No investment in new oil and gas infrastructure, NZAOA tells members

The Net Zero Asset Owner Alliance (NZAOA) has told its members that they should not make private investments in the development of new upstream oil and gas infrastructure, but the same call is not explicitly made in its expectations of companies themselves.

The alliance’s position paper on oil and gas, published on Wednesday, sets out the NZAOA’s expectations of companies, policymakers and investors.

Investor members should not invest in new oil or gas fields, non-brownfield pipelines, oil-fired power generation or unabated gas power generation, according to the new guidance. The guidance also bans investment in new midstream infrastructure for gas unless aligned with a 1.5C pathway.

Members of the $11 trillion alliance are expected to adopt policies that align with this guidance, or show how existing policies already align. However, the position paper does note that there may be “exceptional” circumstances where alternatives are not viable or where government or regional pathways influence decisions.

The guidance on infrastructure investment makes explicit the guidance from the Alliance’s target setting protocol, which only bans investment in assets that are not aligned with science-based or government-issued 1.5C pathways, as well as investments in the expansion of production.

The section that sets out expectations for investors also addresses the question of divestment. It notes that members should determine “the point at which they consider the risks posed by laggard companies to be too great”. It notes that selective divestment from laggards or firms performing poorly against the CA100+ benchmark is an option for reducing portfolio transition risk.

Alliance members are also encouraged to strengthen proxy voting policies, with the paper saying it is “crucial” that resolutions be assessed on the merit of requests. While voting against may be warranted due to poor construction or technicalities, investors should vote based on merit, not tertiary considerations such as relationships with management, it continues.

The paper also criticises investor approaches to climate-related resolutions. It notes that investors who oppose resolutions often wait until the next meeting for adjustments to be made, which it calls a “cumbersome and slow process that does not align with the urgency of the challenge” of transitioning oil and gas companies.

In order to address this issue, the NZAOA says that investors should make clear what “palatable” resolutions look like, or file their own when companies fail to make adequate progress on climate topics.

The initiative’s members are required to adopt the position within 12 months on a comply or explain basis.

Infrastructure ‘discipline’ for companies

For oil and gas companies, as well as carbon-intensive sectors, absolute and intensity-based targets are expected across all three scopes. Consumers are to focus on reducing demand, and all firms should align lobbying with climate goals.

The section for corporates does not make mention of halting finance for new oil and gas infrastructure, but does call for an end to financing in sensitive environments such as the Arctic and deep water. Companies are instead called to “practise discipline in all infrastructure financing decisions” in line with emissions targets and 1.5C scenarios.

The alliance noted that 1.5C pathways with which oil and gas producers are supposed to align their targets say that no new oil and gas fields must be developed to meet declining demand due to the growth clean energy and enabling technologies.

However, it continued that “when engaging and setting expectations for these companies, the majority of Alliance members will take into consideration that the current oil and gas demand level is not yet in line with these scenarios, while other members will expect more immediate action, including no new oil and gas fields”.

Christiana Figueres, former executive secretary of the UN Framework Convention on Climate Change, said that the position paper “set forth important new standards for investors”, but stated that it should have gone further in aligning expectations for both companies and investors on new oil and gas.

“We do not have time to wait for companies to adopt new targets and transition plans before beginning to align their capital expenditures with what we know is needed right now,” she continued.

This was echoed by Manuel Pulgar-Vidal, global leader of climate and energy at the WWF, which is a strategic adviser to the alliance. While he said that WWF appreciated the alliance’s achievements, it will “work together with the alliance to add further ambition to the expectations of all oil and gas companies to immediately end activities to explore and develop new oil and gas fields”.

A spokesperson for the NZAOA told Responsible Investor that: “Expectations for companies primarily focus on actions to reduce demand for and supply of oil and gas. The position states that all oil and gas companies must set absolute and intensity-based emissions targets that cover Scope 1, 2 and 3 GHG emissions, in line with science-based, limited or no overshoot 1.5C-aligned pathways as published by the One Earth Climate Model and the International Energy Agency. Companies that drive the consumption of oil and gas must also commit to these science-based emissions reduction targets.”

To facilitate all of the above, the position paper also calls on regulators and policymakers to design just, equitable and socially acceptable carbon pricing, enforce mandatory disclosure requirements and support blended finance.