The Lever - Exxon Declares War On Its Dissenters

ExxonMobil recently launched an unprecedented lawsuit against two investment firms that sought to reform its climate policies. As Freddy Brewster reveals in today’s featured story, the company is doing so in part to stop Biden’s regulators from making it easier for shareholders across the country to voice concerns about the companies they own.

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ExxonMobil has launched an extraordinary lawsuit against two investment firms for the alleged offense of filing climate-focused shareholder proposals. The fossil fuel giant’s underlying goal: killing a federal regulatory effort that would make it easier for all U.S. shareholders to voice environmental and social concerns about the companies they own.

Critics say the company is also trying to intimidate shareholders from ever proposing such resolutions again in the future — under threat of being tied up in expensive litigation and incurring punitive financial penalties.

If successful, the Exxon lawsuit could set a legal precedent wrestling control away from regulators and cracking down on activist investors working to enact more climate-friendly policies. 

Exxon’s unprecedented lawsuit was filed in January in a Republican-dominated judicial circuit that has become the go-to court system for corporate victories. The suit aims to convince judges to supersede financial regulators who have long been responsible for deciding whether publicly traded companies are required to allow shareholder votes on resolutions. 

Even though the shareholders have withdrawn their resolution, Exxon has continued to pursue the suit. According to the complaint, the company is also asking judges to punish the shareholders for filing the resolution by forcing them to pay the oil company’s attorney’s fees and “other and further relief as the Court may deem just and proper.”

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At issue is a 2020 initiative by President Donald Trump’s Securities and Exchange Commission (SEC), which increased the requirements on how much stock shareholders must hold and how long they have to hold it to issue proposals, thus raising the barrier to submit proposals. President Joe Biden’s SEC has since attempted to roll back the Trump-era initiatives and allow smaller shareholders to bring forth proposals to be voted on by corporate stockholders, but the proposed change has yet to take full effect and the Exxon lawsuit may weaken the SEC’s authority.

“It’s hard to know how the Exxon lawsuit is going to affect potential [SEC] rule making, but certainly the intended effect of Exxon’s action is to try to undermine the authority of the SEC,” said Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility, a faith and values-based organization advocating for more environmentally conscious investing.

Exxon’s lawsuit, which the pro-business trade associations Chamber of Commerce and the Business Roundtable supported in an amicus brief, is the latest in a series of attacks on shareholder proposals. 

But this time, “they’re really going for the jugular,” Zinner told The Lever.

“What they’re trying to do is silence shareholder voices, specifically to silence the voices of shareholders who are concerned about climate risk,” he added. “It’s noteworthy that a company like Exxon is so determined to shut down the conversation… amongst shareholders about these long-term risks.”

Advocates pushing companies to consider these policies are part of the rise of environmental, social, and governance (ESG) investing — a movement that has scored multiple wins in recent years. While some institutions have embraced these progressive principles — which force companies to consider their environmental impacts, focus on the diversity of their staff, and even issue reports on political spending and lobbying — corporations and conservative groups have pushed back. 

Last year, Republican lawmakers established the Republican ESG Working Group with the intent to develop “a policy agenda designed to protect the financial interest of everyday investors from progressive activists who are using our institutions to force far-left ideology on Americans.”

The working group comes after the oil company and other anti-ESG groups spent hundreds of millions of dollars since 2017 lobbying lawmakers on shareholder proposals and other issues.

In particular, the political action committees and employees affiliated with Exxon and the U.S. Chamber of Commerce have donated more than $150,000 to the campaign efforts of the nine GOP lawmakers leading the new working group, according to Federal Elections Commission data.

“A Significant Escalation”

In December 2023, Arjuna Capital and Follow This, two activist shareholder firms focused on climate change and other issues, filed proposals that would have allowed Exxon shareholders to vote on a proposal advocating for Exxon to cut emissions quicker than the oil company had previously proposed. 

In January, Exxon management filed a complaint in a U.S. District Court in Texas — which is inside the ultraconservative Fifth Circuit — rather than following the tradition of asking SEC regulators to let the company exclude the proposal from shareholder voting. The case was assigned to a Trump-appointed judge. 

The activist investor groups withdrew their proposals in early February, but Exxon has continued its lawsuit in an apparent attempt to have business-friendly courts rule in their favor.

The oil company claims the shareholder activists’ proposals had one purpose: “Put us out of business.”

“To be clear, we support the rights of shareholders to submit proposals, but these rights are increasingly being infringed by activists masquerading as shareholders,” Exxon said in a news release about the lawsuit. 

