Panellists at the Stewardship Summit 2024 stressed that forward-looking disclosures on climate transition plans by oil and gas firms are vital.
Oil and gas companies are improving on climate-related disclosures, but are still failing to provide evidence of alignment with decarbonisation metrics and targets, Valeria Piani, Head of Stewardship at UK-based long-term savings and retirement business Phoenix Group, has said.
Speaking at ESG Investor’s Stewardship Summit 2024, Piani said there had been a number of successes on disclosure since Phoenix’s engagement programme on climate change started in 2022.
“We take a very tailored approach [to engagement] across all sectors that are relevant for oil and gas. So, we look, for example, to the governance at companies, the composition of the board, and whether remuneration is aligned with decarbonization targets,” she explained.
On the latter, she said one oil and gas company was now disclosing more on how its long-term pay packages were aligned with its climate targets. “We achieved more disclosure with another company on sensitivity analysis (to climate change) in financial accounting,” she continued. “And we had another company provide much more information on their decarbonization levers and renewable energy plans.”
It has been a challenging time for relations between the oil and gas sector and climate-conscious investors, with several fossil fuel majors reneging on emissions-reduction pledges last year, amid record profits.
In March, a joint Transition Pathway Initiative (TPI) and Climate Action 100+ (CA100+) report found that the oil and gas sector was “alarmingly unprepared” for the climate transition. They said that current climate disclosures made by the ten assessed oil and gas firms were “insufficient” for investors to accurately gauge transition risk.
NGO Reclaim Finance this week said investors have failed in their engagement with the sector and called on them to stop all new investment in oil and gas majors and vote against directors and accounts at their annual general meetings this year.
Scope 3 debate
Piani said there was still a lack of progress on disclosures related to alignment with climate metrics and targets. She said oil and gas companies disclosed in different formats making it difficult to make comparisons. “There is still a conversation in the United States on disclosure of Scope 3 targets, while in Europe it’s accepted to disclose Scope 3,” she explained, adding that there was also still debate on how to align with the Paris Agreement.
The US Securities and Exchange Commission’s recently unveiled climate disclosure rule did not require compliant firms to disclose greenhouse gas (GHG) emissions from upstream and downstream activities in their value chains, also known as Scope 3.
A key point of contention highlighted by Piani was when oil and gas majors met their climate-related targets through divestment of assets. “At a minimum, we ask that they re-baseline the target or be very clear and transparent on the quantification of how divestment actually impacted on achieving these targets. You don’t necessarily get that disclosure, with pushback that it will be too difficult.”
She added that there wasn’t sufficient disclosure from oil and gas companies to allow Phoenix to understand whether their capital allocation was enough to meet decarbonisation targets.
Transition plans
Speaking on the same panel, Mike Coffin, Head of Oil, Gas & Mining at Carbon Tracker, said forward-looking data on capital expenditure was a key metric to understand an oil and gas company’s alignment with climate targets. “It is about the pace [at which] they are moving away from what they’ve historically done. [We need to know] what proportion is going on new projects versus that oil and gas legacy business.”
David Carlin, Head of Climate Risk at the UN Environment Progamme Finance Initiative, echoed these sentiments, pointing to the development of frameworks for climate transition plans as “levelling up” understanding on climate targets.
He said the real value and criticality of the work was that it made companies describe the planning and capital allocations associated with their climate pledges. “That is the stuff we can make decisions on,” he said.
This week the UK’s Transition Plan Taskforce (TPT) published its final set of tools and documents aimed at helping companies and financial institutions mobilise transition finance globally.
Looking to the future of engagement with carbon-intensive firms, Piani noted that the “elephant in the room” was state-owned fossil fuel companies. “I don’t have a solution, but I think that conversation with governments is eventually going to become very important because we can do as much as we can with what we’re exposed to through our portfolios.”
According to the Natural Resource Governance Agency, state-owned enterprises (SOEs) are responsible for approximately 55% of global oil and gas production and are planning US$2 trillion worth of investment in hydrocarbon extraction.
