Our Letter to Chevron
September 6, 2022
Michael K. Wirth
Chairman of the Board and Chief Executive Officer
RE: Strive Engagement with Chevron
Dear Mr. Wirth,
Strive Asset Management recently became a shareholder of Chevron. We write to you and your board of directors on behalf of our clients to deliver what we term a “post-ESG” shareholder mandate.
We believe that Chevron has the potential to become one of the world’s most valuable companies, both in terms of market capitalization and impact on human flourishing. As recently as 2013, Chevron was among the top 10 most valuable public companies in the world by market capitalization. At the beginning of 2022, Chevron did not make the top 50 and is still outside the top 20, but we believe that can change: the growing supply-demand imbalance for energy around the world creates a unique opportunity for a great American oil company like Chevron to meet that need.
To seize this opportunity, Chevron must produce and distribute more fuel to customers around the world – proudly, publicly, and without apology. We are concerned that Chevron faces immense pressure from its large institutional “shareholders” including BlackRock, State Street, and Vanguard to adopt value-destroying limitations on its business that do not align with Chevron’s best interests.
Rejecting these firms’ mandates will require courage. We believe you have already exhibited unusual courage in your leadership as CEO, including most recently in your public letter to the President of the United States explaining the vital role that oil companies like Chevron play in addressing the current energy crisis. We also believe that Berkshire Hathaway’s recent investment in your company affords Chevron greater flexibility than its peers to resist the demands of ESG-promoting asset managers. We are hopeful that with your continued leadership, Chevron can outperform certain of its larger U.S. competitors who have visibly buckled to “shareholder” pressure and misguided activist campaigns. That is why we have chosen to publicly engage with Chevron rather than with certain of your peers.
We respectfully call on you to lead Chevron with the exclusive objective of maximizing long-run value for the company’s ultimate owners while disregarding social pressure applied by certain of the company’s large “shareholders.”
As investors, we believe that it is important for management teams to consider risks, including potential long-term risks associated with climate change, when making business decisions. Businesses must look ahead to the future and make rational decisions. However, we believe that this tautology has been co-opted by politically motivated and self-interested actors to advance ESG agendas in corporate boardrooms that do not actually serve the long-run interests of U.S. energy companies including Chevron.
A Generational Opportunity for Chevron
We believe that the looming global supply-demand imbalance for energy creates a generational opportunity for American companies like Chevron to both create significant shareholder value and contribute to human flourishing.
Global economic growth portends growth for energy demand. Over the last ten years, global energy consumption has grown by 2% per year, with oil growing by 1%, natural gas growing by 2.6%, and coal holding flat. Public narratives about an ongoing “energy transition” are misleading: in 2021 fossil fuels met 82% global energy demand, and fossil fuels’ share of total energy consumption declined by only 11% over the last 50 years1, notwithstanding substantial investments and public pressure to shift to non-carbon sources. Future reductions will be even more difficult to achieve.
Yet fossil fuel producers have systematically underinvested in oil and gas production since 2014 which leaves them unable to meet rising global demand, due in part to the demands of the ESG (“Environmental-Social-Governance”) movement in capital markets. The net result is an unsustainably low level of capital expenditures in oil and gas exploration and production which peaked in 2014 at over $700 billion but has since fallen to $350BN-$450BN per year from 2015-2021.2 Chronic underinvestment now leaves the world short on production precisely when demand growth is strong. Leading analysts persuasively argue that oil and gas capital expenditures must rise an additional $1.2 to $1.3 trillion by 2030 to support global economic growth.
We believe that American oil companies including Chevron can and should capitalize on this opportunity. We recognize that this departs from the popular refrain that energy companies should instead increase investments in non-carbon energy while maximizing short-term dividend yields. Investor demands for capital discipline were understandable as a short-term response to the 2014 oil price crash, but circumstances have changed.
Indeed the industry’s failure to invest in long-run growth partly accounts for low valuations of U.S. energy companies relative to their earnings. Since June 2018, U.S. energy stocks have underperformed the market even as their profits have overdelivered. From June 2018 to July 2022, earnings per share for the U.S. energy sector rose 179% and 234% for Chevron, yet stock prices rose only 7% and 30% respectively. By contrast, earnings in the U.S. tech sector rose just 72%, yet stock prices rose 107%. This is unsurprising: investors cannot ascribe a high multiple to U.S. energy sector earnings if the entire sector underinvests in production capabilities that support longer-term growth. But this can change if companies like Chevron step up to capture the opportunity.
