Shareholder Proposal Related to Climate in 2022
In addition to voting against Directors Garland and Ramos, shareholders may also wish
to support a climate-related proposal at Phillips 66 this year. Follow This has filed a resolution (item 5).requesting
that the company set and publish targets consistent with the Paris Agreement, covering scopes 1, 2 and 3.32
Conclusion:
Phillips 66 has failed to set net
zero targets, align its capital investments with limiting warming to 1.5°C, or ensure its policy influence activities would support
doing so. Therefore, we recommend that shareholders vote AGAINST Chair Greg Garland (Item 1a) and director Denise Ramos (Item 1.d) at
the company’s annual meeting on May 11, 2022.
Appendix A: Proxy Voting for a 1.5°C World
The
world is currently on track to reach disastrous levels of warming, driving massive harm and threatening the lives and livelihoods of millions.
Corporate leaders in the industries responsible for this crisis have failed
to take up the leadership required to change course.
“Climate risk” is systemic, escalating and irreversible
- and corporate boards urgently need to take responsibility for averting and mitigating this risk.
The UN Intergovernmental Panel on Climate Change (IPCC) in 2018 made clear that in order
to have at least a 50% chance of limiting warming to 1.5°C and avoiding the most catastrophic effects of the climate crisis, we must
bring global, economy-wide carbon emissions down to net zero by 2050 at the latest.33
According to the International Energy Agency (IEA), in order to achieve net zero emissions globally by 2050, the electricity sector must
reach net zero emissions in OECD countries no later than 2035 and there can be no investment in new fossil fuel production from today.34
The IPCC also recognizes that reducing rates of deforestation and forest degradation also represents one of the most effective and robust
options for climate change mitigation.35
That means that corporate directors must ensure that companies set ambitious decarbonization
targets in line with 1.5°C pathways, and align companies’ business plans, capital expenditures, and policy influence to those
targets. Despite the escalating climate crisis, systemically important U.S. companies continue to invest in the expansion and continued
use of fossil fuels, further accelerating global warming.36
The
physical and financial risks posed by climate change to long-term investors are systemic, portfolio-wide, unhedgeable and undiversifiable.
Therefore, the actions of companies that directly or indirectly impact climate
outcomes pose risks to the financial system as a whole and to investors’ entire portfolios. In order to manage this systemic portfolio
risk, investors must move beyond disclosure and company-specific climate risk management frameworks and focus on holding accountable the
relatively small number of large companies whose actions are a significant driver of climate change.
When directors fail to transform corporate business practices in line with 1.5°C
pathways, responsible investors must use their most powerful tool – their proxy voting power – to vote against directors.
Bold and unprecedented action by investors is a prerequisite
to averting further global economic and financial catastrophe. While past shareholder efforts at standard setting, disclosure and engagement
have laid important groundwork, company commitments won thus far have been far too incremental, far too hard fought, and collectively
insufficient to the scale of the crisis.
Business-as-usual
proxy voting will not suffice to address the seriousness of the crisis at hand. We
urge investors to vote against directors at companies failing to implement plans consistent with limiting global warming to 1.5ºC.
Key Sectors Are Critical to Curbing the Climate Crisis
The electric power, finance, transportation, and oil and gas sectors are key drivers
of the production and consumption of fossil fuels and must all make dramatic transformations to curb the worst of catastrophic climate
change and protect long-term investors. Similarly, companies driving deforestation – including companies that source key deforestation-linked
agricultural commodities, driving market demand for one of the greatest threats to the world’s forests – must adopt comprehensive
climate policies and end deforestation.
Substantial votes against board members at these companies could help realign business
and investment plans to the goals of the Paris Agreement, hold companies accountable for lobbying and policy influence practices that
obstruct climate action, and align executive compensation to key decarbonization goals.
While each industry and company will need to chart its own path in pursuing decarbonization
consistent with limiting warming to 1.5ºC, setting a target to reach net zero emissions by no later than 2050 is a critical first
step. In the absence of such a target, investors can have no confidence that the company will be able to transform its business consistent
with limiting warming to 1.5ºC.
Voting Guide: Oil & Gas
Petroleum and fossil gas products, including those used in transportation, buildings,
industrial processes, and electricity production, account for nearly 80% of carbon emissions from the U.S. energy system.37
The U.S. is the largest petroleum and fossil gas producer in the world, having overtaken Saudi Arabia and Russia in recent years.38
In general, U.S. oil companies lag behind their European peers in adopting net zero by 2050 ambitions39,
or investing in renewable energy production.40
To stay within the available carbon budget to limit warming to 1.5°C, not only must
oil and gas companies decarbonize their own emissions, but global consumption of fossil fuels must fall as well.41
In May 2021, the IEA set out the implications of a 1.5°C pathway for the oil and gas sector in its ‘Net Zero by 2050’
scenario (“NZE”).42 Prior IEA
scenarios such as the Beyond 2°C Scenario (aligned to limiting warming to 1.75°C by 206043)
and the Sustainable Development Scenario (aligned to the Paris Agreement’s upper target of well below 2°C44),
still fell short of limiting warming to 1.5°C.
