In a move that seems as unlikely as Hugh Hefner paying for research on whether breast implants give you back pain, ExxonMobil (XOM 0.49%) has agreed to release a report on how the company believes climate change will impact its business.
The report will warn investors of the risks that stricter limits on carbon emissions would place on the company's business. ExxonMobil agreed to conduct and make public the research by the end of March.
The move was forced by Arjuna Capital, a sustainable wealth management firm, and As You Sow, a non-profit that promotes environmental and social corporate responsibility through shareholder advocacy, coalition building, and legal strategies, which jointly filed a shareholder resolution demanding a comprehensive "carbon asset risk report," CNN Money reported.
The report will show how ExxonMobil plans to deal with the fact that while it lists reserves of oil and gas as assets, those assets may not be usable without creating an environmental disaster. "Coal, oil, and gas reserves that are claimed as assets on the balance sheets of the top 100 coal, oil, and gas companies contain over three times the total amount of carbon that scientists believe can be released without climate catastrophe," As You Sow reported on its website .
In 2012 World Energy Outlook, an international energy agency, echoed that opinion saying that "no more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the two degree Celsius goal," generally recognized as the level beyond which global warming will have dire ramifications.
Why ExxonMobil is doing this
In short ExxonMobil is bowing to pressure from activists. As You Sow and Arjuna had filed a resolution on climate change that would have been discussed at the company's next annual shareholders meeting. In exchange for ExxonMobil releasing the report on carbon emissions, the activists have agreed to withdraw the resolution, The New York Times reported .
This is not happening because ExxonMobil suddenly realized that it owed the public an apology . The company was dragged into releasing the report and is only doing so to avoid a potentially worse showdown over the issue at its investor meeting.
As You Sow has filed similar resolutions with Chevron (CVX 0.95%), Anadarko (APC), Hess (HES -0.40%), and CONSOL Energy (CNX -1.26%).
It's not just about the environment
While the activists forcing the issue have an environmental agenda, there are also bottom line business reasons ExxonMobil shareholders would want access to this information. Since the company sells fossil fuel and places a value to its fossil fuel assets, any change to how those values are tabulated could potentially mean billions of dollars in value lost.
Some oil reserves are more expensive to extract than others and if carbon emission policies are changed, could become uneconomical to run. With President Barack Obama seeking to reduce carbon emission by as much as 80%, The Times reported, ExxonMobil may be sitting on assets that have the potential to become worthless (or at least worth less).
"Shareholder value is at stake if companies are not prepared for a low-carbon scenario," said Natasha Lamb, director of equity research and shareholder engagement at Arjuna Capital, in a release.
The report will also show how increased restrictions on carbon emissions would impact the projects the company intends to invest in and answer whether any new fossil fuel reserves the company invests in are at risk of losing value.
"These two goals" — extracting a company's reserves and reducing carbon emissions — "are in conflict and unlikely to be able to coexist going forward," Allen Good, an oil company analyst at Morningstar told The Times.
If ExxonMobil has oil assets it can't get to economically then those assets aren't worth very much and need to be revalued on the company's books. Changing laws are always a risk factor for fuel companies, but it's hard to judge how much a change in carbon emission standards will impact the ExxonMobil balance sheet if the company does not disclose the information it is being forced to release.
It's about the bottom line
"Companies need to acknowledge that preparing for a low-carbon future is a necessity, not a choice. Companies that prepare early for a future with reduced carbon emissions will likely perform better than those who delay -- and investors need transparency and disclosure about these company choices," said As You Sow President Danielle Fugere in a release.
Whether you fancy yourself an environmentalist or are someone who believes that it's our duty as humans to exploit the planet's natural resources as fully as possible with no thoughts about the future, this report from ExxonMobil is groundbreaking. Few, if any, companies have been forced to detail the impact their actions have on the world. The ramifications are potentially enormous.
Could activist investors force Coca-Cola to release a report on the health care costs of childhood obesity due to soda consumption? Might Electronic Arts have to provide data on the potential negative impact to its game sales if parents agreed that kids should go outside and play? I'm being a little silly but the potential ramifications of investors holding companies responsible for more than just profits are far ranging.
It's also worth noting that this report may show that ExxonMobil's short-term profits are coming at the expense of the company's long-term future. What's good for the environment may actually be good for ExxonMobil in the long-term if it gets out ahead of its competitors. This isn't two hippies holding a sign, or even Al Gore making a movie, it's activism with a profit motive -- do the right thing not just because it's the right thing but because if you don't you'll stop making money doing the wrong thing.