Consensus estimates project that Chevron is expected to reinvest ~31% of its cash flow in 2022. This appears to be a record low percentage. During the height of the Covid-19 pandemic in 2020, Chevron set a $19-22BN budget. Now that global demand has significantly rebounded, Chevron’s future profit forecasts are undoubtedly higher than they were in 2020, yet Chevron’s budget for capital investment has still not yet returned to pre-pandemic levels.
We believe in your ability to best assess how to allocate capital in a value-maximizing manner and do not wish to second-guess your investment judgments. However, we believe certain of the company’s recent decisions reflect Chevron’s response to social pressures exerted by large ESG-linked asset managers to advance political agendas that do not serve the best interests of Chevron’s owners.
Example: 2021 “Shareholder”-Imposed Scope 3 Emissions Caps
In 2021, a Dutch nonprofit called “Follow This” – an organization founded to fight climate change –submitted a shareholder resolution demanding that Chevron reduce its “Scope 3 emissions.”The group was transparent that its intention was to combat climate change, not to advance a business goal. The Environmental Protection Agency defines Scope 3 as emissions that are “the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain.” This includes 15 categories including emissions relating to employee commuting, leased assets, investments, and downstream usage of its products by customers.
Scope 3 emissions reductions represent arguably the most severe demand of the “E” prong of the ESG movement: the proposal effectively demanded that Chevron assumes responsibility not just for reducing its own greenhouse gas emissions, but also for reducing emissions that are both upstream and downstream of its business. We applaud Chevron’s board of directors for recommending against adopting this harmful 2021 proposal.
Yet over the board’s objection and aided by the votes of large asset managers including BlackRock, State Street, and Vanguard, this 2021 resolution nonetheless earned majority shareholder support. BlackRock, the world’s largest asset manager and Chevron’s third largest shareholder, said at the time that it “believes that companies in carbon intensive industries should aim to set scope 3 emissions reduction targets” and that the proposal was “consistent with what we expect of large companies like Chevron and its peers.” This is puzzling for several reasons.
First, Scope 3 emissions calculations effectively double-, triple-, and even quadruple-count the same unit of emissions. Suppose a gallon of gasoline is used to deliver a pizza. That represents approximately 8,800 grams of emitted carbon dioxide. Those 8,800 grams count not only in Chevron’s Scope 3 emissions, but also in the Scope 3 emissions of Dominos (who made the pizza), Uber (who delivered the pizza), Ford (who manufactured the car leased by the Uber driver) and Facebook (who ordered it for an employee meeting). If every company adopted a Scope 3 emissions cap, the total emissions in need of reduction would be infinitely higher than the total emissions themselves – a nonsensical proposition.
Second, even if double-counting issues were somehow resolved, Chevron cannot possibly know whether its employees drive hybrids or Humvees; whether its office supplies are delivered from nearby or overseas; or whether the data center leased by its outside IT firm is powered by coal or wind. Chevron certainly does not know if its gas is being used to power a truck delivering solar panels or tractors. Trying to make these determinations would turn an already resource intensive exercise into an all-consuming task. And when companies try to avoid this issue by using estimates based on industry averages instead of actual measurements, the results are not only inaccurate, but hinder progress on emissions.
Third, even if Chevron were all-knowing about how each of its customers utilized its fuel, there is no feasible way for Chevron to cause its customers to change their behavior to reduce emissions – other than to purposefully sell less fuel to these customers. Dominos, Uber, Ford, Facebook, and the outside IT firm each report to their owners, not to Chevron. These are just a few of the innumerable technical problems with implementing Scope 3 emissions reductions.
But there is an even more fundamental question is at stake: why is it in Chevron’s best interest as a business to adopt Scope 3 emissions reductions?
The organization who submitted the Scope 3 proposal was transparent that its singular goal was to address climate change, but the duty of Chevron’s board is to exclusively look after the best interests of its shareholders. Scope 3 emissions limitations are necessarily adverse to the growth of any company who adopts them. Microsoft’s Scope 3 emissions ballooned by 23% in 2021 precisely because its sales also boomed: each additional Xbox sold takes additional energy to power it, leading to more emissions downstream. For an oil company like Chevron, Scope 3 emissions caps may represent an existential risk to the business itself. The 2021 Scope 3 proposal effectively requires Chevron to bear responsibility for the emissions of every Amazon delivery truck that burns its fuel, without requiring a symmetric obligation from Amazon in return. This makes about as much business sense as it would for McDonald’s to voluntarily commit to reducing the body weight of anyone who ever consumes a Big Mac, without asking the consumer to share any responsibility. As far as we can tell, this makes no business sense for Chevron.
