Assessing and acting on carbon performance in the oil and gas sector

The new TPI report enables investors to focus on how oil and gas companies are positioning themselves for the low carbon transition.

Last week the Transition Pathway Initiative (TPI) released a discussion paper titled: Carbon Performance in Oil and Gas which provides a framework developed by the London School of Economics Grantham Institute for assessing oil and gas producers against the goals of the Paris Agreement. The paper also provides the first comparative assessment of recent disclosures from Shell, Total and Petrobras whilst noting that the disclosures from Exxon, BP and other oil and gas companies are not sufficient to enable a similar assessment. The paper’s central premise is that oil and gas producers are engaged in primary energy supply. Therefore, the appropriate measure of activity for the sector is energy production and that the appropriate measure of carbon performance is the lifecycle carbon intensity of primary energy supply.
Using recent disclosures from Shell, Total and Petrobras, the report demonstrates that:

  • It is possible to define low-carbon transition pathways for primary energy production that are consistent with i) the Paris Agreement Nationally Determined Contributions (NDCS) or pledges, and ii) limiting warming of the planet to 2 Degrees;
  • An appropriate low-carbon transition pathway for oil and gas producers is measured in terms of companies’ lifecycle carbon emissions per unit of energy supplied; and
  • It is possible to assess companies against these transition pathways, using data on their current lifecycle greenhouse gas emissions and on their future ambitions, objectives and targets.

The results show that all three are above benchmarks at present but, given their ambitions to diversify and reduce their carbon intensity of energy supply, Shell and Total in particular could achieve alignment with one or both of the benchmarks at some point in the future.
The report raises three important conclusions for investors focusing on the carbon performance of the oil and gas sector.*Lack of the right kind of Disclosure: most oil and gas companies are not yet providing the public disclosures necessary to enable investors to assess how they are performing against the Paris Pledges or a 2 Degrees scenario. This means that investors cannot assess the quality of the strategies being adopted by these companies based on public disclosure to manage the risks and opportunities associated with the transition to a low-carbon economy. The disclosure expectations set out in Box 1 are a basic expectation of all companies in the sector. Of course, disclosure is only the starting point. Once companies have stated their ambitions or targets, investors will assess their current and future performance, and engage with those companies needing to reduce their emissions. Oil and gas companies have a variety of strategies available including diversifying their energy mix (e.g. increasing the proportion of renewables), exiting certain activities altogether, offsetting some of their emissions, or not investing in new production assets and returning profits to shareholders.

*Development of Portfolio-wide approaches to carbon management: The TPI methodology provides investors with a basis for aligning their assets with international climate goals like 2 Degrees. For example, in primary energy, they could consider balancing their investments in the oil and gas sector with investments in, for example, renewables or other low-carbon forms of primary energy. This allows them to deal with the reality that the rate at which individual companies can transition will be limited by the company’s business models, capacities, existing asset base and technological development.

  • Wider Approach to Engagement and CA100+: The work of the TPI not only reframes the relationship between investors and companies; it also reframes the relationship between
  • investors and wider society. It provides investors with a framework for communicating and demonstrating their actions and efforts towards the goal of a low carbon transition. It also provides society with a framework for analysing this contribution, for analysing the efforts of individual investors and of collective initiatives such as CA100+.

In conclusion the paper suggests we are moving from process-oriented to performance-oriented approaches to engagement. Over the past decade, investors have been vital in encouraging companies to adopt robust carbon management systems and processes, to report on their carbon performance and to explicitly consider (through scenarios and other forward-looking tools) carbon in their business planning and risk management processes. Investors now have the toolkit to engage much more forcefully on carbon performance, and reducing companies’ impact on the environment.

Adam Matthews, Transition Pathway Initiative (TPI) Co-Chair & Head of Engagement Church Commissioners and Pensions Board, Faith Ward, TPI Co-Chair on behalf of the Environment Agency Pension Fund, Dr Rory Sullivan, Expert Advisor to TPI, Professor Simon Dietz, Director of the Grantham Research Institute, London School of Economics**Notes

The Transition Pathway Initiative (TPI) is a global, asset owner-led initiative, supported by asset owners and managers with over £5 trillion (US$6.9 trillion) of assets under management. TPI aims to evaluate what the transition to a low-carbon economy looks like for companies in sectors with a high impact on climate change, such as coal mining, electricity, oil and gas, and steel. It also aims to assess how well-prepared companies in these sectors are for the low-carbon transition.

Companies are analysed in two ways:
• Management Quality: TPI evaluates and tracks the quality of companies’ governance/management of their greenhouse gas emissions and of risks and opportunities related to the low-carbon transition.
• Carbon Performance: TPI also evaluates how companies’ recent and future carbon performance might compare to the international targets and national pledges made as part of the UN Paris Agreement. It does this by comparing companies within each high-impact sector against each other and against sector-specific benchmarks, which establish the performance of an average company that is aligned with international emissions targets.

TPI publishes the results of its analysis through an open online tool hosted by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics (LSE): Link.

FTSE Russell is a partner of the initiative and supplies ESG ratings data for the assessment of management quality.