Blog: Court, Investors, Biden Push Energy Firms to Address Climate Change – Engineering News-Record

The urgency to confront the impacts of climate change was made clearer last week to companies and governments—and to AEC firms that seek their business and face similar pressure—in a triple whammy of global events. Those include a global court ordering one oil giant to reduce CO2 emissions, a high-profile boardroom win by carbon-neutrality investor advocates of another, and a new President Biden order that raises the bar for corporate and federal disclosure of climate-linked financial risk.

At an AEC financial conference in May sponsored by sector management consulting firm EFCG, engineering company Wood’s CFO Grant Angus noted elevated momentum in clients seeking guidance and advice on projects that will ultimately support the energy transition. But he said one challenge in environment, social and governance (ESG) advisory services is “the long-term nature of sustainable development goals and carbon net-zero targets.”

Helping clients plan and implement ESG “plays to our strengths,” says Lytle Troutt, president of Wood’s environmental consulting business. “It’s a driver and shareholders are demanding it. Companies are building up budgets and adding capital investments for ESG agendas.”

In what is seen as a potential key driver, a Dutch court in The Hague on May 26 ruled that energy giant Royal Dutch Shell is liable for its contributions to climate change and ordered it to reduce carbon dioxide emissions 45% from 2019 levels by 2030.

“This is a significant best-efforts obligation with respect to the business relations of the Shell group, including end-users,” said an English translation of the ruling. “The court acknowledges that [Royal Dutch Shell] cannot solve this global problem on its own. However, this does not absolve [it] of individual partial responsibility to do its part.”

The company would likely have to “forgo new investments in the extraction of fossil fuels and/or will limit its production of fossil resources,” the court said.

In its response, Shell said,Urgent action is needed on climate change, which is why we have accelerated our efforts to become a net-zero emissions energy company by 2050, in step with society, with short-term targets to track our progress.”  

The firm said it is investing “billions of dollars in low-carbon energy, including electric vehicle charging, hydrogen, renewables and biofuels” and has committed already to cut oil generation by 1%-2% a year, and reduce the carbon intensity of its energy products 20% by 2030 and 100% by 2050.

“We will continue to focus on these efforts and fully expect to appeal today’s disappointing court decision,” Shell said.

Calling the ruling a “wakeup call,” one analyst told ENR it would require more action and bring added pressure from investors and stakeholders. The number of filed lawsuits related to fossil-fuel climate change impacts jumped more than 10% to 1,824 since late last year, says Columbia University’s Sabin Center for Climate Change Law, with most of them in the U.S.

“The decision against Shell articulates the duty of care that corporations owe people in the countries they operate in,” says Korey Silverman-Roati, law fellow at the Sabin Center, although he doubts the ruling will influence U.S. courts directly.

 

Boardroom Storm

Also on May 26, ExxonMobil Corp. investors conveyed a message that climate change urgency will require strategic changes in its operation, even with the U.S. oil giant’s record $39.5-mlllion profit last year. They voted to accept two new board directors and shifts in strategy pushed by a small but activist investor, despite the opposition of Chairman and CEO Darren Woods.

A Chevron investor majority also voted that day, against the board of directors’ recommendations, to approve proposals requiring the energy giant to cut emissions from burning its products, a more significant target than direct emissions. ConocoPhillips shareholders supported a similar proposal at the firm’s annual meeting earlier in May, but a majority of BP shareholders did not agree with an investor initiative for more ambitious emissions-reduction goals than the firm announced. 

“It appears that energy-sector corporations, for the most part, have underestimated the demand by investors and the public generally for change—particularly as it relates to climate,” Kris Veaco, a San Francisco board governance consultant told ENR. “Some oil and gas companies are either too big to move as quickly as they need to or just don’t appropriately engage with their investors to really hear and take seriously their concerns.”

[Read Harvard Business Review new analysis on changing investor relations issues here.]

While ExxonMobil has cited forecasts from the International Energy Agency that fossil fuels will still supply 80% of global energy needs in 2030, that agency also said in a May 17 report that energy producers would have to essentially end oil and gas exploration and focus investment on remaining resources to slow global warming.

When its board battle emerged in December, ExxonMobil said it would reduce emissions per unit of energy by 15% to 20% by 2025 for oil and gas production operations. In more recent months, the firm said it would scale back capital spending on production, launch a new low-carbon business and develop technologies that capture and store carbon dioxide emissions and produce clean-burning hydrogen and biofuels.