“Shareholder”-Imposed ESG Pressure Has Impacted Chevron’s Behavior
To Chevron’s credit, the board partially stood its ground after the shareholder vote, declining to adopt “absolute Scope 3 targets.” But our review of Chevron’s behaviors and public statements over the past 24 months suggests that activist ESG pressure has nonetheless changed your company’s behavior – for the worse.
On May 26, 2021 Chevron shareholders voted in favor of the foregoing Scope 3 emissions proposal. By September 14, Chevron issued a press release announcing $10 billion in new investments into renewable energy projects. We note that this number was triple your prior capital commitments to such projects.
We believe that this decision partly reflects an effort to placate your critics, rather than one to exclusively maximize long-run value for Chevron’s owners. On March 1, 2022, Chevron New Energy (CNE) President Jeff Gustavson was asked by an analyst whether CNE is a “value driver or a license to do business” (alluding to the central claim of ESG-promoting asset managers that companies must “earn their social license to do business”). Mr. Gustavson responded: “I think it’s a little bit of both…and that’s a nice combination of having those two things.” We applaud Mr. Gustavson’s candor – and hope that our letter does not cause your legal and public relations departments to coach executives in the future to artificially couch such answers in the language of shareholder value maximization, as many of your peers already do. We are still left wondering how returns on CNE projects compete across Chevron’s total carbon-based portfolio.
Yet your $10 billion pledge did little even to placate your critics. Instead Chevron received further criticism from activist groups for “avoid[ing] a net zero pledge” and for “stop[ping] short of sharp reductions despite investor rebuke” by “sidestepping” the Scope 3 emissions issue.
On October 11, Chevron appears to have responded by issuing a new press release announcing a “net zero aspiration” and set specific targets for reducing carbon intensity, including its Scope 3 emissions. Chevron released an updated “climate change resilience” report, which says Chevron “support[s] the global net zero ambitions of the Paris Agreement.” Addressing climate change may be an important societal objective, but deciding whether and how to address this challenge is the duty of publicly elected officials, not Chevron. Congress had its chance to ratify the Paris Agreement and chose not to. It is not Chevron’s job to ratify it instead.
In the same report, Chevron also voiced its support for a carbon tax: “For us, the term carbon price refers to an external price resulting from a policy like a carbon tax…We support a carbon price” (emphasis included in original report). We are left wondering why publicly apologizing for Chevron’s core oil and gas business by supporting a carbon tax best serves the company’s long-run interests.3 We find it highly unusual for any company to publicly advocate for a new tax on its core product. Apple did not become the world’s largest company by using its corporate resources to advocate for a tax on smartphones. Amazon did not become a behemoth by lobbying for higher sales taxes for online retailers, but instead did the exact opposite.
We respectfully suggest that Chevron would better advance its business interests by standing proudly behind the benefits that fossil fuels deliver to society rather than to voice its support for the Paris Agreement or for a carbon tax. We encourage you not to apologize for producing fossil fuels, and instead to better educate your climate-concerned stakeholders on realities such as the fact that the climate disaster-related death rate today is 98% lower than it was just a century ago – largely due to innovation supported by greater utilization of fossil fuels produced by companies like Chevron.4
Narrowly, certain of your large ESG-promoting “shareholders” appear to have been placated by your recent apologist gestures. Indeed, according to Chevron’s 2022 proxy statement, some of these large “shareholders” admitted in private discussions with Chevron that they never really wanted the extremist Scope 3 emissions reduction targets they publicly voted for in the first place: “Some stockholders, including those that supported the proposal, shared that they recognized that absolute reductions of GHG emissions, and specifically Scope 3 emissions, may not be appropriate for Chevron because that would require significantly changing our business strategy” by, for example, “shrinking Chevron’s traditional oil and gas business.” It is therefore unsurprising that these ESG-promoting asset managers were satisfied with the damaging, though incomplete, measures that Chevron did agree to take.
