Introduction

Between March 2018 and October 2020, the PRI coordinated a collaborative engagement on climate change transition for the oil and gas sector. More than 50 global institutional investors, representing approximately US$3 trillion, engaged with 25 global oil and gas companies.

The objectives were to:

  • explore how companies are comprehensively assessing their exposure to climate-related transition risks;
  • ensure that companies are planning appropriate responses to policy and technological shifts that may limit their ability to exploit their assets (e.g. under the well below 2°C scenario outlined in the Paris Agreement1);
  • better understand how companies are evaluating future capital expenditure and production, and the governance behind this decision making;
  • encourage improved disclosure aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, especially with regards to scenario analysis, metrics and targets.

The 25 companies were:

Apache, BP, Cabot Oil & Gas, Canadian Natural Resources Limited, Cenovus, Chevron, Crescent Point, EQT, Exxon Mobil, Galp, Gazprom, Husky, Imperial Oil, Lundin, Oil Search, Origin, Petrobras, Repsol, Rosneft, Royal Dutch Shell, Santos, Sasol, Suncor, Total, Woodside


This document presents the results of that engagement, summarising the changes in corporate performance after two years of investor dialogue.

Engagement background

In June 2017, 2 degrees of separation: Transition risk for oil & gas in a low carbon world (produced by the Carbon Tracker Initiative2 and the PRI, in partnership with PKA, PGGM, AP7, FRR and Legal & General Investment Management) analysed 69 oil and gas companies’ alignment with a scenario where global warming is limited to well below 2°C, and estimated the proportion of future capital expenditure and production that fell outside a 2°C carbon budget3. 

The 25 companies with the highest percentage of exposed capex were then selected for engagement by investors. They comprised a range of the largest oil and gas companies from around the world, with North American shale producers particularly well-represented due to the focus on potential stranded assets. Engagement was designed to complement and reinforce the goals of Climate Action 100+. For companies targeted by both initiatives, efforts were made to coordinate and/or align investor asks.

Engagement results

Companies increasingly recognise the need to address climate change, but integration is lacking

  • All companies acknowledge climate change as a significant issue for the business and have a policy commitment to act on it.
  • 16 of the 25 companies saw their overall disclosure improve since 2018.4
  • The biggest improvement was in target setting, with 19 companies now setting long-term quantitative targets for reducing greenhouse gas emissions (up from 11 in 2018).
  • 16 companies are doing climate scenario planning (up from 9 in 2018).
  • Just 8 incorporate climate change risks and opportunities in their strategy, with half of these disclosing an internal price on carbon.
  • Only 11 disclose scope 3 emissions, which account for the majority of the sector’s emissions5.

Ambition is improving, but none of the companies are on track to align their full value-chain emissions with a 2°C or lower climate pathway by 2050

  • 15 of the 25 companies have committed to an absolute or relative target for scope 1 and 2 emissions (up from 10 in 2018).
  • However only 5 have targets to reduce scope 3 emissions.
  • One company (Repsol6) only sanctions or acquires projects that it has assessed as being economically competitive on a 2˚C or lower pathway – a requirement that it has embedded in its investment strategy. While additional detail is important, this high-level commitment to assess future exploration or production decisions’ compatibility with the Paris Agreement is one of the most advanced in the sector.
  • 5 companies have no emissions target or plan for reducing fossil fuel investment whatsoever.
  • This is symptomatic of the broader sector. According to separate TPI analysis7, only 9% of oil and gas companies are aligned with Paris pledges that still leave the world on track for 3.2°C of warming.

Stranded assets and associated capital expenditure at risk remain high8

  • Carbon Tracker estimates that approximately 30%-40% of the engaged companies’ capex is unviable in a below 2˚C pathway and that US$60bn of capex associated with the 15 largest projects sanctioned in 2019 is not economically competitive under the International Energy Agency’s 1.65˚C-1.8˚C Sustainable Development Scenario (SDS).
  • European producers outperform their US counterparts when assessed on impairment prices, emissions plans and capex exposure.

Next steps

Whilst climate-related disclosure is improving and there is growing recognition of the need for action, the oil and gas sector’s current emissions trajectory is insufficient to avoid the catastrophic impacts projected by global warming scenarios9. Investors therefore need to engage on an explicit net-zero agenda, looking at how oil and gas companies, and the sector as a whole, can rapidly decarbonise over the short, medium and long term10.

To deliver real-world outcomes, investors need to enhance their stewardship, particularly where companies are not acting in line with expectations. This includes exploring a range of escalation tools when necessary, such as: multi-asset class engagement, shareholder resolutions, proxy voting, engagement with policy makers and standard setters and/or public statements.

