion) who have targeted the companies that account for up to 80% of global industrial emissions. Climate Action 100+, 2019 Progress Report, dated September 2019. To put that in perspective, the total value of the 500 largest companies in the United States, comprised within the S&P 500 index, is $23 Trillion.

Climate Action 100+ identifies climate change as:

one of the most significant risks facing investors today. Climate related risks are systemic and will impact all economies, asset classes and industries… As such, [it] threatens the ability of long-term investors to sustain value and meet their investment objectives over time. We believe investors have a vital role to play in driving the low-carbon transition across the global economy. Investors can use collaborative engagement as a means of influencing positive change and protecting the long-term value of the assets they invest in on behalf of their beneficiaries.

Fink’s letter echoes these goals and the foundation for them:

Each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders… [A] company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders…. [U]ltimately, purpose is the engine of profitability.

These statements address the question what role do investors have, charged with maximizing risk adjusted returns for their beneficiaries, to pursue climate policy goals. The need for investor climate activism would be lessened with a more concerted U.S. federal government effort. However, the independent work of investment managers to pursue climate policies at the companies they own could be transformational.

Investment managers, who manage investments for other people, are either subject to statutory fiduciary duties under the U.S. Employee Retirement Income Security Act or to common law fiduciary duties under Trust law. These duties were generally interpreted to require fiduciaries to solely take financial metrics into account in making investment decisions and frowned on efforts by investment managers to divest from companies, for example, that continued to do business with the apartheid regime of South Africa or that wished to divest from tobacco companies. See generally, Fiduciary Duties in an Age of Impact Investing, Bloomberg

Law, September 13, 2017, authored by Jo-el Meyer, Bloomberg Law Deputy News Director and Suzanne McDowell of the law firm of Steptoe and Johnson. The investment managers of the world have to come to the view that they are fully justified in taking into account social, environmental and governance issues in making investments. As the January 2020 Fink letter states, “as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value.”

This is a significant change. If they want the companies they own to perform over the long term, then it pays to understand how a company like Exxon is preparing for a world in which we consume sharply lower amounts of crude oil and natural gas. One reason in favor of the long term value approach is that, historically, most investment managers “actively” managed their portfolios. If a company was in a business that did not have strong fundamental drivers of value or where management was not adapting to new market conditions, then the manager would simply sell the stock and purchase a different stock with better prospects for price appreciation. Indeed, to date, many investment firms and other investors, who are concerned about the impact of climate change on their portfolios, have chosen to divest from the common stocks of the companies responsible for the largest greenhouse gas emissions. See, for example, the website of, a non profit promoting divestment. On the other hand, Bill Gates, the billionaire Microsoft co-founder says that “climate activists are wasting their time lobbying investors to ditch fossil fuel stocks….Divestment, to date, probably has reduced about zero tonnes of emissions.” Financial Times, “Fossil fuel divestment has ‘zero’climate impact, says Bill Gates”,

September 17, 2019.

While active managers, like Warren Buffett of Berkshire Hathaway, have a choice to divest or not, the calculus has changed for the world’s largest investment managers. Investors have dramatically shifted away from actively managed funds to passively managed fund investing where an index or electronically traded fund (ETF) of securities is created and the securities in the fund are formulaically constructed. There is no human stock picking once the index or ETF is created. A common index is the S&P 500 index, which consists of the 500 largest publicly traded companies in the United States, though there are many different indexes and ETF products. In the Fall of 2019, for the first time passive funds under management exceeded active funds under management held by active managers. See Investopedia, Epic Shift

Sees Passive Funds Pass Active as Stock Pickers Retreat, Matthew Johnson, September 12, 2019. Blackrock, State Street and Vanguard (the two other top holders of fossil energy companies) are the three largest passive management firms in the world, with 82% market share. Id. Over many decades, these companies have been building up massive assets in passive index funds where they are in essence forced holders of the securities in these indexes indefinitely into the future. While Blackrock is aggressively building and promoting new investment products that do not contain fossil fuel companies, it will continue to be a large owner of big oil companies, exploration and production companies, pipelines, refiners, airlines, auto companies, railroads, etc. It therefore has a long term vested interest in the financial performance of these companies in a carbon constrained world.


