Alliance sets new guidance for oil and gas investments that is “sensitive” to energy dislocations.
The UN-convened Net Zero Asset Owner Alliance (NZAOA) has rejected criticism of new guidance on oil and gas investment, calling for “a more systemic approach to stewardship” in which multiple stakeholders support the global economy’s transition away from fossil fuels.
The NZAOA’s Position on the Oil and Gas Sector calls on consumers and suppliers of oil and gas to set Scope 1, 2 and 3 greenhouse gas (GHG) emissions reduction targets and align their operations activities, including capital expenditure, with 1.5°C pathways.
“As diversified owners of broad swaths of the economy, any constriction of energy supply without a tandem reduction in demand or increase in alternative supply simply leads to energy dislocations,” said Jake Barnett, Co-lead of NZAOA’s engagement track told ESG Investor.
“The NZAOA is sensitive to energy dislocations because they hurt regular folks and erode public trust and support for broad climate action that we need.”
Barnett, also Director of Sustainable Investment Services at Wespath Institutional Investments, said that the alliance wanted to take a “holistic view” of what the global energy system requires to transition away from oil and gas.
The alliance’s position on the transition away from fossil fuels is guided by the Intergovernmental Panel on Climate Change’s (IPCC) 1.5°C no or limited overshoot scenarios, as well as the One Earth Climate Model (OECM) and the International Energy Agency’s (IEA) Net Zero by 2050 Roadmap.
“Oil and gas cannot be the foundation of the energy system for us to exist in perpetuity,” he said.
The alliance calls for increased policy ambition to rapidly reduce oil and gas demand and increase the supply and availability of renewable alternatives.
“Climate change is an existential risk, not just a financial risk, but an existential risk to large swathes of the economy,” said Patrick Peura, Co-lead of the NZAOA’s engagement track. “We need to create a more systemic approach to stewardship, where all actors need to be pulling and moving in tandem so that all our ambitions lead to a virtuous cycle.
“This is not a transition that happens without all actors on board. This is why our new guidance focuses on demand, reduction and destruction in line with supply.”
According to the alliance, investors must align with credible 1.5°C net zero scenarios, acknowledging that this cannot be achieved if there are new upstream infrastructure investments in new oil and gas projects.
However, it does recognise that some investors may choose to continue investing in new oil and gas in “exceptional circumstances”.
Great leap backwards?
NGO research and campaign organisation Reclaim Finance has criticised the alliance’s new guidance for failing to acknowledge that “there is no room in feasible 1.5°C scenarios for investments in new oil and gas projects”.
Paddy McCully, Senior Analyst – Energy Transition at Reclaim Finance, said: “Emissions from burning oil and gas are causing climate havoc worldwide which is intensifying rapidly. The NZAOA is well aware of this, and accepts that it has the responsibility to act, but this paper shows that it is not actually prepared to act on its convictions.”
According to McCully, the alliance has “stripped the language” from its published draft outlining that the climate science showed 1.5°C means there can be “no investment in new oil and gas fields and other new mid-stream and downstream infrastructure”.
“The draft language is vastly stronger than the language in the final version which only applies to direct investments in infrastructure projects which is only a small proportion of finance for new oil and gas projects,” he told ESG Investor.
In response, the alliance’s Barnett said that he did not “characterise the new guidance as a watering down of commitments”.
“There was never a point in the drafting process where we said, ‘let’s make this explicitly less ambitious than our previous draft’,” he said. “We feel this is high ambition, we are proud of the position we are putting forward.”
Christiana Figueres, Founding Partner of Global Optimism – strategic advisors to the alliance – and former Executive Secretary of the UN Framework Convention on Climate Change, said in the NZAOA press release that the alliance’s position sets important new standards for investors to align with the transition but admitted that it “should have gone further”.
Barnett noted that the alliance wanted to put her comments “front and centre” to show how the organisation is “wrestling with the tension” outlined in the new guidance between “the practical economic complexities of this transition [that] coexist with the urgency of the scientific imperative to act now”.
A number of finance sector alliances focused on collaborative efforts to support transition away from fossil fuels have been targeted for criticism by right-wing politicians, including accusations of anti-competitive behaviour, forcing many such networks to reassess their approach to providing guidance to members.
Peura, also ESG Engagement Manager at Allianz Investment Management, added: “There will be opportunities in the future to update our position on oil and gas similar to how it has done with other industries.
“What is feasible at this time may change, so the alliance will revisit its position on oil and gas as new science and new economics become available.”