Corporate Governance

Energy Transition and the Role of the Board | 20 Shearman & Sterling LLP Energy Transition and the Role of the Board Emily Leitch, Bill Nelson, Marwan Elaraby and Judy Little Insights In the past several years, the pace of what is now commonly referred to as "energy transition" — the global energy sector's shift from predominantly oil, natural gas, coal and fossil-based sources of energy to renewable energy sources such as hydrogen, wind and solar — has accelerated significantly. Clean energy investment by oil and gas companies went from under $5 billion in 2015 to $12.7 billion in 2020. 1 Driving the transition are activist investors, institutional investors and regulators, with a recent assist from a Dutch court. NET ZERO EMISSIONS A particular challenge to traditional oil and gas companies is the international call to slash greenhouse gas emissions to net zero by 2050, with interim goals to be achieved by 2030. Achieving this goal requires, among other things, new energy sources and new methods of reducing CO2. The emphasis on net zero emissions — a balance between emissions produced and those taken out of the atmosphere through technologies like carbon capture — is derived from a special report released by the Intergovernmental Panel on Climate Change (IPCC) in late 2018 in connection with the Paris Agreements ("Paris Accord"). This report asserts that net zero emissions by 2050 is a necessary step to mitigate global warming. Over 110 countries have endorsed this goal with most committing to net zero emissions. 2 Meanwhile, momentum has been growing in the private sector as many corporations, under pressure from investors to show their commitment to easing climate change and to the long- term viability of their companies, have voluntarily followed suit. In the energy industry, Repsol was the first to commit in 2018, while BP was the first supermajor to adopt net zero emissions in February 2020. In the United States, energy companies have been slower to make net zero commitments. ExxonMobil announced in August it was considering a plan to reduce net-carbon emissions to zero by 2050. Likewise, Chevron has pledged to limit carbon emissions that contribute to climate change but has not set net- zero targets. In a landmark court ruling, a Dutch court held in May 2021 that Shell was partially responsible for climate change and that the net zero consensus of the Paris Accord applies globally and to non-state actors. Going further than the Paris Accord, however, the judge ordered Shell to reduce its carbon emissions by 45% by 2030 on an absolute basis. 3 The court recognized that the reduction would negatively affect Shell's bottom line since oil and gas provide the majority of Shell's revenues. According to the court, Shell's commercial interests were outweighed by the interests of mitigating climate change. This ruling, which Shell is appealing, has already resulted in further climate change litigation against non-governmental entities with, for instance, activists suing Volkswagen, BMW, Daimler and Wintershall DEA in a German court claiming the defendants' current plans and measures contradict the Paris Accord and are, therefore, illegal. PROXY SEASON AND ACTIVIST INVESTORS In 2020, a 53% majority of shareholders at Chevron voted for a resolution seeking a commitment from the oil giant to align its lobbying activities on climate policy with the goal of the Paris Accord. Climate Action 100+ investor signatory BNP Paribas Asset Management filed the first climate-related shareholder proposal ever to win a majority of Chevron shareholder votes, and it was the only proposal on Chevron's 2020 proxy ballot that won a majority. 4 Proving this was not an outlier, the 2021 proxy season saw a significant increase in shareholder support for climate-related proposals compared to 2020 and 2019. Climate-related proposals won majority support at ExxonMobil, Shell, Total, Phillips66, ConocoPhillips and again at Chevron, with Chevron's shareholders voting 61% in favor of a proposal to cut Scope 3 emissions. 5 3 See Diederik Baazil and Laura Millan Lombrana, "What a Dutch Court Ruling Means for Shell and Big Oil," Bloomberg (June 4, 2021). 4 See Ceres, "Climate Action 100+ investor signatories achieve major gains during 2020 U.S. Proxy Season," https://www.climateaction 100.org/news/climate-action-100-investor- signatories-achieve-major-gains-during-2020-u- s-proxy-season-2 (June 23, 2020). 1 See Bloomberg NEF. 2 See United Nations, "For a livable climate: Net zero commitments must be backed by credible action."

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