What are United States publicly traded companies required to tell their shareholders about the impacts of climate change on their financial results and future prospects? Public companies are required under the Securities Exchange Act of 1934 to publicly report their financial results — their balance sheet and income statement and all material information — on a quarterly basis. See Section 13(a) of the Securities Exchange Act of 1934 (companies with registered publicly held securities must file annual and quarterly reports to help investors decide whether a company’s security is a good investment). In addition, Section 14(a) requires disclosure so that investors may make an informed decision whether to and how to vote their proxies in connection with the election of Directors of the corporation. See TSC Industries. v. Northway, Inc. 426 U.S. 438, 450 (1976)(“an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”). See also Basic v. Levinson 485 U.S. 224, 232 (1988) (applying the same standard in connection with an investment decision). Indeed, the bedrock principle of the U.S. securities laws is transparency into all material aspects of a company’s business so that investors can knowingly invest in our capital markets and companies will be able to raise capital, build their businesses to cause the economy to grow and for the country and its inhabitants to thrive. “The mission of the U.S. Securities and Exchange is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” SEC website under the “About” tab, “What we do”, “Introduction.”

The SEC confronted the topic of public company climate disclosure required in 2010 and that guidance remains in effect. As we shall see, the SEC gave companies such broad discretion of what to disclose that they could choose to say almost anything or almost nothing. The SEC first reviewed the state of affairs at the time noting that state and local governments were starting to regulate greenhouse gas emissions, that Congress was considering cap and trade legislation, that the EPA was requiring large emitters to report greenhouse gas emissions, and that these developments “could have a significant effect on operating and financial decisions.” SEC Release Nos. 33-9106; 34-61469; FR-82, “Commission Guidance Regarding Disclosure Related to Climate Change,” dated February 8, 2010. The SEC examined whether an international treaty could lead to emission reductions and increased costs for different companies, that climate change could impact a company’s physical assets through storm intensity, sea level rise, the availability of water, the value of real estate, and the cost of insurance. Id. 1-8. It acknowledged that large institutional investors were requesting more information from the major oil companies.

It noted that “The Climate Registry”, “The Carbon Disclosure Project” and “The Global Reporting Initiative” were different organizations collecting and publicizing greenhouse gas emissions from many hundreds of companies. Id. At 8-9.

Turning to existing guidance, the release referred to the disclosure requirements of Regulation S-K and Regulation S-X, which provide for specific information disclosure and “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.” Id. At 12. The SEC noted that Item 101(c)(1)(xii) of Regulation S-K states:

Appropriate disclosure also shall be made as to the material effects that compliance with Federal, State and local provisions …regulating the discharge of materials into the environment…may have upon the capital expenditures, earnings and competitive position of the registrant…[and] disclose any material estimated capital expenditures for environmental control facilities…”

Item 105 requires disclosure around administrative or judicial proceedings regarding discharges into the environment. Item 503 requires disclosure of risk factors and Item 303 requires disclosure of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, also known as MD&A. This latter disclosure requires information “about the quality of, and potential variability of, a registrant’s earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance.” Id. At 15. MD&A disclosure has been described as “flexible” and “principles” based so that registrants must “identify and disclose known trends, events, demands that are reasonably likely to have a material effect on financial condition or operating performance.” Id. 1t 17. The SEC noted that it has not quantified a “specific future time period” that must be considered but left it to the same standard for climate change as “any other judgment” of the registrant required by Item 303. The broad discretion accorded to companies pursuant to the release allowed companies across the spectrum of types of businesses to pretty much say whatever they chose to say. In 2010, while climate science was even then an acknowledged fact, the SEC gave companies the ability to question its validity, question its timing and question the consequences on a particular business. While no company denies climate science, the guidance has given a company such as Exxon, the largest multi faceted oil and gas company in the United States, the freedom to limit it specific disclosures as to Climate change to the following:

Due to concern over the risks of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These include the adoption of cap and trade regimes, carbon taxes, minimum renewable usage requirements, restrictive permitting, increased efficiency standards, and incentives or mandates for renewable energy. Such policies could make our products more expensive, less competitive, lengthen project implementation times, and reduce demand for hydrocarbons, as well as shift hydrocarbon demand toward relatively lower carbon sources such as natural gas. Current and pending greenhouse gas regulations or policies may also increase our compliance costs, such as for monitoring or sequestering emissions.

