09.15.2021

Investors Set Net Zero Transition Standard in Oil and Gas

  • Net zero standard sets minimum expectation for what must be included in net zero transition plans from oil and gas companies, to create a level playing field in corporate reporting and meet investor expectations for credible and comparable company net zero transition plans.
  • Publication of the standard comes following a series of high level dialogues between leading investors and major oil and gas companies, convened under the Institutional Investors Group on Climate Change (IIGCC) and informed by the Transition Pathway Initiative (TPI).
  • The standard stresses need for comprehensive absolute and intensity emissions reduction targets, which cover all material emissions, as well as alignment of capital expenditure and production plans with a net zero target. It acknowledges ‘winding-down’ as a legitimate strategy, as well as diversifying energy offerings or working through a company’s value chain to re-shape demand.
  • In a major step, the standard will now be piloted with a core group of leading oil and gas companies, including BP, Eni, Repsol, Shell and Total to trial implementation and prepare for wider adoption across the sector, and consider integration into TPI and Climate Action 100+ analysis.

Together with IIGCC and TPI, more than 20 leading global investors with collective assets of USD 10.4 trillion have engaged with leading oil and gas companies, including BP, Shell and Total, to inform a set of expectations for the oil and gas sector in aligning to net zero. The ‘Net Zero Standard for Oil and Gas’, outlines the actions that oil and gas companies should be taking and how they should be reporting on those actions so that investors have a level playing field to effectively evaluate their progress.

While a number of companies within the oil and gas sector have set net zero targets and started developing transition plans, analysis by TPI and others[1] has highlighted significant variation in the extent and scope of these commitments. Faced with increasingly urgent timelines highlighted by the recent IPCC report on climate change and the IEA’s analysis on a pathway to net zero for oil and gas companies, investors need companies to demonstrate clear and credible net zero plans and a mechanism for assessing whether they are fit for inclusion in net zero portfolios.

“In order for investors to play their role, we need to be able to meaningfully compare different company strategies whilst recognising that there is no one size fits all approach. Assessing the credibility and adequacy of company transition plans is a technically complex task.” explains Adam Matthews, Chair of the Investor-Company process to develop the Standard and Chief Responsible Investment Officer, Church of England Pensions Board. “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.”

There is no single or straightforward path to achieving a net zero target. However, there are a number of options available which can come together to form a credible plan, including:

  • Diversifying into new areas of business, particularly renewable energy;
  • Working with customers to transition to low carbon energy;
  • Developing technology and solutions to reduce emissions; and
  • Ceasing exploration and running existing assets down to return cash to investors.

The standard sets a framework to better allow investors to compare different strategies pursued by oil and gas companies. It specifically addresses areas such as ambition, targets, decarbonisation strategy, capital expenditure, governance and disclosure. It is intended to supplement the economy-wide framework developed as part of the Climate Action 100+ Net-Zero Company Benchmark, with specific guidance for the oil and gas sector.

“The past 18 months have seen enhanced climate ambition from a number of leaders within the oil and gas sector, with many suggesting that their targets are consistent with ‘net zero’. However, analysis shows that for many there is still work to do to get on track to achieve net zero by 2050 and meet the goals of the Paris Agreement.” adds Stephanie Pfeifer, Chief Executive, IIGCC. “This net zero standard is intended to support investors in understanding the credibility of companies’ commitments and transition plans so that they can engage effectively with the sector, especially those companies that are lagging behind. It offers 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.”

“As recent reports by the IEA and IPCC have made clear, a net-zero trajectory is imperative and the energy sector must act now. 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.” adds Sora Utzinger, Senior ESG Analyst, Aviva Investors.

“The oil & gas sector is vital to the transition to net-zero, with many possible Paris-aligned strategies. We strongly support piloting of the oil & gas standard to help the industry to clearly understand investor expectations across a range of strategies and the various types of targets and performance metrics to successfully demonstrate Paris-alignment.” adds Bruce Duguid, Head of Stewardship, EOS at Federated Hermes.

Following the publication of the standard, IIGCC and lead investors will now move forward with a pilot programme to trial implementation with a core group of leading oil and gas companies, including BP, Eni, Repsol, Shell and Total, and plan for wider roll out across the sector.

Source: IIGCC

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