In fact, Chevron’s agreement to set Scope 3 carbon intensity targets was the very reason BlackRock and State Street each voted against a Scope 3 proposal in 2022. Specifically, State Street noted that following the 2021 meeting, Chevron “adopted a portfolio carbon intensity target which includes Scope 3 emissions which we had encouraged during our engagements with the company. We voted against this year’s proposal given the company’s responsiveness to our engagement as well as last year’s shareholder vote.” BlackRock similarly noted that “Chevron updated their climate-related disclosure and specifically addressed scope 3 emissions.” (Interestingly, BlackRock CEO Larry Fink offered a different explanation in June 2022: “[we] said and I have always been loud on this, we are not going to support Scope 3 at this time…I have no problem in doing Scope 1 and 2 but we’ve always said Scope 3 is forcing big companies, banks, and asset managers to be the environmental police.” He made no mention of BlackRock’s 2021 vote.)
As shareholders, we wish to better understand what was said during BlackRock’s and State Street’s aforementioned “engagements” with the company. While we commend the board’s ultimate refusal to set absolute Scope 3 emissions reductions targets, we are concerned by Chevron’s apparent obeisance to these firms’ demands.
Your Fiduciary Obligation
We understand that you are in a challenging position when Chevron’s top “shareholders” mandate your board to adopt a course of action that you believe is not in the best interests of Chevron’s shareholders. But here is the reality: your purported “shareholders” are not the actual owners of your company.
Today the three largest passive asset managers in the world – BlackRock, State Street, and Vanguard – manage over $20 trillion, approximately equal to the total U.S. gross domestic product. In 2021 these firms appeared in public filings as Chevron’s top 3 shareholders. By contrast, the actual owners of Chevron are not BlackRock, State Street, Vanguard – or, for that matter, Strive. Chevron’s actual owners are the clients of these institutions: everyday citizens whose capital is invested in passively managed index funds.
You owe a fiduciary duty to the actual owners of Chevron, not to the institutions who claim to represent these owners. There is strong reason to believe that these large asset managers are not voting with their clients’ best interests in mind. Indeed, nineteen state Attorneys General have explicitly accused BlackRock of as much. Last month, they sent a letter alleging that the company “use[s] the hard-earned money of our states’ citizens to circumvent the best possible return on investment.” It further accused BlackRock of violating the law by “commit[ing] to accelerate net zero emissions across all of its assets, regardless of client wishes.”
We also note that certain these institutions suffer significant conflicts of interest when representing their clients. For example, Chinese firms including PetroChina are well-positioned to acquire projects dropped by U.S. companies like Chevron who face ESG-imposed pressure to achieve emissions reductions. PetroChina recently reported strong financial results which the company attributes in part to its increased investments in production capacity. BlackRock is a large shareholder in PetroChina while imposing no emissions reduction measures on that company to our knowledge. While such asymmetries may serve BlackRock’s own business interests in China, they harm the business interests of American companies like Chevron. In Q1 2022 Berkshire Hathaway became the second largest shareholder of your firm. Unlike your largest ESG-promoting shareholders, Berkshire Hathaway invests capital from its own balance sheet and does not suffer these conflicts of interest. Ironically, Berkshire Hathaway itself was itself the subject of ESG-linked pressure applied by BlackRock in 2021 attempting to overhaul how the company accounts for climate risks. Warren Buffett, the Chairman and CEO of Berkshire Hathaway, publicly dismissed BlackRock’s demands as “asinine” and continued to manage his company without regard to their pressure. “The company’s business units operate in a decentralized fashion, and the parent is only concerned with their financial performance,” Mr. Buffett reportedly said at the time. The next time you receive non-binding mandates from “shareholders” that you believe do not advance Chevron’s best interests, we respectfully suggest you do the same.
We Seek to Deliver a Solution
Our goal in writing this letter is to liberate you from constraints imposed on Chevron by its ESG-promoting “shareholders.” Speaking on behalf of our clients, we respectfully urge the company to:
- Evaluate all projects based on financially measurable return on investment, without regard to any other social, political, cultural, or environmental goals.
- Make capital investments in oil and gas production in a manner that maximizes long-run return on investment rather than to meet emissions reductions targets, net-zero goals, or other constraints not codified in law.
- Rescind all commitments to Scope 3 emissions reductions, including to clearly reject the demands of the 2021 non-binding shareholder resolution supported by BlackRock, State Street, and Vanguard.
- Evaluate potential conflicts of interest borne by asset managers who pressure the board to adopt environmental or social policies.
- Cease the use of corporate resources to publicly advocate for a carbon tax unless you can demonstrate that such activities contribute to creating shareholder value.
- Cease the use of corporate resources to produce “sustainability” or “ESG” reports unless you can demonstrate that such activities contribute to creating shareholder value.
We look forward to engaging with your management and board of directors ahead of next spring’s proxy voting season.
With best regards,
Executive Chairman, Strive Asset Management