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On the other hand, advocates consider the lawsuit an infringement on shareholder rights because it discourages shareholders from bringing forward similar proposals in the future, said Ben Schiffrin, director of securities policy for Better Markets, a consumer advocacy group. 

And since many shareholder resolutions aim to get management to consider and make concessions on pressing issues, rather than necessarily win a vote, the suit seems tailor-made to shut down any engagement with shareholders critical of Exxon’s strategies.

“It seems to be designed to prevent not just these shareholders but other shareholders from bringing proposals before their corporations,” Schiffrin told The Lever. “So if you’re another investor, not only do you risk being sued in federal court, but now you risk not being able to avoid that lawsuit even if you give the company what it wants.”

Exxon’s lawsuit strikes directly at the SEC rule governing how shareholders may propose resolutions to be included in companies’ proxy statements and is part of a yearslong campaign by many anti-ESG groups to squash shareholders’ rights, Schiffrin said. He added that Exxon seems to be asking the court to interpret the SEC rule in a way that favors the oil company, rather than simply deferring to the SEC itself. 

“This [lawsuit] represents a significant escalation in that campaign,” Schiffrin said. “It is one thing to fight over what the SEC rules should or should not be. But now, instead of going through the normal process with the SEC and seeking a no-action relief, [Exxon] is hauling these shareholders into court and making them defend against a federal lawsuit just for trying to bring their proposal before their fellow shareholders.”

Schiffrin also said that the Exxon lawsuit seeks to prevent Arjuna Capital and Follow This from resubmitting similar proposals in the future. 

The judge overseeing the case is skeptical of Exxon’s lawsuit and ordered the oil company to file a status update detailing its claims before the court, since the two activist firms rescinded their proposals.

“As it stands now, the Court struggles to see what the ongoing case or controversy is in this matter given the only relief sought from the Court was a declaration that Exxon may exclude Defendants proposal from its annual shareholder meeting,” the judge wrote in early February.

Exxon has asked the judge to continue the lawsuit because “the underlying issue” of Arjuna Capital and Follow This resubmitting their proposals after they have previously failed “remains and must be resolved.”

Exxon, Arjuna Capital, and Follow This, did not respond to requests for comment.

“Utterly Unsubstantiated Claims”

The current model for environmental, social, and governance investing has been around for decades and has roots in the anti-apartheid movement of the 1980s. Advocates say a core component of the investment strategy is urging companies to consider the long-term effects of their business practices rather than just working to maximize short-term profits. 

ESG investing took off in the 2010s as investors began pushing corporations to adopt climate change policies in line with the 2015 Paris Climate Agreement that sought to limit global temperature increases to 1.5 degrees Celsius and achieve net-zero greenhouse gas emissions by 2100, among other goals. 

Some of these ESG-related proposals have paid off. A 2024 report by Morgan Stanley found that ESG-related investments in 2023 generated almost double the returns compared to investment funds that do not focus on ESG. 

According to Morningstar, a financial services firm, ESG investing has begun to wane in popularity recently due to high interest rates, supply chain disruptions, and, notably, “continued political scrutiny of sustainable and ESG strategies.”

Since it was founded in 2013, Arjuna Capital, which describes itself as “an investment firm focused on sustainability,” has been filing ESG-related shareholder proposals with Exxon every year. In 2014, Exxon agreed to issue a report detailing its climate change-related financial risks after Arjuna and another activist group filed a shareholder proposal on the matter. 

In 2019, the New York State Attorney General’s Office sued Exxon, accusing the oil company of misleading investors about the financial risk of climate change. Natasha Lamb, co-founder of Arjuna Capital, testified against Exxon. 

“Those allegations are, in no small part, informed by the climate-change disclosures negotiated by Arjuna Capital over five years ago,” Arjuna Capital wrote in a statement to its clients at the time. 

Exxon was ultimately cleared of wrongdoing, with the judge stating that the lawsuit was a “securities fraud case, not a climate change case.”

These activist shareholder firms have since scored other wins. In 2021, a majority of Microsoft shareholders voted to demand the tech company better address workplace sexual harassment complaints after Arjuna Capital brought the proposal forward. That same year, Engine No. 1, another activist hedge fund focused on “decarbonization,” led a successful effort to replace three Exxon board members.

But in 2020, shareholder activists faced a major setback when the SEC’s Trump-appointed commissioners adopted new rules that dramatically increased the amount of stock an investor must hold to propose a resolution and limited how often a failed resolution could be resubmitted.

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Before then, investors had to hold at least $2,000 worth of stock for one year before they could propose a resolution for other shareholders to vote on. The new rules implemented by the Trump-era SEC required shareholders to own at least $25,000 in stocks for one year, $15,000 for two years, or $2,000 for three years before filing a proposal. 

