Exxon kept it in the ground
Banks obfuscate. Scope 3 scrutiny. The great green reshuffle. Plus, ExxonMobil is bad at disclosures.
View from the top
🏦 On the question of climate, banks are battling scrutiny from every angle. Last week, Europe’s biggest pension fund warned it would divest from lenders that fail to decarbonise their portfolios in three years. ABP head of investments Dominique Dijkhuis told Bloomberg the sector has “really lagged” in meeting words with action. Now, the asset owner is implementing strict performance indicators to hold it accountable. Commitments by banks are notoriously difficult to evaluate, not least because portfolio exposure isn’t public knowledge. Making them even more inscrutable, financing tends to happen at the level of parent companies rather than specific projects (91% and 4% of global fossil-fuel financing, respectively, according to the Rainforest Action Network). As pointed out by the FT, that renders virtuous decisions to cut ties with fossil fuels — such as that taken by HSBC in December — largely symbolic. But it may prove harder to run rings around the regulators, which have been busy issuing climate-related risk guidance for the US and EU. Soon after the Fed rolled out its scenario analysis exercise for the six largest US banks, the ECB published its first set of indicators for risks facing financial institutions.
🧮 Get excited, accountants. The ISSB has confirmed its Global Sustainability and Climate Reporting Standards will go live in June, with re-deliberations winding up in February. Last week, we touched on the single vs. double materiality debate fracturing the deceptively dull world of sustainability standards. The lightning rod is Scope 3 emissions, on which the ISSB recently changed position following consultation feedback. Its decision to include Scope 3 guidance is now attracting counter criticism. Expect increasingly divergent views on Scope 3 impact analysis, particularly as standardisation and regulation drive influence from company marketing to compliance departments. Already, reports the FT, board support is dwindling on fears of legal liabilities incurred through green accounting. For larger businesses with sprawling supply chains — and, within those, exposure to smaller developing-market companies — gathering granular Scope 3 data is no easy feat. But the alternative could bring legal headaches of a different kind, as JBS is finding out. For companies under the remit of the German Supply Chain Due Diligence Act — which came into effect this month — indirect risk analysis is no longer optional.
📊 The last quarter of 2022 put Article 9 to the test. In anticipation of stricter SFDR disclosure standards, finds Morningstar, 307 funds representing €175B were downgraded to Article 8. That’s 40% of the ‘dark green’ category, which now accounts for just 3.3% of capital earmarked for sustainability. Passive vehicles were represented disproportionately, prompting the question “can any pure sustainable fund be rules-based?” (prompting the answer “sure, if you use Util data.”). Even with a 52.2% SFDR market share, Article 8 fund providers can’t relax. ESMA is threatening a “greenwashing lawsuit tsunami” with its proposed names rule, under which funds claiming to be ‘sustainable’ must be 80% sustainable. Only 27% of qualifying Article 8 funds meet that threshold. In effect, the rule would expose more providers to the challenge (one we like to explore) of satisfying fund purity and liquidity/diversification simultaneously. Thankfully, fiscal stimulus is expected to expand the investable universe with an avalanche of greennovation. Which is good, because end investors are still pouring in. In Q4, Articles 8 and 9 accrued almost €16B (+7.3% on Q3) as Article 6 shed €3.3B (-1.1% on Q3). Globally, sustainable funds attracted $37B (+50% on Q3), even as the broader fund universe suffered $200B in outflows.
ExxonMobil keeps it in the ground
Last week’s newsletter closed with the line “corporate reporting is no proxy for progress.” That is, in simple terms, the reason Util exists.
Conceived as an alternative to corporate disclosures, Util’s analytics are informed by peer-reviewed research. Even where available, self-reported data are unreliable. In our view, you don’t need to look very far to find evidence that they warrant a truckload of salt.
In that regard alone, ExxonMobil is the gift that keeps giving.
ExxonMobil had a head start.
In 2015, leaked memos and an eight-month-long investigation revealed ExxonMobil, in the words of environmental campaigners, “knew about climate change as early as the 1970s, but chose to mislead the public about the crisis in order to maximize their profits from fossil fuels.”
Thanks to its ambitious and well-funded research programme, the conglomerate didn’t just understand the science. It understood the science over a decade before climate change became a public issue in 1988, when NASA’s James Hansen testified to Congress about global warming.
It gets worse. According to analysis published this month, the climate models developed by ExxonMobil either matched or surpassed those developed by contemporary independent scientists. They were more accurate than even those developed by Hansen. From the 1970s onwards, ExxonMobil climate scientists “correctly and skilfully” predicted that global temperatures would rise 0.2C per decade and become detectable between 1995 and 2005.
What did ExxonMobil do with its groundbreaking findings? Try to prevent (what its own scientists characterised as) “potentially catastrophic events” that would afflict “a substantial fraction of the earth’s population”? Take advantage of the opportunity to lead the market on clean energy? Save the economy trillions in future climate costs and itself years of lawsuits, windfall taxes, and terminal decline?
Of course it didn’t.
I mean, we know the rest. The facts were a profit risk and so were concealed from policymakers, shareholders, and customers. Today, ExxonMobil is among the 20 fossil fuel firms responsible for one third of all modern greenhouse gas emissions.
Together, fossil fuel companies have worked diligently to keep their role under wraps. In 1998, ExxonMobil partnered with its peers on one of the most consequential disinformation campaigns in history. In their agenda plan, ‘success’ was defined as the moment when “‘climate change’ becomes a non-issue, meaning the Kyoto Proposal is defeated and there are no further initiatives to thwart the threat of climate change.”
In 1996, then-CEO Lee Raymond referred to “the unproven theory that [fossil fuels] affect the earth’s climate.” In 2013, then-CEO Rex Tillerson called climate models “not competent” and “not that good.”
The oil major spent tens of millions on disinformation over tens of decades, while publicly downplaying and denying the environmental impact of its business activities. PR firms were contracted, governments lobbied, and — when climate change could no longer be ignored — ExxonMobil perfected ESG reporting to help it preen for sustainability indexes and investors.
Was it worth it?
ExxonMobil hosts its fourth-quarter earnings call tomorrow. Since 2022 was a bumper year for oil & gas profits, shareholder loyalty may well be rewarded. But a year of windfall profits seems small consolation for four missed decades of policy, innovation, and investment.
The total cost to the company and its investors isn’t limited to climate risk. The research published in the last couple of weeks has, reportedly, strengthened existing US state lawsuits against ExxonMobil, deepening the expensive and protracted legal peril it faces on multiple fronts.
One other interesting study came out last week. Inmarsat found that 76% of business leaders distrust the ESG reporting of their competitors, while 80% believe their peers are working harder to appear sustainable than to achieve sustainable outcomes. Somewhat counterintuitively, 81% believe their own companies to be more sustainable than their competitors, yet only 47% were willing to share the entirety of their ESG data with third parties. Weird.
Util wasn’t around in 1988. Had it been, however, our analysis of ExxonMobil (below) would have been informed by the same material on which it relies today: independent scientific research.More valuable, surely, than a BBB rating in 2023.
Some of it, at least. Processing tens of millions of peer-reviewed texts in 1988 would, admittedly, take more time.