Attention oil and gas companies: The gauntlet has been thrown. Investors want net zero strategies now.
Fossil fuel companies “with credible independently verified net zero strategies will be supported by their investors…those without will be challenged.”
Such is the edict of the Institutional Investors Group on Climate Change (IIGCC) in their most recent publication, “Net Zero Strategies for Oil and Gas”, which lays out a “Net Zero Standard” that specifies actions oil and gas companies should take and how these actions should be reported.
The IIGCC developed the report in conjunction with the Transition Pathway Initiative (TPI), investors active in Climate Action 100+ (CA100+), NGOs, experts in the oil and gas sector, as well as oil and gas companies themselves.
According to the IIGCC, more than 20 leading global investors, with roughly $10.4 trillion of assets under management, provided input.
Such a standard has been a long time coming. It is essential for investors to identify a baseline for comparing and contrasting potential investment possibilities. It is also critical for helping companies know how to best meet investors’ expectations.
Adam Matthews, Chair of the Net Zero Oil & Gas Standard Dialogue and Co-Chair IIGCC Corporate Programme Chief Responsible Investment, writes, “…this is intended to create a level playing field for what, at a minimum, must be included in transition plans so we can understand, compare, contrast, and perform our role as long term stewards of our assets.”
The Standard is intended to supplement the economy-wide framework developed as part of the Climate Action 100+ Net-Zero Company Benchmark, and serve as a to-do-list for the oil and gas sector.
Ten indicators underpin its design:
- Ambition
- Long Term Targets
- Medium Term Targets
- Short Term Targets
- Decarbonization Strategy
- Capex (Capital Expenditure) Alignment
- Climate Policy Engagement
- Climate Governance
- Just Transition
- TCFD Disclosure
In this blog post, we will examine the first four indicators in detail.
Subsequent posts will examine the other indicators and how the report suggests companies should follow them.
Also, because this Standard concentrates on oil and gas companies, emissions related to non-energy or petrochemical production are considered outside its scope.
Indicator 1: Ambition
Are companies actively trying to meet the Net Zero GHG emissions by 2050 (or sooner)?
That is the first item investors are examining when deciding to include a business in their Net Zero portfolio.
This is a tall order. For an oil and gas company, reaching net zero not only requires a cut in their own emissions, but also those released with the use of their products.
Specifically, a comprehensive emissions target should cover:
- All energy related activities, including business divisions and activities such as exploration, production, refining, transportation, and marketing; and
- All material emissions. At a minimum, including emissions from scopes 1, 2 and 3 (category 11 – use of sold products) and all greenhouse gases i.e. CO2, methane and other gases if material.
For reporting purposes, companies should ensure emissions disclosure is consistent with their energy disclosure and that scope 1 and 2 emissions are stated on the same basis as scope 3.
Indicators: 2-4: Long-term, Medium-term, and Short-term targets
The indicators are defined as follows by the CA100+ Net-Zero Company Benchmark:
Indicator 2: “Set a target for reducing its GHG emissions by between 2036 and 2050 on a clearly defined scope of emissions.”
Indicator 3: “Set medium-term (2026 to 2035) targets for reducing its GHG emissions...on a clearly defined scope of emissions.”
Indicator 4: “Set short-term (up to 2025) targets for reducing its GHG emissions...on a clearly defined scope of emissions”
A company can set emission targets on either an absolute or intensity basis. If using an intensity basis, the expected impact “should state the expected impact of falling intensity on absolute emissions to provide investors with an alternative way to assess the reduction in transition risk and the contribution the company is making to the overall societal net zero goal.”
Wind-Down Approach
How does one reduce emissions? There are several legitimate approaches. One is “wind-down” or harvesting, where companies allow production to fall due to either a reduction in upstream production, divesting, and/or slowing capital investment.
How to measure this information is another matter. The report suggests using an absolute emissions metric. TPI is currently developing a method to directly benchmark absolute emission reductions using a growth assumption. But for now, in order to enable investors to compare apples to apples, all oil and gas companies should disclose the expected impact of its medium- and long-term targets on emission intensity.
Gross Emission Reduction
Another legitimate approach currently on the table is the reduction of gross emissions through technology, CCUS, Bioenergy Carbon Capture and Storage (BECCS) or DACS, voluntary offsets or the actions of third parties in the supply chain.
The effectiveness of this approach, however, has yet to yield substantial results. Therefore, the Standard considers that it “…should not be the primary way oil and gas companies de-carbonize.” Instead, the authors suggest that if used, total neutralizing strategies should comprise less than 50% of total emissions reduction.
The Standard cautions companies that rely heavily on decarbonization in later years will be considered to have a higher transition risk by investors.
For disclosure purposes, an oil and gas company should divulge the total contribution (in MtCO2e) of netting off measures for medium- and long-term targets.
Upstream Business
The Standard strongly suggests that a company set emission targets for all of its upstream activities as well.
“US oil majors have largely favored plans that target the emissions produced by their own operations, covering just a tiny proportion of their wider impact on the climate,” writes Cecilia Keating, Senior Reporter, BusinessGreen in her article “What’s inside the new Net Zero Standard for Oil and Gas?”
This will have to change for oil and gas companies worldwide. More than $1 trillion of investment are at risk if oil and gas firms ignore energy trends and global climate goals.
As Matthews writes in the report’s introduction: “Emission reductions across the board means significant fossil fuel demand destruction. This will have profound impacts on the industry as a whole and every company within it. This level of disruption to the industry represents significant financial risk to investors – albeit not as large a risk that unabated climate change poses.”
The next two blog posts will examine the Standard’s suggestions for Indicators 5 through 10.
Click here for a copy of the report.