The Trump-run SEC also implemented stricter requirements for resubmitting failed shareholder proposals. In order for these proposals to be included again in a company’s proxy statement, they now had to receive at least 5 percent support from other shareholders during the first vote, 10 percent support in the next year’s vote, and 25 percent in the third year’s vote. Previously, the resubmission rules called for 3 percent, then 6 percent, and then 10 percent in the first three years. 

In a written comment to the SEC in 2020 regarding the proposed rule change, Exxon stated that reviewing a single shareholder proposal could cost the company more than $100,000, and that it had received 16 shareholder proposals a year since 2000. In its comment, Exxon highlighted how Arjuna wants to “shrink” Exxon, and that Follow This has called its efforts a “Trojan horse” to push companies to “stop exploring for more oil and gas.”

Exxon supported the proposed rule change, as did the Business Roundtable and the investment firm BlackRock. The U.S. Chamber of Commerce joined them, calling the changes “long overdue.”

“​​The Commission’s prudential guardrails have steadily weakened, and the shareholder proposal system today has unnecessarily devolved into a free-for-all that a small minority of interests use to advance idiosyncratic agendas at the expense of Main Street investors,” the Chamber wrote to the SEC.

However, according to Dennis Kelleher, president of Better Markets, the proposed changes in 2020 were a radical move that would silence smaller shareholders and disqualify many proposals. 

“The [proposed rule change] arbitrarily and capriciously ignores benefits offered by shareholder proposals,” Kelleher wrote to the SEC in 2020, adding that the estimated costs for proposal review cited by Exxon and others were “utterly unsubstantiated claims.”

Before the 2020 rule change, SEC commissioners met with anti-ESG stakeholders behind the scenes, including representatives from the Chamber of Commerce, and investment firms Vanguard, Goldman Sachs, and T. Rowe Price. 

In 2023, Vanguard and T. Rowe Price received praise from The Committee To Unleash Prosperity, a right-wing nonprofit, for pushing back against ESG-related initiatives, and Goldman Sachs recently blocked a shareholder proposal asking the firm to report its clients’ climate change commitments.

“Controversial Social And Political Topics”

Since Biden took office, the current SEC has attempted to roll back the 2020 rule changes by issuing a legal bulletin directing SEC staff to “no longer focus on determining the nexus between a policy issue and the company” when examining proposals focused on social issues. Instead, staff are directed to focus on “whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.”

The Biden-run SEC is also considering a formal change to bring back the pre-2020 shareholder proposal rules. But the agency is facing stiff opposition and deep-moneyed pockets.

Exxon has spent more than $34 million since 2017 lobbying lawmakers and regulators on corporate governance, shareholder proposals and voting, and a slew of other issues, disclosures show. 

According to regulatory filings, the U.S. Chamber of Commerce has spent more than $420 million since 2017 lobbying Congress, the SEC, the Treasury Department, and other federal agencies on shareholder proposals, corporate governance, and other issues. The Business Roundtable has spent more than $23 million lobbying several of the same entities on similar issues since 2017.

“These companies have an enormous amount of influence over politicians and spend money at the federal, state, and local levels,” said Zinner with the Interfaith Center on Corporate Responsibility.

In comments to the SEC, the Business Roundtable called the Biden administration’s proposed rule rollback “ill-conceived,” claiming that the changes would “result in further abuse of the shareholder proposal process by a small number of proponents or embolden a wider body of shareholders to submit proposals that may unnecessarily burden companies with overly prescriptive ways and means of achieving certain results, which may have already been obtained through different, more appropriate means.”

In their amicus brief supporting the Exxon lawsuit, the Chamber of Commerce and the Business Roundtable took aim at the SEC’s supposed leniency. They wrote that the SEC has “assumed a central role” in the rise of ESG-motivated shareholder proposals and that the agency “shirked its responsibility” to block proposals focused on political and social issues. 

“The SEC’s stance has only encouraged a new surge of ideologically driven proposals, forcing companies to devote even more time and money to controversial social and political topics that have nothing to do with creating value for shareholders,” the brief states.

Zinner said the lawsuit is a “frontal challenge” to the SEC’s authority to determine whether companies should be allowed to exclude certain shareholder proposals from their annual statements. He also believes the lawsuit is moot, since Arjuna Capital and Follow This rescinded the proposals. 

“[The lawsuit] is an attempt to intimidate shareholders who are concerned about long-term climate risk,” he said. “But I think it’s also an attempt to push back on agency rule making and guidance that [Exxon] disagrees with, and [it] is an attempt to undermine the authority of the SEC more broadly.”

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