The oil giant has committed $100 million to Stanford University research in energy technology to lower CO2 emissions on a large scale and announced last month an estimated $100-billion effort to develop a carbon capture complex for itself and other energy, power and industrial firms in the Houston Ship Channel area of Texas.

Andrew Logan, senior director of oil and gas at Ceres, a nonprofit sustainable investment advocacy firm, says election of the new ExxonMobil directors “clearly signals tremendous shareholder concern about [the company’s] current approach to the energy transition,” he said. “It’s hard to imagine that the board as a whole will not choose to revisit the company’s strategy, and soon.”

In a late May research note, Morgan Stanley boosted its ExxonMobil rating as a “vote of confidence for management, and for further decarbonization.”  The investment firm noted “strategic changes [CEO] Woods has advanced over the past year” and did not expect the shareholder vote “to materially change” Exxon strategy. But the new directors “will bring expertise as [ExxonMobil] scales its low-carbon businesses in the coming years,” it said, noting changes ahead “as shareholders incorporate criteria beyond just financial metrics” into investment decisions.

Just published analyses by the Society of Petroleum Engineers and Wall Street research firm Zacks explore how well several European and U.S. oil and gas majors are succeeding in executing their energy-transition strategies.

 

Biden Weighs New Risks

President Joe Biden also addressed the overall economic risks of climate change last week by directing federal agencies to find ways to mitigate effects to workers, business and the federal government itself.

In a May 20 executive order, the president directed cabinet secretaries and other officials to identify climate-related financial risks to government programs, including housing and banking, and to find ways to reduce them in the U.S. financial system.

“With so much at stake, this executive order ensures that the right rules are in place to properly analyze and mitigate these risks,” Biden said, also requiring them to be disclosed to the public.

Biden directed the U.S. Labor Secretary to consider suspending, revising or rescinding Trump-era rules that bar investment firms from considering environmental, social and governance factors, including climate-related risks, in how worker pensions and retirement funds are invested. 

The order also requires major federal suppliers and contractors to disclose greenhouse gas emissions and climate-related financial risks and directs development of a comprehensive climate risk strategy within 120 days. That strategy must identify public and private financing needs to reach economy-wide net-zero emissions by 2050 while also advancing economic opportunity and will factor into purchasing decisions.

“In the near term, companies can expect increased public and private scrutiny of current reporting practices and may be called upon to demonstrate compliance with existing disclosure rules and guidance,” said attorneys at law firm Beveridge & Diamond in a May 25 analysis.

They said the order could expand risk-disclosure requirements now being developed by the U.S. Securities and Exchange Commission, and that “U.S. mandates now being set may serve as a model for other governments.”

Not everyone agrees. “Progressives know they can’t pass their ambition to eliminate fossil fuels through Congress in open debate. So they’re doing it by degrees and in relative stealth via regulation across the economy;” said a May 27 Wall Street Journal editorial. “The discretion here is broad and expect it to be used. Rule by the climate technocrats is coming fast.”

In its response, the U.S. Chamber of Commerce said, “Any new climate-related financial regulatory actions must be measured, reflective of agencies’ legal missions and buttressed by evidence-based administrative processes.” Tom Quaadman, its executive vice president, added: “We trust that the administration will urge regulators to work closely with the private sector and all appropriate stakeholders.”

 

Focus on ESG

Danielle DyBuncio,  CEO of construction industry technology firm ViaTechnik and a board member of two AEC firms, says the design and construction sector “has a critical role to play in building a more resilient environment and improving efficiency and sustainability in design, construction and operation of buildings and infrastructure.”

She says that at contractor Ryan Cos. US., a large integrated development, construction and design firm of which she is a director, the firm’s new Total Societal Impact ESG program “has become a focal point of company strategy.”

In reporting second-quarter results on May 10, Jacobs CEO Steve Demetriou said the firm “continues to capitalize on … tailwinds” in supporting client ESG priorities, terming it “a high-growth business opportunity for Jacobs, comprising nearly $5 billion of revenue.“

SNC Lavalin Group CEO Ian Edwards, in his first-quarter results call with analysts also earlier this month said “we’re doing our part, both as a company, and as a partner to governments and private clients through our Engineering Net Zero offering, which provides a broad range of sustainable solutions in energy, transport and infrastructure. We see this as an integral part of our future growth.”

At the EFCG event, Andreas Georgoulias, firm director of sustainability and risk, noted “a lot of inquiries” from its AEC clients on the financial value of their own ESG disclosures and said 30% saw ESG-related work as an important revenue source ahead.

ESG’s continued growth as a corporate priority “is good news because firms in this industry are very well positioned to capitalize,” he said.

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