A new standard has been established to outline what a credible net zero strategy looks like for the oil and gas sector, in a bid to help investors benchmark the climate plans of fossil fuel firms and assess which are fit for inclusion in net zero portfolios.
The Net Zero Standard for Oil and Gas, the product of engagement between oil and gas majors and more than 20 leading investors, sets minimum expectations for firms across a series of areas, including emissions targets, decarbonization strategies, capital expenditure, governance and disclosures.
It stresses the importance of both absolute and emissions intensity reduction targets and a clear alignment between firms' capital expenditure and production plans and net zero-compatible decarbonization pathway. It also suggests a number of potential pathways for how fossil fuel firms can align their operations with global climate goals and the IEA's recent warning that a net zero pathway depends on no new fossil fuel extraction. Recommended strategies include diversifying into new areas of clean growth, such as renewables, ceasing exploration and running existing assets down before returning cash to investors, and developing technologies and solutions that reduce emissions.
The group highlights the clear need for a more stringent framework for investors to assess oil and gas firms' climate plans. Net zero pledges have swept the oil and gas sector over the last 18 months, but there is significant variation in the scope and extent of firms' commitments, making it difficult for financiers to compare plans and assess which firms —if any — are showing climate leadership.
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.
While some fossil fuel giants have established absolute emissions reductions targets, many have opted to focus on emissions intensity, providing leeway for companies to increase fossil fuel production if balanced with a surge of renewables capacity. U.S. 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. In contrast, European oil and gas majors have tended to include the emissions generated by the oil and gas they sell in their decarbonization plans, but in some cases only for specific regions or business lines.
And while some oil and gas firms have acknowledged production must fall over the coming years, all are continuing to flout the International Energy Agency's warning that new fossil fuel exploration must end immediately in order to help meet global climate goals. In May, the Carbon Tracker think tank warned not one of the world's 10 largest oil and gas companies had emissions reduction strategies fully aligned with the Paris Agreement, a trend that posed a significant threat to both the planet and investors.
Adam Matthews, chief responsible investment office at the Church of England Pensions Board, who chaired the process to develop the new standard, said investors needed clarity over what constituted a credible oil and gas transition plan if they were to drive progress towards a more sustainable economy and meet their own net zero portfolio targets.
More than 20 leading global investors, with roughly $10.4 trillion of assets under management, contributed to the standard.
"Assessing the credibility and adequacy of company transition plans is a technically complex task," he said. "Our aim in developing this Oil and Gas Sector Net Zero Standard is to allow us to do that. It will encourage the consistency of reporting that we need to make this comparison, and it also identifies the strategies that oil and gas companies may include in their net zero transition plans. Ultimately, this is intended to create a level playing field in transition plan reporting so that we can understand, compare, contrast and robustly perform our role as long term stewards of our assets."
The Institutional Investors Group on Climate Change (IIGCC), which convened the group investors that worked on the new guidelines, confirmed that a clutch of European oil majors — BP, Shell, Eni, Repsol and TotalEnergies — were set to pilot the standard and prepare it for wider adoption across the sector.
Stephanie Pfeifer, chief executive of the investor group, said the standard offered "a reset moment for investors and oil and gas companies alike to get behind a shared understanding of what needs to be included in a transition plan within the oil and gas sector in order to allow for effective comparisons of investor evaluations."
More than 20 leading global investors, with roughly $10.4 trillion of assets under management, contributed to the standard, according to the IIGCC.
The document notes that net zero strategies must include "clearly defined" short, medium and long-term targets, covering both direct and value chain emissions, that are aligned to a goal of limiting warming to 1.5 degrees Celsius, and include both absolute and intensity emissions metrics. Integrated energy companies should also set separate targets for their upstream businesses, it states, and all firms should report the amount of emissions they intend to "net off" using offsets or carbon removal technologies.
To meet the new standard, fossil firms must count all their emissions — including the emissions produced during their operations and the emissions generated by the end use of their products. Plans must account for all climate impacts arising from their activities, across all divisions, regions and equity stakes.
In addition, the standard demands that companies must align investment strategies with a net zero decarbonization trajectory and provide detailed information on the assumptions underpinning the conclusion that their plans are credible. Meanhile, capex budgets should be disclosed at least three years in advance, specifying firms' upstream and exploration plans. If a company does not set out plans to reduce fossil fuel production in line with net zero, it is required to justify this failure through additional cost and capex disclosures demonstrating how it intends to address the risks associated with continued production.
Carbon Tracker warned not one of the world's 10 largest oil and gas companies had emissions reduction strategies fully aligned with the Paris Agreement.
Elsewhere, the standard demands that companies enhance their climate reporting, demanding that firms "improve and standardize" their existing emissions and energy disclosures and set out the future fuel and price forecasts underpinning their accounts and underlying assumptions. If a company is not yet adopting assumptions consistent with a net zero scenario, it must highlight the impact of a net zero scenario on its revenue and profits, balance sheet and cashflow.
Sora Utzinger, senior ESG analyst at Aviva Investors, said the standard would help investors identify which firms it needed to engage more closely with as it worked to deliver its own net zero investment goals. "IIGCC's Net Zero Standard for Oil and Gas Companies provides capital markets with a useful set of principles to compare progress across the board, helping us support the leaders and to intensify efforts with the laggards," she said.
Environmental campaigners and sustainable development economists have long called on investors to use their significant financial clout to push oil and gas firms away from polluting assets and activities, and it appears many are listening. With more than $10 trillion of assets under management, the investors that have contributed to the new Net Zero Standard for Oil and Gas represent a significant chunk of the global economy. As such, the new principles for net zero for the fossil fuel industry should help tackle the credibility gap that dogs many oil and gas industry transition plans, sending a clear signal to fossil fuel companies that vague, weak or incomplete decarbonization plans are not going to cut it anymore with many of their financial backers.
As Carbon Tracker made clear in an analysis published earlier this week, a business-as-usual approach is not only reckless for the planet, but threatens to significantly damage the economy, with more than $1 trillion of investment at risk if oil and gas firms ignore energy trends and global climate goals. With this new standard, oil and gas companies have a clear template to follow if they want to make good on their net zero pledges.