Corporate Governance

Shearman & Sterling LLP 21 | Energy Transition and the Role of the Board Significantly, the ExxonMobil proxy fight was the first of its kind at a large U.S. company where the activist shareholder, a new hedge fund with a 0.02% stake in the company, focused on energy transition. The activist shareholder garnered the support of D.E. Shaw, BNP Paribas Asset Management and three institutional investors, BlackRock, Vanguard and State Street, and won three board seats (a quarter of the board), displacing incumbent directors. Key arguments were that ExxonMobil's strategy was inadequate to ensure a successful transition to a new low-carbon economy, ExxonMobil's directors lacked sufficient energy industry experience, and ExxonMobil's lobbying activities did not align with the company's stated ESG goals. 6 In a similarly unprecedented investor action, Shell's shareholders nearly succeeded in vetoing Shell's plan to net zero that was announced the previous February. Activists accused Shell of greenwashing, noting that the plan included a 20% increase in natural gas production by 2030 to be offset by massive tree planting. With the support of Britain's biggest asset manager, activists advocated for a vote against the company's net zero plan, arguing it was not sufficiently ambitious. A 2021 proxy season trend was the emergence of board- sponsored or shareholder-sponsored "say on climate" advisory votes that allow shareholders to approve or disapprove of the company's publicly available climate policies and strategies. At Total's annual meeting, 90% of its shareholders voted to approve a board-sponsored resolution supporting the company's ambitions on sustainable development and energy transition toward carbon neutrality and its related targets by 2030. The resolution was largely driven by activist investors holding just over 1% of Total's outstanding shares who wanted Total to take more proactive steps toward decarbonization. Total also changed its name to TotalEnergies in June 2021 to evidence a broader commitment to energy sources. ISS and Glass Lewis have updated their voting policies during the 2021 proxy season. The proxy advisors stated they will generally support proposals related to enhanced climate change disclosure, with ISS stating it will recommend voting for requests for reports on the feasibility of developing renewable energy resources and for proposals requesting that the company invest in renewable energy resources. INSTITUTIONAL INVESTORS From a capital-raising perspective, companies are finding that to stay in the green, they must make appropriate commitments to going green. As noted above, shifts in institutional investor support in the 2021 proxy season contributed to activist stockholders' success and may have influenced companies to reach agreements with activists prior to their annual meetings. BlackRock has clarified its expectation that companies disclose a plan for how their business model will be compatible with a low-carbon economy consistent with a global aspiration of net zero emissions by 2050. Vanguard updated its proxy voting guidelines in April 2021 to advise that it is likely to support proposals that request disclosure on how climate change risks are incorporated into strategy and capital allocation decisions, for an assessment of climate impact (including scenario analysis 7 ) and/or request feasibility analysis. State Street has published a call for boards of oil and gas companies to focus on adapting, not just mitigating, in the face of climate change. 8 As per State Street, boards should consider how climate change could fundamentally reshape the global opportunities amid the transition to a low-carbon economy. This scenario planning should be incorporated into the board's governance oversight structure and long- term strategic planning and be communicated to investors. ESG REPORTING AND THE SEC Notably, U.S. oil and gas companies that have announced net zero commitments have done so using inconsistent standards. For instance, Occidental committed to net zero on all oil and gas it produces by 2040. 9 ConocoPhilips committed to zeroing out its direct greenhouse gas emissions by 2030. 10 Diamondback Energy pledged to be a net zero producer in Scope 1 emissions immediately. 11 Devon Energy and Pioneer Natural Resources have pledged to cut Scope 1 and Scope 2 emissions intensity in half by 5 Greenhouse gas emissions are categorized into three groups or "Scopes" by the most widely used international accounting tool, the Greenhouse Gas (GHG) Protocol. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company's value chain. 6 See Rusty O'Kelley and Andrew Droste, "Why ExxonMobil's Proxy Contest Loss is a Wakeup Call for all Boards," Harvard Law School Forum on Corporate Governance (October 28, 2021). 7 Scenario analysis is a risk analysis that can be applied to plausible climate futures to aid in understanding how climate change may impact a company. Climate scenarios are developed by considering an array of factors ranging from atmospheric changes to societal behavioral changes to new government policies to technological breakthroughs. 8 See Michael Younis, "Climate-Related Disclosures in Oil and Gas, Mining, and Utilites: The Current State and Opportunities for Improvement," State Street Global Advisers, https://www.ssga.com/investment-topics/ environmental-social-governance/2019/06/climate-disclosure- assesment.pdf (June 2019). 9 See Reuters, "Occidental Petroleum announces net zero target for greenhouse gas emissions," https://www.reuters.com/article/us-occidental- results/occidental-petroleum-announces-net-zero-target-for-greenhouse- gas-emissions-idUSKBN27Q2NU (November 10, 2020). 10 See ConocoPhilips, "Managing Climate-Related Risks: Emissions Reduction Targets," https://static.conocophillips.com/files/resources/ conocophillips-2020-climate-change-report.pdf (2020). 11 See Carolyn Davis, "Diamondback Sees No 'Clear Signal' to Boost Permian Output," North American Gas Forum (May 5, 2021).

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