Big investors put pressure on big oil
Oil firms may still able to raise billions of dollars for big upstream projects, but institutional investors are starting to demand emissions reduction measures
A group of heavy hitters in the global investment community, Climate Action 100+, claims it has made significant progress in obtaining net-zero emission commitments from industry-but says action to meet the Paris Agreement targets remains inadequate.
"We are now at a tipping point. A significant number of companies have made bold commitments to achieve net-zero emissions, with others increasingly following suit," Stephanie Maier, a Climate Action 100+ steering committee member and director of responsible investment at financial services firm HSBC Global Asset Management, said when the group launched its first progress report in early October.
Climate Action 100+, representing 373 global investors that manage over $35tn of assets, seeks to rein in carbon emissions by adding to the pressure being applied to big fossil fuel producers and consumers across the economy.
The report says much more needs to be done by the world's largest corporate greenhouse gas emitters to tackle global warming, despite some progress. Carbon-intensive industries are still mainly offering pledges, rather than implementing concrete measures to help reduce emissions at the rate needed to restrict global temperatures to less than 2°C above pre-industrial levels.
In the oil and gas sector, Shell, Total, Norway's Equinor and Spain's Repsol are praised for developing initial investment plans to diversify their businesses and setting long‐term intensity targets to reduce emissions. BP's adoption of a resolution initiated by Climate Action 100+ members-and backed by 99pc of shareholders-under which it agreed to set out how each of its major investments is compatible with the Paris Agreement, also wins plaudits.
However, beyond diversification, investors also want to see capex "constrained to projects that are viable or aligned with lower demand", the report states. "While these commitments represent important progress, no company in the [hydrocarbons] sector has yet comprehensively explained to investors how its business and… emissions profile fit with achieving net-zero emissions by mid‐century."
Some oil companies still tend to work on the assumption that the Paris Agreement targets will be missed and plan accordingly, adopting short-term thinking based on the oil price, according to Andrew Grant, an analyst at Carbon Tracker, a think tank that contributed to the report.
"You can do any sort of modelling about how demand might look in future, but that does not really affect company sanction decisions-those are almost entirely based on the oil price. If you draw a chart of annual capex by the oil industry and compare that to the oil price, the two basically still move in lockstep," says Grant.
The oil price has not proved to be a particularly reliable indicator of what makes a good long-term hydrocarbons investment, he notes. It may be even less so in the future, given how demand could be affected by the uncertain future trajectory of carbon taxes, emissions regulations, falling renewable energy costs and clean energy technology advances.
But there is little evidence that pressure from activist investor groups are making it hard for fossil fuel companies to raise finance, even for relatively risky long-term investments, such as deepwater oil exploration and production in frontier acreage or multi-billion-dollar LNG projects.
Grant wrote a report for Carbon Tracker, published in September, which estimated oil and gas companies had approved 18 major projects worth $50bn since 2018 that would undermine climate targets. Shareholder returns would be put at risk if efforts to meet the Paris Agreement targets were intensified and lower-than-anticipated fossil fuel demand left oil firms with what would effectively be stranded assets, he stated.
"Despite all the chat about being Paris-aligned, a cursory glance at the investment behaviour of the large companies show that isn't the case. So I think it's a 'must try harder' on the report card," according to Grant.