We are in the midst of AGM season for the oil and gas majors, culminating in the final showdown at ExxonMobil next week where the shareholder ask is for more climate information disclosure and demonstration of portfolio resilience through a transition to a low-carbon economy. Last week BP’s Chairman and Shell supported the Task Force on Climate-related Financial Disclosures (TCFD). Chevron has made movements towards publishing scenario planning, avoiding a vote on a key shareholder resolution, and two thirds of Occidental shareholders (including the world’s largest fund manager BlackRock) approved a proposal for the company to report on the business impacts of climate change, despite the board’s objections. [And there was 46% support for a shareholder proposal on 2 degrees C scenarios at The Southern Company yesterday – Ed.]
These are real signs that attitudes towards disclosure and climate risk governance and preparedness are changing.
This is backed up by research. In collaboration with four international investor networks (the Ceres Investor Network on Climate Risk and Sustainability; AIGCC, IIGCC and IGCC) we have looked at 10 of the world’s largest oil and gas companies in North American and Europe, including ConocoPhillips, Shell and Total, and have discovered a significant improvement in climate risk disclosure in recent years. There are a number of key drivers, including investor and shareholder lobbying, such as the recent call by over 200 investors with more than $15 trillion of assets for the G20 to support and implement the TCFD’s recommendations. At the root is also a strong business case for companies to take advantage of the opportunities presented by the transition to a low carbon economy, and to think through their strategy to address systemic physical and transition risk. Companies can learn a great deal from good scenario analysis.
The final TCFD recommendations due in July are also a significant catalyst. The TCFD’s pillars of governance, strategy, risk management and targets/metrics will be important in mainstreaming global disclosure in the boardroom and with wider stakeholders. This will provide the transparency that companies and investors need for benchmarking and investment decision-making. Earlier this week We Mean Business, which has some of the companies featured within its networks, called on G20 governments to formally endorse the TCFD recommendations. At CDP we are committed to adopting the TCFD recommendations in their entirety as part of our annual disclosure request and as a next step would also encourage governments to move towards requiring universal, high-quality corporate climate disclosure. In our recent report in partnership with the Global Investor Coalition on Climate Change ‘Investor Climate Compass: Oil and Gas’ we assessed the climate risk performance of BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Occidental, Shell, Statoil, Suncor and Total and concluded that even before the TCFD recommendations are finalised several leading players are stepping up climate risk disclosure efforts.
Statoil comes out top of the 10 companies in the report and is praised as “one of very few oil and gas majors to not only support the idea of stress-testing against a 2⁰C scenario analysis but to also set targets and commit capital to decarbonise its portfolio.”
Third placed French company Total, has an ambition to have 20% of its asset base in low-carbon ventures by 2035 and produced its first 2⁰C climate strategy last year.
The report also demonstrates ‘the discernible impact’ of persistent climate-focused investor engagement – either through private dialogue or public challenges via shareholder resolutions on the 10 large oil and gas companies. The impact is mainly on board and executive decision-making with respect to the disclosure and management of climate change risk. We expect pressure from shareholders to only increase in the coming years.
Yet despite progress more could be done. While eight of the companies assessed have so far signalled their clear support for the Paris Agreement all of them still need to do more to strengthen their support for robust national and international climate policies and integrate the implications of wider climate action into business planning.
We ranked ExxonMobil, the largest global publicly traded oil and gas company as second to last among the 10 companies assessed in terms of environmental risk disclosure, due to its limited low carbon activities and reluctance to publish comprehensive stress testing against 2⁰C. ExxonMobil is an outlier against the core TCFD proposed pillars of climate governance and strategy.
Bottom of the rankings is Suncor, the Canadian oil sands-focussed firm although of late it has “improved both its disclosure and its governance of low carbon resiliency issues”.
Seven of the 10 companies evaluated have now conducted scenario analysis to identify how their business strategies must evolve to adapt to the impact of the ‘well below’ 2⁰C Paris Agreement target, although just three have so far publicly quantified the financial impacts of a 2⁰C scenario.
But at the same time just three of the firms were found to have divested or scaled back from high carbon and high cost oil sand assets in order to curb their potential stranded asset risk exposure, while only an estimated 1.5 per cent of the 10 companies’ total capital expenditures last year was directed into low carbon investments. And, while half of the companies evaluated now link executive compensation to greenhouse gas emissions performance, just two of them “link incentives to upstream or strategic intent to reduce emissions.”
Given that the global low carbon transition is well underway and oil demand could peak within a decade, there can no longer be any divergence for these companies between climate and overall strategy.With turbulence around oil share prices and the move away from China and India on gasoline, investors are requesting greater disclosure to the market on financial impacts about portfolio resilience and 2⁰C transition planning. This is about building confidence, pricing risk better and seeing how companies are adapting to the energy transition. Asset owners and the world will be watching on the 31st May when Exxon shareholders vote on the New York State and Church Commissioners item 12, and again in July when the G20 meet.
Tarek Soliman CFA is a senior Analyst at CDP and leads on the oil and gas investor research series.