The Annual Report then goes on to say that various governments are supporting renewable energy projects but that Exxon is focusing its research on “developing energy-savings materials, and other technologies … [such as] carbonate fuel cells to … capture CO2 emissions from gasfired power plants.” Carbon capture is the only way to allow fossil fuels to be used in a zero/low carbon economy.

The annual report is devoid of any concern much less a plan to reorient Exxon away from the exploration/production of fossil fuels in order to meet the Paris accords of a global cut of fossil fuel production by by 2040. Rather, in what the science indicates is a path to global suicide, Exxon states in the Report under the MD&A section that its own projections are that “[b]y 2040, global demand for liquid fuels is projected to grow to approximately 118 Million barrels of oil equivalent per day, an increase of about 20% from 2016.” As to natural gas, Exxon states that: “Global natural gas demand is expected to rise 40% from 2016 to 2040.” 2018 Annual Report p. 42. Calculations suggest that oil production and consumption needs to decline by 35% to come close to meeting the Paris target. See Oil Companies Must Cut Production by 35% to Meet Paris Climate Accord Numbers by 2040, Common Dreams, November 1, 2019.

See also Oil Majors Must Cut Output by average of 35% to 2040 to hit Paris Targets,

ConocoPhillips and Exxon must cut most, Shell least,, November 1, 2019. Exxon has been pressed hard by its largest investors for years to acknowledge climate change, the impact on its core businesses and the need to adapt. In 2017, Exxon, in response to shareholder resolutions filed in 2016 and 2017, agreed to publish a climate risk report. The shareholder resolution requested that Exxon publish an assessment of the long term portfolio impacts “consistent with the globally agreed upon 2-degree target.” After Exxon ultimately issued a report in 2018, the Institute for Energy Economics and Financial Analysis described the report as “vague and general” and “fundamentally unresponsive to the resolution.”

ExxonMobil’s Climate Risk Report: Defective and Unresponsive,, authored by Kathy Hipple and Tom Sanzillo, March 2018. The report did not address a 2-degree scenario and did not provide an analysis of financial risk to Exxon. Id. Instead the company assumes current levels of production and the need to continue its policy of 100% replacement of its fossil fuel reserves — i.e., to to develop each year sufficient reserves to replace its production that year. Id. Exxon’s effective denial of potential impact is consistent with most other U.S. oil and gas companies. Haliburton, the largest oil and gas exploration and oil services company, similarly states that climate change presents various significant risks that could effect its financial results — without much more. Connoco and Chevron’s disclosures in their 2018 Annual Reports are more fulsome and responsive. Both discuss the Paris agreement, the need to reduce production/ consumption/emissions. Both discuss the need to reduce flaring and venting of natural gas in their production fields and to aggressively limit leaks. In discussing goals to reduce emissions, however, there is a difference between emissions associated with their own operations and emissions associated with the consumption/burning of oil and gas by end users. Connoco announced in November 2017 its intention of a 5 to 15% reduction in its GHG mission intensity by 2030. Chevron’s 2018 Annual Report says that GHG issues, through international agreements and new laws and regulations, are “integrated into the company’s strategy and planning.”

These varying disclosures are representative of companies across the board using the discretion provided by 2010 SEC guidance to make limited, different and non-comparable disclosures. The 2010 climate guidance has never been updated despite continuing criticism. Allison Herren Lee, currently one of three current Commissioners of the U.S. Securities and Exchange Commission, has just come out to publicly describe the current state of climate change disclosure under the U.S. securities laws to “Ignoring the Elephant in the Room.” January 30,

2020, The SEC undertook in 2019 to “modernize” disclosure and make changes to key items but, according to Commissioner Lee, did not “make any attempt to address investors’ need for standardized disclosure on climate change risk.” She points out that the science is “largely undisputed,” the economic threat is “more apparent,” investors are demanding “consistent, reliable, and comparable disclosure,” many companies have already “responded,” voluntary standards have “proliferated, legislation has been “introduced,” and regulators are “taking action.” She also points out that the “principles based ‘materiality’ standard has not produced sufficient disclosure to ensure that investors are getting the information they need.” Id. Commissioner Lee does not propose any particular standard to utilize — instead, she states “we have not engaged in that discussion at all as we update the very provisions that we’ve said may implicate climate change disclosure.” Moreover, “[we] purport to modernize without mentioning what may be the single most momentous risk to face markets since the financial crisis.” Id.


