Climate activists vs. Big Oil: The legal struggle continues

ExxonMobil Corporation (“Exxon”), one of the world’s largest oil companies, filed a lawsuit in the US earlier this year in an attempt to prevent a shareholder climate resolution calling on the company to accelerate the pace of reductions in greenhouse gas emissions. This is the latest in the ongoing struggle between shareholder climate activist groups and ‘Big Oil’ and has been closely watched by large corporations in all sectors and jurisdictions. Climate litigation is clearly here to stay as corporations find themselves under increasing pressure to proactively adapt for a green energy future. 

Background

The Exxon saga began with Follow This, an Amsterdam-based green shareholder group whose goal is to commit the oil and gas industry to implement the Paris Climate Agreement. (This is a legally binding international treaty on climate change, responsible for setting the overarching goal of limiting a rise in average world surface temperatures to below 2°C, while pursuing efforts for a 1.5°C increase above pre-industrial levels.) They compel adherence to the Paris Agreement by uniting shareholders in oil and gas companies to submit proposals (also known as climate resolutions) to shareholder meetings.

Follow This acquired a small shareholding in Exxon, one of the world’s biggest contributors to greenhouse gas emissions. Their shareholding forms a minute proportion: 1 millionth of Exxon’s market capitalisation. With the support of Arjuna Capital, a US wealth management firm focused on sustainability, Follow This put forward a climate resolution calling for Exxon to accelerate attempts to cut greenhouse gas emissions, and push the company towards greater transparency and accountability regarding its environmental impact.

The legal proceedings: Exxon’s retaliation

On 21 January 2024, Exxon filed a lawsuit in the Texas District Court against Follow This and Arjuna Capital, with the aim of preventing the climate resolution from going to a vote at the shareholder meeting scheduled for 29 May 2024.

It is rare for companies to go to court to block a shareholder motion in the US – in fact this was Exxon’s first time in doing so. Exxon’s argument was that the climate resolution breached the US financial regulator’s rules (also known as U.S. Securities and Exchange Commission (“SEC Rules”) for investor petitions, specifically the SEC ‘proxy rule’ for 2 reasons:

1. Shareholder proposals cannot be resubmitted again if they do not gain increasing investor support over a period of time. Exxon stated that Follow This’ 2024 proposal did not meet the requisite SEC threshold for resubmission, as their similar proposals in 2022 received a 28% approval from Exxon shareholders, which dipped to 11% in 2023.
2. The substance of the proposal ‘deals with a matter relating to the company’s ordinary business operations’. Exxon claimed that the resolution forms part of an ‘extreme agenda’ which unduly interferes with the company's ability to manage its business effectively. Exxon alleged that Arjuna and Follow This are “not like most ExxonMobil investors” as instead of seeking to improve business performance or increase shareholder value, they pursue a “Goldilocks Trojan Horse’ strategy, by becoming shareholders solely to campaign for change through shareholder proposals that are calculated to diminish the company’s existing business." Exxon maintained that it is already taking steps to address climate change and that imposing specific emissions targets could limit its flexibility and competitive position in the market.

Exxon requested that the Texas District Court make a decision by 19 March 2024, but a decision is still awaited.

Climate activists retreat?

In their statement of response, Follow This stated that shareholders should have a right to vote on whether Exxon should pursue emissions reduction targets, and that the “resolution leaves the strategy of how to achieve emissions reductions entirely up to the board”. As such, this would not unduly diminish Exxon’s existing business. Reducing emissions does not necessitate bad business – particularly where fossil fuels can be replaced by renewable energy.  

However, on 2 February 2024, Follow This and Arjuna Capital withdrew their climate resolution. Despite this, Exxon refused to withdraw their case before the Texas District Court. It is likely that the rationale of pursuing the case is to use the proceedings to challenge how the SEC interprets and applies its proxy proposal rules, in order to prevent similar climate resolutions from being put forward in future. Follow This and Arjuna Capital have asked the Texas District Court to dismiss Exxon’s lawsuit.

Corporate self-determination?

At the heart of this case lies the tension between corporate autonomy and shareholder activism. Whilst Exxon’s board of directors can assert their right to manage the company’s affairs free from external interference, how far should this corporate autonomy extend? It is widely accepted that climate change represents a systemic global economic risk. As such, it ought to be a material consideration with regard to Exxon's business, and therefore falls within the purview of shareholder oversight. Further, Follow This and Arjuna Capital have pointed to growing investor concern about the financial implications of climate change, and argue that Exxon has a responsibility to disclose and mitigate these risks.

Impact on Climate Litigation in the UK

In the UK, climate litigation has gained traction in recent years, with high-profile cases challenging government policies and corporate practices. With greater access to litigation funding and growing public support, claims are more viable for climate activist organisations. This is exemplified by the three-day legal challenge to the UK government’s net zero strategy brought by environmental organisations, Friends of the Earth, ClientEarth and the Good Law Project. Heard in February 2024 at the High Court, its outcome is eagerly awaited. 

Another example is ClientEarth’s derivative action against Shell. Whilst ultimately that did not succeed, with the court dismissing the claim that Shell had mishandled climate risk by inadequately preparing for net zero under the Paris Climate Agreement, it nevertheless shows the creative thinking and approach that activists are prepared to take to challenge corporates in the climate arena. The court was unwilling to interfere with the board of directors’ discretion in how it managed the affairs of the company and said climate change was only one of many competing considerations to be factored in by the board of directors when making decisions in the best interest of the company. Nevertheless climate litigation in another guise is unlikely to be in abeyance.

In the Exxon lawsuit, Exxon advanced a similar argument in favour of corporate authority. It remains to be seen whether the Texas District Court will allow Exxon’s lawsuit, and if so whether its decision will have a chilling effect on shareholder climate activist groups, and their ability to propose climate resolutions. Nevertheless, climate resolutions continue to rise. By way of example, even whilst the Exonn lawsuit continued, Follow This are shifting their focus on their climate resolution proposed with Shell.

As governments, businesses and third sector organisations around the world intensify efforts to combat climate change, investors and activists are increasingly taking steps to hold corporations to account for their contributions to global warming. Whilst we await the Texas District Court’s decision on Exxon, it is clear that efforts are gaining momentum (irrespective of court decisions) as activists seek creative ways of holding corporations to account, and putting them under pressure to adhere to or improve their green commitments.

further information 

Should you have any questions about the issues covered in this blog, please contact Katie Allard in our Dispute Resolution team.

For further information on Environmental, Social and Governance issues, please visit our website here.

about the authors 

Katie Allard is a Senior Associate in the Dispute Resolution Team. She has a wide-ranging commercial practice with particular interest and expertise in complex civil fraud and asset tracing investigations, boardroom and shareholder disputes, and breach of contract claims, acting for both claimants and defendants. 

Lavanya Loganathan is a trainee solicitor at Kingsley Napley and is currently in her third seat with the Dispute Resolution team.