The Hemingway Law of Motion

Friday Reflection | May 28, 2021

In his 1926 novel The Sun Also Rises, Hemingway’s characters have the following exchange: 
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”¹

Our lives are full of tipping points, and change isn’t always smooth and linear – especially in the short term as we are living through it. Response to certain crises can take much longer to develop than we usually assume, and when it coalesces, change can occur much faster than we had anticipated.

Results from shareholder resolution votes pressuring oil and gas industry giants Exxon Mobil and Chevron surprised investors this week. During a week when the stock market moved generally higher on positive economic data, shareholders insisted both companies’ managements proactively address the risks of climate change. Pressure for change in the fossil fuel industry has been building up for decades; now significant changes are coming all at once.

The Board of Directors at Exxon Mobil saw a shakeup this week as activist shareholders successfully elected two new directors to help the company shift toward greater consideration of renewables. Engine No. 1, a small investment company that led the proposed changes, was strongly opposed by current management. Their message of tapping “into broadly held discontent among investors who are ever more sensitive to climate” ultimately won the vote.²

A similar vote was successful at Chevron this week, where shareholders demanded that management develop a plan to cut emissions from the company’s products, and narrowly missed passing a resolution to analyze the impact of a move to net-zero emissions on business results.³ These investors’ goals aren’t unconventional; they are arguing in favor of responsible business management to ensure financial success for the company. To do so, though, they require bolder responses by management to a changing landscape in energy demand.

These successes are striking. Since the first Earth Day in 1970 kicked off an active national conversation about degradation of our environment, there has been considerable consolidation in the oil and gas industry, and leadership has successfully resisted similar pleas for change from shareholder activists. This week the stakeholders voting for change included core institutions such as the NY and CA state pension funds, as well as mammoth investment firms Blackrock, State Street, and Vanguard.⁴ In a ruling that may eventually apply to all the oil multinationals, a Dutch court mandated that Royal Dutch Shell cut carbon emissions in response to a lawsuit by climate activists.⁵

Despite celebrated progress toward a renewables transformation – state mandates for the development of renewable energy generation, and rapid growth rates of solar and wind generation in the last two decades – fossil fuel market share hasn’t changed much in fifty years.⁶ Electricity generation from all renewable sources has only increased from a 23.6% share in 1971 to a 29.5% share at the end of 2020.⁷ Over the same period, the share of electricity generation from coal has only declined from 40% to about 36%.

Our economy both in the US and globally has grown over the last half-century in part because of the availability of sufficient fossil fuels to provide the energy intensity that technological change has required, with a special emphasis on electricity. The rise of solar and wind particularly has created new sources of energy, but we have also retained in-place fossil fuel production. The Exxon Mobil board election may shift the balance finally, especially in concert with other shareholder votes and stakeholder actions. Change has started to feel safer than continuity, and that is the key element to the acceleration we are now witnessing.

With continuity had come a sense of security, as long as the benefits of energy use underpinning economic growth and technical innovation outweighed the costs of environmental damage and climate change. Today, oil companies are investing in fields that produce less and less oil per dollar of investment, with a concomitant increase in cost and in the price of the finished product. Despite this reduced efficiency and promises to limit the pace of growth in emissions, total output continues to grow to meet rising demand. The rise of renewables and the increasing awareness of climate change has made possible a shift in narrative, bringing us to real conversation among various stakeholders about the right path forward.

Growth depends on change, whether that comes from technology, policy, or social awareness. Humans are most comfortable with gradual change. This is one reason the pandemic is so difficult: not because we don’t have the technology to work remotely or don’t understand hygiene, but because we have been forced to make radical and disciplined change overnight.

Closer to home for us and our clients, is the news that our team is returning to the office and navigating the changes that come with that transition. The ability to meet in person with clients will add to our virtual meeting capability and allow us to partner more effectively with clients as they face changes in their own lives. Our clients often face the prospect of radical change, from handling the financial transformation augured by the incapacity or death of a loved one to the sudden clarity that it’s time for retirement.

Most of the time we need patience as we work towards longer-term hopes and goals, but occasionally Hemingway motion kicks in, and we face a leap forward to create our own radical, positive change.

Ahead of Memorial Day, we want to express appreciation to the brave men and women who have made the ultimate sacrifice for our freedom. We also want to honor the one-year anniversary of the murder of George Floyd and the national conversation about progress toward racial equity over the past year. North Berkeley wishes our entire community a beautiful and meaningful holiday weekend.  Our office will be closed on Monday.

¹ Hat tip to Timothy Taylor and his Conversable Economist blog, January 17, 2015.

² Engine No. 1’s Exxon Win Provides Boost for ESG Advocates Bloomberg

³ Chevron investors back proposal for more emissions cuts Reuters

⁴ Hedge fund that beat ExxonMobil says it will have to cut oil output Financial Times

⁵ A bad day for Big Oil  Washington Post

⁶ Global Energy Review 2021: Overview IEA

⁷ Global Energy Review 2021: Renewables IEA