Statoil, Eni and Total wake up to carbon bubble risks

ShutterstockAdam Boor

Could some of the world's largest fossil fuel companies be on the cusp of a new era of climate disclosure and engagement with climate risks?

That is the question sparked by a number of new studies and interventions from a host of leading green business groups backed by some of the world's largest investors and multinational firms.

According to "In the Pipeline (PDF)," a new report released by CDP and four international investor networks, some of the world's largest oil and gas companies, including Statoil, Eni and Total, significantly have improved their climate risk disclosure in recent years in response to investor and shareholder lobbying. Yet despite highlighting progress from some oil and gas firms, the report also stresses that several fossil fuel majors, including industry powerhouse ExxonMobil, are still failing to embrace climate risk disclosure, regardless of mounting pressure from their investors.

The report came the same day as the We Mean Business (WMB) coalition issued a new statement calling on G20 governments to formally endorse the recent climate risk disclosure recommendations put forward by the Financial Stability Board's (FSB) Task-force on Climate-related Financial Disclosure (TCFD).

Late last year the TCFD group, led by Bank of England Governor Mark Carney, put forward a series of recommendations calling on listed firms to provide more detailed information on how they are responding to climate-related risks and disclose information on scenario planning, whereby they prepare for a range of different decarbonization scenarios. The recommendations are out for consultation with the groups expected to put forward its final proposals at the next G20 Summit in July where policymakers are set to debate the extent to which the new guidelines should be adopted and whether some proposals should become mandatory requirements for listed firms.

The We Mean Business coalition of green business organizations calls on the G20 and B20 business leaders to "formally endorse" the TCFD's recommendations, mandate the task force to develop further guidance and benchmarking tools to assess the quality of corporate disclosures and "ensure [a] level playing field globally on transparent reporting expectations, specifically on middle to long-term scenarios and financial assessments which contain competitive information for companies."

It also calls on national governments to outline how they intend to ensure the TCFD's recommendations can be translated into "effective policy frameworks and applied in all G20 countries through important national reporting requirements."

"This would provide more clarity and certainty to investors in the long-term," the group added.

In addition, it echoes calls last week from business leaders for policymakers to deliver an expansion of carbon pricing schemes and provide greater transparency on how they envisage economies transitioning to a low carbon model that is compatible with less than 2 degrees celsius of warming this century.

The CDP report  also published in May and backed by the Ceres Investor Network on Climate Risk and Sustainability; the Asia Investor Group on Climate Change (AIGCC); the Institutional Investors Group on Climate Change (IIGCC); and the Investor Group on Climate Change (IGCC)  suggests a growing number of carbon intensive businesses are responding to this combination of legislative pressure and investor calls for them to disclose greater levels of information about how they are responding to climate risks.

The report analyzes the impact of persistent climate-focused investor engagement  either through private dialogue or public challenges via shareholder resolutions  on 10 large oil and gas companies in North America and Europe. According to CDP, the findings confirm that investor engagement has had "a discernible impact" on board and executive decision-making with respect to the disclosure and management of climate change risks, and it predicts pressure from shareholders significantly will increase in the coming years.

But while eight assessed companies so far have signaled their clear support for the Paris Agreement, the report argued all of them still need to do more to strengthen their support for robust national and international climate policies.

The report assessed the climate risk performance of BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Occidental, Shell + BG, Statoil, Suncor and Total and concluded that even before the TCFD recommendations are finalized, several leading players are stepping up climate risk disclosure efforts.

Statoil comes out on top of the 10 companies in CDP's rankings, and is praised in the report as "one of very few oil and gas majors to not only support the idea of stress-testing against a 2C scenario analysis but to also set targets and commit capital to decarbonize its portfolio."

Italian firm Eni is ranked as the second-best performer thanks to its "ambitious" emissions targets, followed by French company Total, which produced its first 2C climate strategy last year.

ExxonMobil is ranked by CDP as second to last among the 10 companies assessed in terms of environmental risk disclosure, with the report noting that its low carbon activities limited to biofuels and carbon capture and storage (CCS) research.

Bottom of the rankings is Suncor, although the report notes the Canadian oil firm more recently has "improved both its disclosure and its governance of low carbon resiliency issues."

Tim Smith, director of environmental, social and governance (ESG) shareowner engagement at Walden Asset Management, said that despite public expressions of support for the Paris Agreement, some fossil fuel company lobbying activities and industry trade associations were continuing to fight regulations and legislative efforts to boost the low carbon transition.

"It is vitally important that company boards review their climate advocacy and find new, creative ways to be supportive of moving us forward," said Smith.

The CDP report's findings also show that seven of the 10 companies evaluated have conducted scenario analysis to identify how their business strategies must evolve to adapt to the impact of the "well below" 2C Paris Agreement target, although just three have so far have sought to actually quantify the financial impacts of a 2C scenario.

But at the same time, just three firms were found to have divested or scaled back from high carbon assets in order to curb their stranded asset risk exposure, while only 1.5 percent of the 10 companies' total capital expenditures last year was directed into low carbon investments.

Further CDP findings also show eight of the firms have disclosed their Scope-3 emissions to investors alongside their Scope 1 & 2 emissions, yet only four have set emissions reduction targets.

And, while half of the companies evaluated link executive compensation to greenhouse gas emissions performance, just two of them "link incentives to upstream or strategic intent to reduce emissions," the report found.

"Given that the global low carbon transition is well underway and oil demand could peak within a decade, there can no longer be any difference for these companies between overall strategy and climate strategy," the report concluded. "Investors are requesting greater disclosure to the market on financial impacts in line with the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations about portfolio resilience and 2C transition planning."

The latest interventions come ahead of a series of oil and gas firm AGM shareholder meetings this month, with Shell's scheduled for May 23 and both ExxonMobil — facing particular pressure from growing numbers of shareholders — and Chevron holding their meetings May 31.

Shareholders in oil giant Occidental Petroleum Corp voted in favor of a proposal requiring the company to disclose more information on how it would be affected by climate policies such as the Paris Agreement. This provided an early indication of the kind of arguments and votes that could play out in the coming weeks.

Significantly, the resolution reportedly was passed after investment giant BlackRock backed the proposal — a move that follows the asset managers' recent pledge to take a stronger line on climate-related issues.

However, there are also signs of some fossil fuel industry pushback against the drive for wider disclosure in lines with the TCFD recommendations. A separate recent report from analytics and data provider IHS Markit backed by BP, Chevron, ConocoPhillips and Total argued that the proposals put forward by the task force could distort markets and mislead investors.

Daniel Yergin, IHS Markit vice chairman and co-author of the report, told Reuters that the proposals were "useful in terms of heightening the discussion around climate risk." But he warned that focusing on climate-related risks over other potential risks that businesses face could provide investors with a distorted picture. "Eight decades of understanding of the materiality concept would be changed by this initiative," he told the news agency. "The use of scenarios and metrics is misleading; there are issues around confidentiality, and why should we single out just one risk?"

However, writing on Twitter, Daniel Firgir of Bloomberg Philanthropies argued the backing of BlackRock and other big investors for the Occidental climate disclosure resolution had "disproved in real time" HIS Markit's contention that investors do not need more climate risk disclosure.

The next few months should provide plenty more momentum to the debate over whether carbon intensive firms should be taking urgent steps to report on their carbon bubble risks, and it increasingly looks as if those firms that refuse to engage soon could face a sizeable investor backlash.

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