While the SEC has been sleeping, much of the rest of the investment world has been hard at work developing the very standards that Commissioner Lee expresses the need for, along with building industry organizations to support investors working on climate change such as:

Technical Advisory Group of the Climate Action 100+, the Task Force on Climate-related

Financial Disclosures (operating under the auspices of the G20 Finance Ministers and Central

Bank Governors), the Carbon Tracker Initiative, the Climate Disclosure Project, the Transition

Pathway Initiative, the 2 degree Investing Initiative, the Sustainability Accounting Standards Board, Science Based Targets. All of these organizations are collaborating to break the status quo of the fossil fuel industrial complex seeking to protect their business models designed around the production and consumption of fossil fuels.

The focus here is on the oil and gas companies and what they should be reporting. The Fink letter states that while progress has been made and many “companies already do an exemplary job,” that “we need to achieve more widespread and standardized adoption.” The “Sustainability Accounting Standards Board” or SASB, he states, “provides a clear set of standards” and that the Task Force on Climate-related Financial Disclosures “provides a valuable framework,” for evaluating climate-related risks and governance issues. For the oil and gas industry SASB requires companies to disclose:

Gross global Scope 1 emissions, percentage methane, percentage covered under emissions limiting regulations.

Amount of gross global Scope 1 emissions from: (1) flared hydrocabons, (2) other combustion, (3) process emissions, (4) vented emissions, and (5) fugitive emissions.

Discussion of long term and short term strategy or plan to manage Scope 1 emissions, …targets and an analysis of performance against those targets.

Sensitivity of hydrocarbon reserve levels to future price projection scenarios that account for a price on carbon emissions.

Estimated carbon dioxide emissions embedded in proved hydrocarbon reserves.

Amount invested in renewable energy, revenue generated by renewable energy sales.

Discussion of how price and demand for hydrocarbons and/or climate regulation influence the capital expenditure strategy for exploration, acquisition and development of assets.

The Climate Action 100+ asks companies to set “Science Based Targets” (SBT) necessary for the company to meet the goals of the Paris Agreement — “to limit global warming to well below 2 degree C above pre-industrial levels.” Climate Action 100+ 2019 Annual Status Report, Point 2. Only 3% of oil and gas companies have done so to date. Id. Further, “Climate scenario analyses require a company to identify new strategies and plans to thrive in a decarbonized world.” Id. Point 3. Oil and gas companies should set

near-term objectives …[to] include a substantial reduction of capital deployment in activities associated with high GHG emissions (e.g. development of new oil reserves), a substantial increase in low-carbon deployment (e.g. renewable energy infrastructure), decarbonization garnets and changes in policy advocacy in order to accurate a clean energy transition.

Id., Sector Review Oil and Gas.

The contrast between the Exxon disclosures on climate described above and what these standards require is stark. Exxon does not quantify its scope 1 emissions. Exxon provides in its Annual Report for 2018 very little detail about how it will seek to reduce flaring, venting and leaking of natural gas. Even more important, rather than cutting back on investments in new oil and gas reserves, in 2018 Exxon tripled its reserves. Indeed, in March 2020, Exxon confirmed that it would continue to spend $30 to $35 Billion per year on Capex to execute its oil and gas growth strategy, according to Chairman and CEO Darren Woods. Exxon says very little about general efforts to reduce fossil fuel consumption in its day to day operations. All of this is despite the fact that as long ago as 1982, Exxon scientists developed and shared with senior management their view that climate change was real. They said that the level of CO2 in the atmosphere had increased 8% in the prior 25 years, rising to 340 ppm at that time. The trend probably began with the Industrial Revolution and could lead to flooding of coastal land masses. The science was described as “unambiguous” and “mitigation of the greenhouse effect would require major reductions in fossil fuel combustion.” Exxon Report by M.B. Glaser, Manager of Environmental Affairs Programs of Exxon, dated November 12, 1982 (available online). While the efforts of the investor climate activists have had very little impact on U.S. oil and gas companies, it is a far different story for the major European oil and gas companies — the largest of which is Royal Dutch Shell. Shell is a company that is about 80% of the size of Exxon as measured by market capitalization. In its most recent Annual Report, it states:

We fully support the Paris Agreement’s goal to keep the rise in global temperature this century to well below two degrees Celsius…we also support the vision of a transition towards a net-zero emissions energy system. . . .

