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Climate change causes credit risk for oil producers

A number of recent events have highlighted the increasing credit risk facing major oil producers over concerns about climate change, according to credit rating company Moody’s.

This includes a court ruling against Royal Dutch Shell, which ruled it must deepen planned greenhouse gas emissions cuts. On the same day - 26 May 2021 - ExxonMobil elected two climate-activist candidates to the company’s 12-member board of directors, while a large majority of Chevron shareholders called on the company to limit emissions from the combustion of oil and natural gas.


These actions, according to Moody’s, represent a “substantial shift” in the landscape for oil companies, which had previously prevailed in courts, and largely fended off significant shareholder votes on climate-related matters.


Of the three developments, Moody’s considers the seating of board members at ExxonMobil as the most important as the outcome is binding and cannot be appealed. Its shareholders elected two candidates among four that small climate-activist shareholder Engine No. 1 - which owns 0.02% of ExxonMobil’s outstanding shares - had nominated, despite the company’s concerted efforts to defeat the nominees.


On the same day, Chevron’s shareholders voted 61% in favor of a resolution calling on the company to cut its Scope 3 emissions - which are indirect emissions that occur in a company’s value chain.


Meanwhile, Shell will likely be forced to curtail some aspects of its business. This ruling from a Dutch court - which states that, by 2030, it must cut its CO2 emissions by 45% from 2019 levels - came after a lawsuit from several climate activist groups.


According to Moody’s, the ruling amplifies its sense that the industry will have to decarbonise substantially more quickly than companies are currently planning. This will require companies to shift businesses swiftly away from oil generation. This will likely reduce debt capacity at a time when outsized spending may be necessary to fund acquisitions, capital spending and research and development oriented toward renewable energy and efforts to decarbonise.

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