Under the NZE, fossil fuel use falls dramatically and can be satisfied with existing
assets, with no need to invest in new oil and gas fields, and no new coal mines or mine extensions.45
However, according to analyses by Carbon Tracker, the world’s largest oil companies have projects both sanctioned (those currently
producing or under development) and unsanctioned (those not yet under development) over the course of the next two decades that would
exceed the carbon budget for 2.0°C of global warming, let alone 1.5°C.46
This signals that many companies are not yet fully committed to meaningful reductions. While oil demand fell in 2020 due to COVID-19 disruptions,47
oil demand and pricing are currently rebounding,48
and any expansion plans are fundamentally at odds with the immediate global production reductions required within most Paris Agreement-aligned
scenarios.49
As shale-focused companies rely primarily on continued new drilling to sustain production,
these companies are particularly at risk: in order to limit to 1.5°C and be aligned with the IEA NZE, shale-focused companies in particular
must reduce production by more than 80%.50
However, many U.S. companies continue to expand into shale-rich regions such as the Permian Basin51
(see Capital Allocation section). The Permian is predicted to account for much of the growth in US oil production, and much of this will
likely be exported and burned overseas; an Occidental Petroleum company executive recently noted the trend by saying “every single
molecule from here on out has to be exported.”52
Target setting
To avoid the risk of global temperature overshoot, emissions need to fall by 45% from
2010 levels by 2030, reaching net zero by 2050.53
Net-zero commitments should also incorporate interim targets and milestones that allow accelerated emissions reduction between now and
2030 rather than delaying the hard task of emissions reduction until after that date. Net zero commitments must cover projects on a full
equity share basis, such that all joint ventures and subsidiaries are covered by the company-wide target. Companies should achieve net
zero by 2050 with limited use of offsets, negative emissions, or unproven or uncommercialized technologies, including carbon capture and
storage (CCUS). Relying on CCUS–rather than phasing out the production of fossil fuels–is a risky strategy54;
even pro-CCUS sources acknowledge that many proposed CCUS technologies are as yet unproven, and a massive infrastructure investment and
buildout would be required to capture enough carbon to limit warming to 1.5°C.55
Oil and gas companies should clearly disclose specific plans to use offsets or negative emissions to achieve net zero emissions by 2050,
so that investors may assess the quality and credibility of their plans.
KEY DATA SOURCES:
| ● | CDP (formerly Carbon Disclosure Project), company survey responses56 |
| ● | Science-Based Targets Initiative, Companies list57
and Sector Guidance58 |
| ● | Climate Action 100+, Disclosure Indicators 1-459 |
| ● | Oil Change International, Big Oil Reality Check60 |
Capital allocation
Given that oil supplies currently in production already exceed the carbon budget for
limiting warming to 1.5°C, oil and gas companies must immediately cease approving investment in new projects that fall outside the
carbon budget. At minimum, Arctic and oil sands projects should be halted because they are inconsistent with limiting warming to 1.5°C61,
economically marginal due to elevated production costs, and carry additional environmental and human rights risks.62
Oil production in the Permian Basin in Texas and New Mexico – almost entirely fracking63–has
nearly quadrupled from 2010 to today,64 while
natural gas production has more than tripled.65
According to an analysis conducted by Oil Change International, carbon emissions from Permian oil and gas production through 2050 could
alone exhaust nearly 10% of the global 1.5°C carbon budget.66
The climate impact of Permian oil and gas is even greater than coal based on the amount of methane that escapes into the atmosphere during
hydraulic fracking.67 It is estimated that
the Permian Basin has a 60% higher methane leakage rate than other U.S oil and gas regions.68
Given that the vast majority of these emissions would come from wells not yet in production at the end of 2020, much of these emissions
could be avoided if companies simply halted all drilling of new wells.69
Investors should use the NZE scenario as a floor to assess companies’ climate policies,
transition scenarios and capital allocation alignment. Importantly, no new oil or gas fields should be approved for development under
a 1.5°C pathway; no investment in new oil and gas production should be undertaken;70
and production levels must fall by the 2030s.71
Under such a scenario, asset stranding of additional production assets as well as existing assets is a major risk to investors.72
KEY DATA SOURCES
| ● | Rainforest Action Network, Banking on Climate Chaos73 |
| ● | Carbon Tracker, Fault Lines (2020)74
and Adapt to Survive (2021)75 |
| ● | Carbon Tracker, Company Profiles: Oil & Gas Companies76 |
| ● | Climate Action 100+, Climate Action 100+ Net-Zero Company Benchmark: Company
assessments, see Disclosure Indicator 677 |
Policy influence
Oil and gas companies must fully align their policy influence activities, including political
spending and lobbying, with the policy settings required to accelerate sector-wide emissions reductions on a timeline necessary to limit
warming to 1.5°C. Oil and gas companies must provide full disclosure of all political and lobbying spending in all jurisdictions to
allow investors to assess this alignment. Finally, companies must ensure the alignment of the policy influence activities of any trade
associations or similar entities of which they are members or to which they contribute with 1.5°C outcomes, or cease membership of
such organizations.
KEY DATA SOURCES:
| ● | Climate Action 100+ Net-Zero Company Benchmark: Company assessments, see
Disclosure Indicator 778 |
| ● | InfluenceMap, List of companies and influencers79 |
Summary table
TARGET SETTING |
1.1 |
Net zero by 2050 commitment that covers all relevant emissions sources, in particular scope 3 emissions from the burning of products sold, and on a full equity share basis |
1.2 |
Net zero commitment has limited use of offsets, negative emissions, or unproven or uncommercialized technologies, including carbon capture and storage |
1.3 |
Company has adopted robust interim targets, including substantial reductions by 2030 |
CAPITAL ALLOCATION |
2.1 |
Company has a plan to realign capital expenditures to meet a net zero decarbonization commitment, including substantial reductions in production in line with the IEA Net Zero by 2050 Scenario |
POLICY INFLUENCE |
3.1 |
Alignment of policy influence activities with net zero target and limiting warming to 1.5°C |
1]
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4]
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64
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65
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76
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79
https://influencemap.org/filter/List-of-Companies-and-Influencers#