The emissions of the oil and gas industry collectively account for approximately half of global carbon dioxide (CO2) emissions. If fossil fuels continue to be extracted at the same rate over the next 28 years, as they were between 1988 and 2017, global average temperatures would be on course to rise 4°C by the end of the century. Such an increase will have catastrophic consequences.
To try and change this trajectory, shareholders of major oil & gas companies have filed 160 climate change shareholder resolutions at 24 U.S. oil & gas companies between 2012 and 2018, which is detailed in a new report, 2020: A Clear Vision for Paris Compliant Shareholder Engagement, released Friday.
These resolutions resulted in a range of successes—from appointing climate-competent board members to reducing some operational greenhouse gas emissions. Despite this movement, none of these U.S. oil & gas companies have adopted plans, or targets, to limit their full lifecycle contribution of greenhouse gas emissions.
"There is a short window of time to ensure that global temperature rise does not exceed 2°C. Moving oil and gas companies—one of the largest sources of greenhouse gas emissions—to transition to Paris compliant, low carbon business plans is critical to meeting this goal."
Instead, the vast majority of these companies are continuing business as usual investments to maintain or expand production. Specifically, there has been no material progress in reducing the emissions that matter most, Scope 3 product emissions, in alignment with the Paris Climate Accord. These emissions, because of their size and scale, are the relevant proxy for assessing company progress on climate change goals, as is a company’s disclosure of Paris compliant business plans to rapidly ramp down these emissions.
The fact that global greenhouse gas emissions, and oil & gas company capital expenditures on exploration and production, keep rising signals a fundamental limitation of the current shareholder engagement strategy. Shareholders must grapple head-on with the implications of an oil & gas business model that continues to invest unabated in products which, when used, run counter to science-based targets and the Paris Agreement.
Oil and gas companies’ demand projections and rationales for continued capital expenditures are based on assumptions that are not in alignment with Paris goals. Too few companies are conducting true 2°C scenario planning and stress test analyses, or disclosing sufficient information when they do, including assumptions and outcomes. The result for the companies that have performed such analysis is generally projections of demand far beyond what can be burned while keeping global temperatures safely below 2°C. Company intentions to supply whatever demand exists irrespective of climate impact, and to continue investments in exploration and production of reserves that are likely to be stranded under Paris compliance, contributes directly to the world continuing to overshoot its Paris goals and is in defiance of accepted science-based targets
While many shareholders of oil & gas companies have divested or committed to divest, others remain steadfast in holding these investments in order to engage company management. For pension funds, university endowments, mutual funds, and foundations such investments are increasingly a financial risk.
Over the past 10 years, the energy sector has underperformed the benchmark, leading to significant portfolio underperformance and fiduciary risk for the trustees and investment committees of these institutions. While oil prices have recently increased, giving some performance relief, long-term risk for this sector continues to rise. An array of negative business indicators that increase performance risk include: high costs of capital expenditures on exploration and production; mounting debt, credit downgrades, increased litigation targeting oil & gas companies on climate; increased cost competitiveness of renewables and other low carbon technologies; the likelihood of declining demand as efficiency and climate policies move forward globally; and associated fiduciary risk to large institutional shareholders.
In addition, climate change negatively impacts the global economy threatening all sectors of shareholder portfolios—from supply chain blockages, to cycles of flood and drought, to lack of fresh water, to agriculture losses, to reduced global demand for products, among others. As global climate impacts rise, broader portfolios will suffer.
There is a short window of time to ensure that global temperature rise does not exceed 2°C. Moving oil and gas companies—one of the largest sources of greenhouse gas emissions—to transition to Paris compliant, low carbon business plans is critical to meeting this goal. After seven years of shareholder advocacy focused on financial, risk-based climate engagement with the oil and gas industry, it is time for a strategic shift to increase impact. Having gained so little on material climate change, and given up so much in portfolio underperformance, a new course of action is needed.
Shareholders must therefore demand 2°C transition plans from oil & gas companies by 2020. This will mean that shareholders must unify and demand that oil and gas companies immediately undertake scenario analysis compatible with a 2°C demand level, with transparent methods of assessment and disclosure, and then adopt Paris compliant business plans with clear timelines for implementation. Such plans must provide sufficient detail that shareholders can review, understand, and compare companies’ actions.
We no longer have the luxury of time. Shareholder engagement must focus on one last, fit for purpose demand, seeking 2-degree assessments from companies in year one and 2-degree action plans by 2020. If Paris compliant engagement fails, then investors must divest. It is the only way investors themselves can be Paris compliant.