Making Progress Toward Sustainability: An Exxon Case Study

In 2020, the CEO of Exxon Mobil said something that caught our attention.

Darren Woods told investors that competing oil and gas companies’ pledges to reduce carbon dioxide (CO2) emissions would do little to solve the climate change crisis. Woods called his rivals’ emissions-reduction promises nothing more than a “beauty competition” that Exxon would ignore as it sought other strategies to address the industry’s impact on climate change.¹

The American Century Global Value team interpreted his comment as Exxon's lack of commitment to the energy transition. In the years since, however, we think Exxon has adopted a more serious approach to sustainability within its operations and in addressing the broader climate issue.

American Century's Global Value Transition* team thinks Exxon is attractive because it's transitioning to sustainability for its business operations. Exxon also exemplifies how Global Value Transition applies its key performance indicators (KPIs) to evaluate whether to invest in a company and how our engagement with management can guide its progress toward sustainability.

We believe the result is a more sustainable and, at its core, a better-run business.

Our Journey with Exxon: From Disinvestment to Engagement

The American Century Global Value team has followed Exxon since the team's inception in the early 1990s. In 2016, we believed Exxon made questionable investments in high-cost assets in the U.S., Russia and Canada, saddling the company with an asset portfolio that we deemed to be of lower quality than its peers. We were also concerned about the company's strategic vision, especially its lack of focus on and planning for the energy transition.

Woods' "beauty competition" comment in 2020 and our evaluation of the company at the time left us doubtful that the company had adopted a meaningful energy transition plan.

Exxon’s Sustainability Pivot: How Investor Activism Catalyzed Change

We doubted Exxon’s willingness to craft a sustainability plan because we had previously asked company management how it would react to an activist investor seeking to influence change. Exxon’s response suggested it would resist an activist investor’s maneuvering.

But in February 2021, an activist investor tested the company. Engine No. 1, a small hedge fund and an unlikely foil for a behemoth like Exxon, took a stake in the oil and gas company. The hedge fund went public because Exxon’s management had dragged its feet on addressing climate change.

It appeared that Engine No. 1 had brokered some level of dialogue with Exxon’s board of directors, leaving us with the impression for the first time in five years that investors could influence the company to improve its strategic direction. We initiated a position in Exxon in 2021 and coalesced around the push to make Exxon a more sustainable company.

Later that year, investors nominated a slate of directors keen on lowering Exxon’s emissions. A close proxy vote resulted in three new directors on Exxon’s board — directors we supported — marking a surprising turn in favor of the energy transition and sustainability. The proxy vote was close enough that we believe new directors wouldn’t have reached the board without votes from shareholders like us.

Exxon’s Energy Transition Acceleration: Net-Zero Goals and Strategic Investments

The events of 2021 quickly redirected Exxon’s focus toward the energy transition. In January 2022, the company announced a plan for net-zero Scope 1 and Scope 2 greenhouse gas emissions by 2050. Woods, who had been dismissive of emission pledges two years earlier, said that Exxon was “committed to playing a leading role in the energy transition” and “developing comprehensive roadmaps to reduce greenhouse gas emissions from our operated assets around the world.”²

Exxon has launched aggressive goals to reduce emissions in the Permian Basin, the highest-producing U.S. oilfield. In 2023, Exxon announced plans to acquire Pioneer Natural Resources, a top oil producer in the Permian Basin. Upon announcing the acquisition, Exxon accelerated Pioneer’s net-zero emissions target from 2050 to 2035, which is expected to close in the second quarter of 2024.

Exxon also announced a corporate plan to spend $17 billion on lower-emission investments to reduce greenhouse gas emissions from its operations and that of its customers.

Exxon’s Sustainable Growth Story: Doubling Share Value Amid Energy Transition

Exxon’s business hasn’t suffered during its sustainability journey. It trades at around $115 a share and its balance sheet is as strong as ever as the company approaches a net cash position. It sustains its franchise with a deep reserve base. The portfolio of assets, which we soured upon in 2016, has improved with new investments in Guyana, the Permian Basin and liquified natural gas.

Exxon has outperformed relative to the MSCI World Value benchmark by 40%, plus dividends, since 2021, when the company was pushed toward the energy transition.³ It has outperformed peers over the same period, besting Chevron by 30% and Shell and TotalEnergies by 15% each.⁴

To us, Exxon is a rich example of why we believe Global Value Transition’s approach works:

• We invest in companies overlooked by the market for their progress toward sustainability.

• We actively engage with management teams to ensure that companies we invest in continue their sustainability journeys.

• We can escalate our engagement to reorient companies toward the targets we set for them in our KPIs.

• Our investment targets become better-run enterprises due to their business model progression.

Driving Sustainable Progress: Our Proactive Engagement Approach

Global Value Transition actively engages with companies like Exxon. With some companies, we escalate our engagement to ensure that they continue to make progress toward sustainability, whether through proxy voting or, in some cases, board-level conversations.

As part of our well-defined engagement plan, we identify KPIs for each company that set a baseline for improvement and allow us to measure progress toward sustainability. Figure 1 details some of the specific KPIs we developed for Exxon.

We have defined specific, relevant and measurable KPIs for all portfolio holdings. Our goal is to engage and partner with our investee companies on their transition journeys.