Pressure from stakeholders and regulators will continue to mount on fossil fuel giants, says ASI’s Hartnett.
Asset owners should maintain their strategy of active engagement with the oil and gas sector, despite its slow progress in mapping transition to decarbonised business models, according to Bill Hartnett, ESG Stewardship Director at Aberdeen Standard Investments.
“We see it as a question of the direction of travel. We believe engagement is the best approach and we see it bearing fruit. There has been a considerable ratcheting up of ambition (by European oil and gas firms) as a result of collaborative stewardship initiatives such as Climate Action 100+,” said Hartnett.
Earlier this month, Transition Pathway Initiative (TPI) issued research showing that none of the 59 large, publicly listed oil, gas and coal energy companies are yet on track to align their greenhouse gas emissions with efforts to keep climate change below two degrees centigrade.
The research body, backed by asset owners and managers responsible for a combined US$22 trillion AUM, said seven firms – Glencore, Anglo American, Shell, Repsol, Total, Eni and Equinor – have set emissions targets in line with pledges made by national governments as part of the 2015 Paris Agreement. But these commitments only steer a course to 3.2 degrees of global warming, according to the United Nations Environment Programme.
The TPI report said Shell, Total and Eni are approaching a two-degree pathway, “but still need further measures to be assessed to align with this benchmark”. In contrast, firms in the electricity utility sector have made much stronger commitments, with 59% of firms aligned with Paris and 33% aligned with keeping climate change below two degrees.
Shell Royal Dutch recently announced a major restructuring programme with the aim of transitioning to supplying low-carbon energy, pledging to achieve carbon neutrality by 2050. Climate-focused investor group Climate Action 100+ is regarded as having influenced Shell and other European oil majors through active engagement activities.
As well as greater regulatory scrutiny of the electricity sector in regions such as Europe, Hartnett suggests the scale of the challenges facing oil, gas and coal firms are of a greater magnitude than for power utilities. “We’re not yet on the path to net zero, but the pledges made by European oil and gas firms over the last couple of years represent tremendous progress on what is an existential issue for them. Their path is much trickier than electricity utility firms, for which much of the necessary technology is already available,” he said.
The TPI research includes an assessment of management quality in relation to governance of climate risks, ranging from zero to four, with the latter implying a thorough strategic assessment. The average score for firms in the energy sector is 2.7, just 0.1 higher than in 2019. Twenty firms improved their score with 13 declining. Eneos, Neste and Suncor Energy all moved down because they no longer disclosing their involvement in trade associations active in climate lobbying. Although the vast majority of energy firms have formulated policies to tackle climate change, just 9% ensure consistency between these policies and the lobbying positions of groups of which they are a member.
In reviewing exposures to the oil and gas sector, Hartnett says asset owners should maintain ongoing vigilance, watching for signs of long-term headline commitments feeding through to the everyday business activities and processes.
“The long-term high-level commitments of oil and gas firms need to be evidenced through various short-term steps, such as TCFD disclosures, executive incentives through remuneration, lobbying practices, capital expenditure and scenario analysis for decarbonisation of their operations,” he told ESG Investor.
Asset owners further ramped up their efforts to decarbonise portfolios recently, adding to pressure on firms in heavy-emitting sectors. The United Nations-convened Net-Zero Asset Owner Alliance, members of which have committed to net zero emissions by 2050, published their 2025 Target Setting Protocol earlier this month, which outlines their plans for reducing carbon emissions in their portfolios over the next five years.
Hartnett believes that other factors will also accelerate change, notably rising expectations from policy makers and regulators. “Pressure will continue to increase on the sector. As well as the ongoing dialogue with asset owners, regulatory drivers and technology innovation will influence the transition path of oil and gas firms. COP 26 in Glasgow will ratchet up the regulatory requirements next year and much will depend on how technology can support the growth of renewables,” he said.
Earlier this year, analysis by Rystad Energy showed that 10 oil majors had committed to invest US$17.5 billion on renewable energy projects over the next five years, compared with US$166 billion slated for expenditure on oil and gas exploration projects over the same period.
The TPI report assessed the climate-related management quality of 163 companies across the energy sector against 19 indicators and assessed 125 companies on carbon performance, benchmarking their emissions pathways against three scenarios.
Founded by asset owners and managers in 2017, including Aberdeen Standard Investments, the TPI uses publicly disclosed data to assess the progress that companies are making on the transition to a low-carbon economy.