Engagement with most of the companies targeted by this group will continue via other initiatives. This includes Climate Action 100+, which sees investors pushing the oil and gas sector to transition to net-zero emissions by 2050.

Climate Action 100+ and Net-Zero Company Benchmark

Climate Action 100+ is an investor initiative to ensure the world’s largest corporate greenhouse gas (GHG) emitters take necessary action on climate change. Since its launch in December 2017, more than 500 investors managing US$47 trillion are engaging more than 160 companies across multiple regions and sectors. 

Working with leading research organisations11, the Climate Action 100+ Net-Zero Company Benchmark (due to be released in 2021) will analyse which companies are leading the transition to net-zero emissions. Indicators will include:

  1. Ambition: whether the company has set an ambition to achieve net-zero GHG emissions by 2050 (or sooner)
  2. Targets and goals: if clear short-, medium- and long-term GHG reduction targets or goals covering all material scope 1, 2 and 3 emissions are in place and aligned to a 1.5°C global warming trajectory
  3. Decarbonisation strategy: whether the company has a robust decarbonisation strategy to deliver these reduction targets, goals and ambitions
  4. Capital alignment: whether the company has assessed how consistent with the Paris Agreement its capital investment in carbon-intensive assets or business lines are
  5. Climate policy support: whether the company has a clear commitment and set of disclosures clarifying intent to support climate policy, and whether direct and indirect lobbying is consistent with this inten
  6. Governance: whether the company has effective board oversight of, and executive remuneration linked to, delivery of emissions targets and goals
  7. Just transition: whether the company has incorporated the impact on employees, communities and other stakeholders into its transition planning
  8. Reporting: whether the company’s overall climate risk reporting is consistent with all of the TCFD recommendations

More PRI resources on oil and gas

References

1Article 2.1(a) states: Holding the increase in the global average temperature to well below 2°C above pre‑industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre‑industrial levels.
2 Carbon Tacker has updated its research series, including 2019’s Breaking the Habit and 2020’s Fault Lines.
3 This analysis utilises the oil and gas demand levels indicated by the International Energy Agency’s (IEA) World Energy Outlook. To date the IEA has produced scenarios equivalent to 2°C and below (with varying probabilities), but no model for a 1.5°C aligned scenario.
4 The PRI assessed company disclosures using Transition Pathways Initiative (TPI)’s Management Quality framework. This set of 19 indicators evaluates how well companies manage their greenhouse gas emissions, as well as their risks and opportunities related to the low-carbon transition. TPI methodologies and criteria are aligned with the TCFD recommendations.
5 According to LSE, downstream emissions from burning fossil fuels are the major source of emissions from oil and gas, accounting for roughly 70%-90% of lifecycle emissions from oil products and 60%-85% from natural gas.
6 The PRI assessed these ambition indicators using Carbon Tracker analysis that evaluates the compliance of company emissions targets, production and investment strategies in accordance with reference carbon budgets. See theironline company profiles for more details. In December 2019, Repsol announced a plan to align its business with the Paris Agreement, including a goal of net zero emissions (including scope 3).
7TPI’s 2020 Energy Report finds that of 53 oil and gas companies assessed on carbon performance, none are on track to align their emissions with a 2°C climate pathway by 2050.
8 The PRI assessed company exposure using Carbon Tracker’s capex performance bands (%). The latest analysis can be found in their report Fault Lines. Carbon Tracker use an economic model to link asset-level potential supply of oil and gas (using Rystad Energy UCube) to demand pathways under different carbon-constrained scenarios (IEA).
9 See UNEP’s Emissions Gap Report 2019 for more detail.
10 An IPCC Special Report found that limiting global warming to 1.5°C would require “rapid and far-reaching” transitions in land, energy, industry, buildings, transport, and cities. Global net human-caused emissions of carbon dioxide (CO2) would need to fall by about 45% from 2010 levels by 2030, reaching net zero around 2050.
11 The Climate Action 100+ Net-Zero Company Benchmark was developed during 2020 with EY, which undertook the research and facilitated the construction of the framework in collaboration with almost 50 Climate Action 100+ signatories, network experts and leading climate research and data NGOs. TPI, supported by its research and data partners the Grantham Research Institute on Climate Change and the Environment at LSE and FTSE Russell, has been selected to conduct the company research and analysis. Additionally, Carbon Tracker and 2 Degree Investing Initiative will analyse recent focus company CAPEX and output relative to a range of alternative climate change scenarios, to give investors independent validation on particular indicators. Other experts and data providers may be identified as the company research progresses and aspects of the benchmark are further developed and refined.

Topics