Ahead of 2023 AGM season, the new IIGCC standard offers investors a new framework to assess oil and gas firms’ net zero commitments.
The Institutional Investors Group on Climate Change’s (IIGCC) Net Zero Standard for Oil and Gas will increase scrutiny of the sector’s transition commitments and provide clarity of investors’ expectations, Adam Matthews, Chief Responsible Investment Officer at the Church of England Pensions Board, told ESG Investor.
Matthews, who chaired the development process for the new standard, said it “levels the playing field” on disclosure and its insights will help investors identify companies that have “genuine intention” to transition.
The new standard arrives ahead of the 2023 AGM season, which will feature numerous say-on-climate votes at oil and gas companies, as well as shareholder resolutions on climate targets and disclosures.
While Matthews said the full impact of the new standard will not be felt until the 2024 AGM season, investors will begin to ask companies to commit to disclose against the net zero standard.
The new standard has been designed to complement the disclosure framework of the Climate Action 100+ (CA100+) Net Zero Company Benchmark. All 90 metrics used in IIGCC’s new standard are aligned with the indicators of the Climate Action 100+ benchmark.
“It’s a very clear message from investors that they have consolidated their expectations around this, and I look forward to seeing the results of that,” Matthews said.
According to an analysis released this week by German campaign group Urgewald, institutional investors own shares and bonds in fossil fuel firms worth US$3.07 trillion, of which approximately two third were in oil and gas companies.
Clarity on investor expectations
The new standard, led by the IIGCC, was developed in collaboration with the Transition Pathway Initiative (TPI), investors and regional investor groups.
It is one of several sector-specific frameworks developed to help Climate Action 100+ investors and other stakeholders assess the alignment of transition plans with a 1.5°C climate scenario. As well as integrating with the CA100+ Company Benchmark, they are designed to help investors using the Net Zero Investment Framework (NZIF) to align their portfolios with net zero targets.
Results from a pilot study with five companies showed increasing transparency over their decarbonisation plans, including disclosures on the contribution of offsets to targets and guidance on production plans. However, it also underlined the need for continued improvement in several areas, in particular the alignment of all targets and plans with relevant 1.5° C scenario benchmarks.
“Pilot testing helped to create the right indicators to capture what companies were disclosing while also ensuring it was not creating unnecessary disclosure as well,” Matthews said.
Matthews noted that the new standard provides “far more clarity” around investors’ expectations on offsets, as well as delving into greater detail around the setting of targets and the scope of them upstream and downstream. It also provides additional clarity on the just transition and climate lobbying.
“It enhances all elements of a company’s transition in the oil and gas sector,” Matthews said. “We’ve now got a best practice standard and there is a keenness that companies can now commit to disclose against the standard.”
Commitment to transition
Matthews said the new standard offers the basis for investors to “interrogate the transition plan of a company” and, if brought to a vote at the company’s AGM, this standard can be used to judge its credibility.
“It provides a rigorous basis to assess a company’s transition plan, and whether that plan is sufficiently robust, has the credible basis to deliver the targets set and the deployment of capital expenditure to meet them,” he added. “It provides a way of interrogating a transition plan in a very credible way.”
Say-on-climate resolutions filed by a company’s management at the AGM to obtain shareholders’ opinion on its climate strategy and implementation have played a prominent role in this AGM season. But they have been used to obtain backing for plans that do not necessarily align with net zero scenarios. Investor sentiment on investee firms’ climate policies is increasingly being demonstrated in other ways.
UK workplace pension scheme Nest and university pension scheme Brunel Pension Partnership are among five schemes that have said they intend to vote against the reappointment of BP Chair Helge Lund at the oil major’s AGM, which will take place on 27 April, due to its decision to slow planned cuts in fossil fuel production and carbon emissions.
Faith Ward, Chief Responsible Officer at Brunel flagged that the lack of shareholder engagement regarding the reductions in commitments relating to oil and gas production marked a “material change” to the BP’s 2022 plan which seriously “imperils” the company’s credibility as that it will deliver on its promises.
Tony Burdon, CEO at Non-profit Make My Money Matter, said: “Nest’s move sends a powerful signal to fossil fuel companies. By publicly announcing that they will vote against BP’s directors for back sliding on climate commitments, Nest is showing us that investors won’t just standby as fossil fuel giants roll back on their emissions pledges.”
International Energy Agency Head Fatih Birol recently warned that companies increasing fossil fuel production are contradicting goals to stop global warming. “We have to bring the consumption of oil, gas and coal down,” he said.
NGO Reclaim Finance has also published a new voting guide for investors that highlights some of the key issues under scrutiny at upcoming AGMs including say-on-climate votes. The firm recommended voting against say-on-climate proposals at TotalEnergies, Repsol, and Amundi.
It also flagged that say-on-climate resolutions do not always fulfil their purpose, with many “often failing to include the key information necessary to make a proper assessment of whether a climate strategy and its implementation is aligned with a 1.5°C trajectory”.
Research from shareholder advisory firm Squarewell Partners found that 48% of companies that proposed say-on-climate resolutions in 2022 did not disclose short-term targets, while 26% had not published any information regarding capital allocation.