Investors warn complacent gas industry
Firms need to step up climate change efforts in new ESG environment
Gas companies must take concrete steps to prove what they are practically doing to meet climate change goals, or they risk alienating investors’ trust in the industry and therefore access to funds.
“You must demonstrate that you are resilient to the changes that lie ahead, and that you have a clear unambiguous positive role to play in driving the energy transition forward” Nick Stansbury, fund manager at financial services form Legal & General Investment Manager (LGIM) told the European Annual Gas Conference (EAGC) in Paris.
So far, the industry has shown “a great deal of complacency” around the issue of climate change and decarbonisation, he says.
The energy sector is experiencing a “true revolution”—with the energy transition requiring a radical change at a much faster speed than ever before—and the financing sector is also seeing the rise of “responsible investment”, with investors demanding more and more that businesses prove their green credentials.
Assets under management of UN PRI signatories—that is, asset owners and investment managers that have subscribed to the United Nations Principles for Responsible Investments—went from zero to $60tn between 2006 and 2018. This signals a trend of increased scrutiny of investors into companies’ environmental impact and practices, says Stansbury.
“[A] growing presumption against giving any of our clients’ capital to you” Stansbury, LGIM
And if, on one hand, the energy industry is “intrinsically capital intensive” and “dependent on capital from our clients”, there is also a “growing presumption against giving any of our clients’ capital to you”, he warns.
This raises the need for a clearer analysis of emissions trends, and communication of clear plans demonstrating how companies’ capital spending is “consistent with a Paris Agreement outcome”.
Moreover, in the current context where there are “more molecules of gas than there is carbon budget left to use them”, companies must compete for the right to produce gas, says Stansbury.
At the same time, gas “companies throwing large amounts of cash at renewables’” projects to improve their green credentials was not a successful strategy, he warns. Gas companies should rather “stick to their area of expertise”, such as developing biogas and hydrogen projects.
The mentality around investments in the energy sector is changing at institutions such as the European Bank for Reconstruction and Development (EBRD), with 70pc of investments granted so far in 2019 being related to ‘green’ projects, says Cristian Carraretto, associate director, sustainable resource investment at EBRD.
EBRD has invested an average €1.6bn/yr in energy projects since 2010. “We are stepping up our commitment in aligning our operations with the Paris Agreement,” says Carraretto, adding that, from next year, EBRD will report on whether projects are aligned or not with the goals.
“We still believe gas is a transition fuel” he says, adding, however, that geography will play an increasingly important role in the financing of future projects, with gas most likely being competitive, from an environmental standpoint, only in countries where decarbonisation is lagging behind the Paris curve.