Insufficient visibility of emissions reductions, including Scope 3, thwarts investor scrutiny.
Investors currently do not have the right metrics and data to determine whether oil and gas majors are responsibly transitioning to low-carbon operations and practices that deliver real-world emissions reductions, according to new reports.
As a high-emitting sector, oil and gas companies are under increasing pressure from investors and regulators to set decarbonisation targets that align with the goals of the Paris Agreement. This has been compounded by the energy security crisis, with countries across Europe in particular looking to accelerate the transition to renewable energy to reduce their reliance on Russian gas.
However, while there are metrics available to help investors track the rate at which companies’ fossil fuel production is being phased down or closed, the impact on carbon emissions levels is less clear, according to a report by independent non-profit think tank 2° Investing Initiative (2DII).
If an oil and gas company is selling off legacy fuel assets to ensure alignment with decarbonisation targets, as opposed to “responsibly retiring” them, those assets could still be in operation under different ownership, the report said, with a percentage of the emissions being passed on rather than eliminated. 2DII has proposed a series of metrics to give investors more visibility.
Its recommendations include looking at the ongoing capex split between fossil fuel production, climate solutions and other non-climate diversification activities, as well as measuring the frequency of new corporate lending and debt security issuance earmarked to finance energy production that is not compatible with decarbonisation targets.
The think tank will study the effectiveness of the proposed metrics over the course of this year, before incorporating them into its existing Paris Agreement Capital Transition Assessment (PACTA) tool from 2023.
Reducing emissions across all scopes
Investors also face challenges securing data on Scope 3 emissions and decarbonisation efforts across the fossil fuel sector.
Oil and gas companies are inconsistent in their commitments to reducing their Scope 3 emissions, according to a separate report by Scope ESG, the sustainability analytics arm of Scope Ratings. This is despite the fact Scope 3 makes up 85% of the oil and gas sector’s overall emissions, the report said.
Analysing the decarbonisation strategies of six European oil and gas majors, Scope ESG noted that Shell, ENI and Repsol have not set Scope 3-specific targets, although ENI and Repsol have set net emissions reduction goals that include emissions across their value chains.
Conversely, TotalEnergies has pledged to reduce its Scope 3 emissions in Europe by 30% by 2030 compared to 2015 levels. BP is targeting a 35-40% reduction in its Scope 3 upstream combustion emissions by end of the decade compared to 2019 levels.
There is increasing regulatory pressure to disclose “material” Scope 3 emissions, both through the widely adopted Task Force on Climate-related Financial Disclosure framework and the EU’s Corporate Sustainability Reporting Directive. It is also expected that investors will challenge US corporates on their Scope 3 emissions at AGMs this season.
Reducing Scope 3 emissions will require companies to decarbonise their existing products and services. But oil and gas companies are not dedicating enough of their revenue capex to investments in sustainable technologies and renewable energy, the report noted.
Scope ESG said that “sustainable investment as a share of revenues remains below 2.5% a year on a constant revenue basis”.
Shell, which last year faced scrutiny from investors due to its “half-baked” energy transition plan, has only committed to an annual investment of less than €2 billion a year in sustainable technologies and renewable energy, the report said, despite overall revenues estimated to reach just shy of €250 billion.
This aligns with the previous findings of the World Benchmarking Alliance’s 2021 Oil and Gas Benchmark.
In 2019, just 30 of 100 assessed oil and gas companies disclosed the percentage of capex allocated to the development of low-carbon and mitigation technologies, with those that did disclose investing an average of 7.12% of their capex in the development of sustainable technologies.
The benchmark estimated that 77% of total annual capex needs to be invested in the development of low-carbon technologies to align with 1.5°C.
At risk of being left behind
A recent report by the Investor Group of Climate Change (IGCC) has highlighted that Australian oil and gas companies are not prioritising the transition to net zero, thus increasing risks to investors.
The IGCC, a body which represents Australian and New Zealand investors on climate change, commissioned energy research and consultancy firm Wood Mackenzie to assess the viability of a shortlist of proposed new or recently sanctioned gas projects against two 1.5°C global warming scenarios.
It found that all assessed projects will record lower cash flows under both scenarios. Further, Australia’s net export of liquified natural gas (LNG) will decline to less than 20% of current levels by 2050 as the cost of backfill projects makes Australian LNG “uneconomical”.
Oil and gas companies investing in these new projects, as opposed to investing in the transition to net zero, are at risk of being left behind, said IGCC CEO Rebecca Mikula-Wright.
“As an industry, gas companies need to develop and implement business strategies that will enable them to thrive in a zero-carbon world, and they need to do that now,” she said.