We believe that the need to reduce GHG emissions, which are largely caused by burning fossil fuels, will transform the energy system in this Century. This transformation will generate both challenges and opportunities for our existing and future portfolio.

We welcome and support efforts …. [such as the TCFD] to increase transparency and to promote investors’ understanding of companies’ strategies to respond to…. Climate change.

See Shell’s Net Carbon Footprint Ambition: Frequently Asked Questions, at Shell has developed a net carbon footprint ambition, which should result in a 50% reduction in its net carbon footprint by 2050 and a reduction of 20% by 2035. The footprint includes emissions from Shell operations, emissions from third parties who supply energy to Shell, emissions by customers who use Shell energy products (Shell contends that is the first oil company to include oil and gas end user emissions) and emissions mitigation through carbon sinks such as reforestation and carbon capture. Id. Shell has committed to devoting up to $2 Billion in Capex on annual basis to renewable energy investments and other investments to develop alternatives to fossil fuels. Other European fossil fuel companies, such as British Petroleum and Total of France, are pursuing similar disclosure programs and changes to their underlying businesses. However, continental Europe is without substantial oil and gas reserves and its governments and regulators have been far out ahead of the rest of the world in developing renewable energy projects. For example, The Supreme Court of the Netherlands in December 2019 ordered the government to cut the nation’s greenhouse gas emissions by 25 percent from 1990 levels by the end of 2020. It was the first time a nation has been required by its courts to take action against climate change. But see Juliana v. United States (9th Cir, January 20, 2020) (Court refuses to pursue judicial action to force governmental action on climate change). Moreover, European companies are modest players in a world where U.S. Companies produce 17 Million barrels of crude a day and the next two highest producers are Saudi Arabia (12 Million) and Russia (11 Million). When one considers what policy paths look like to just a 1.5 to 2.0 further increase in global temperatures, the impacts on fossil fuel companies is outside the realm of what these corporate executives can conceive. Oil and gas is the business they know and have profited from for decades.


It is high time for the global investment community to take the gloves off and force U.S. companies to get in gear on climate change. After years and decades of pressure, which has been both public and private, there has been little progress. Companies like Exxon and Haliburton have successfully stonewalled their investor base. The senior officers of these companies do not have future multi decade tenures in their positions such that negative consequences 15 to 25 years from now matter to their personal net worths. Transitioning their businesses will be unprofitable in the short term, making the value of their incentive based compensation (stock options, bonuses based on financial performance, etc.) far less valuable.

The Blackrock suggestion that, absent change, it will vote against management is a step in the right direction. Public companies hold their annual meetings to elect or re elect directors on an annual basis. The rights of shareholders to influence corporate affairs comes mainly through their right to elect directors at the annual meeting. The world is now well familiar with activist investors, such as Nelson Peltz, Bill Ackman, Paul Singer and Dan Loeb who successfully use proxy contests to advance their financial goals through electing new directors who support those goals. In contrast, the climate activist investors have been far less aggressive. Until recently, Blackrock defended its public inaction by assuring investors that it was privately advocating for change. Vanguard and State Street continue to stick to this approach. Other investors generally brought non binding resolutions to vote asking for more transparency. Blackrock’s threat to “withold votes” or to “vote against” the incumbent directors is well short of executing a serious, well thought out campaign to replace incumbent directors and management. A new slate of experienced and talented directors that could actually take control and alter a company’s direction would need to be proposed and pursued to a successful election. Blackrock and its brethren investors on the Climate Action 100+ need to execute this kind of strategy. A winning strategy would need a detailed financial plan to show how the company will be, over the long term, a stronger more valuable company while sharply cutting its own emissions and the emissions of its customers who purchase its products. The proponent would need to do its own deep dive into into the financial condition of the company and develop projections for return on investment going forward based on a different business model. It would also be necessary for the proponents to have access to confidential business information of the oil and gas company at issue to see what plans it has considered and what projections it has made under a climate friendly business model. One overlooked tool to utilize to obtain this information is Section 220 of the Delaware Corporation Code, the right to inspect books and records for a proper purpose. See The Rise of Books and Records Demands Under Section 220 of the DGCL, Harvard Law School Forum on Corporate Governance, April 12, 2019.

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