Milking a snake: Energy companies at the vanguard of net-zero?

Article by Ivka Kalus, Chief Investment Officer and Portfolio Manager of Haven Green partner Promethos Capital.

The largest greenhouse gas emitters in the planet that impede the global economy from aligning to the Paris Agreement of 2 ̊C temperature rise are primarily companies in the energy, industrial, and transportation sectors. Among them, energy companies1 that are involved in the fossil fuel value chain are some of the largest emitters. In response, asset owners and asset managers have together introduced some form of fossil-fuel divestment strategy on $15 Trillion of combined assets. However, much of the world’s economy is still deeply reliant on fossil fuels, and hence the energy companies that extract, refine and distribute them. Collective divestment has raised awareness as well as the cost of capital for many energy companies, but the action also precludes investors from a seat at the table, and the resulting loss in ability to influence the governance process. Nevertheless, energy companies have massive capital expenditure budgets,2 are well-placed to support the transition to renewable energy, and could become significant players in the vanguard to reduce carbon emissions and significantly promote sequestration. To attract investor capital, energy companies are realizing that it is in their financial interest to integrate climate risks into their strategic decisions, to benchmark their performance credibly, and to aggressively invest in new carbon-free energy solutions.

Climate and Strategy: Boards and senior management at energy companies must carefully consider energy transition and regulatory risks in their operations and decision-making. Including these risks distils to improving disclosure of current assets, large scale projects, and future capital deployment. Energy companies cannot function on assumptions of ever-growing oil demand, favourable oil price scenarios, or the need to increase bookable reserves. In fact, building scenarios for peaks in energy demand, and the growing prominence of gas and renewable energy assets in energy portfolios are strategies that can indicate a corporate culture that embraces realism with ambition.3

Investors look for ways in which climate change scenarios and various risks from climate change are being accounted for in board decision-making. Companies must consider measures such as using carbon pricing on capital expenditure or tying emissions and net-zero targets, not only ESG themes related to risk management, to director compensation. Boards and management that instead spend time on activities like mergers, reshuffling their portfolio to time the oil markets, or extreme cost-cutting are likely just focused on short-term gains. European domiciled corporates have had to be more forward-thinking; the continent will decarbonize faster than North America or large Emerging Markets, and corporates there have far better climate goals.4 With recent 2050 net-zero targets announced by European firms ExxonMobil and Chevron are left wanting of long-term transition targets and strategies. EM energy companies, most-state owned, face even lower pressure to disclose and align strategies to climate change scenarios.

Benchmarking: Quantifying the impact of these physical and transition risks is vital to allow investors to discriminate between energy companies that have low emissions intensity against those with high intensity.5 This quantification can become vital in helping investors identify companies rapidly reducing their emissions intensity. Therein lies the greatest potential for financial and environmental impact. The Transition Pathway Initiative, for example, benchmarks emissions intensity for integrated European Oil and Gas companies based on their emission targets for 2050.6 Such comparison across other energy companies and firms from other sectors would be further illustrative to investors to discriminate among companies. However, Scope 3 GHG emissions from Oil & Gas companies are more than 80% of total emissions, yet very difficult o calculate and report on for individual companies.7 Outside of the six integrated European O&G companies, hardly any other energy companies report on Scope 3 emissions.

Without more disclosure from energy companies across the world and more data on Scope 3 emissions, we can rely on frameworks that provide a more holistic way in assessing a firm s climate preparedness. The Task Force on Climate-related Financial Disclosures (TCFD provides recommendations for corporate disclosure across governance, strategy, risk management, and metrics and targets, while the Sustainability Accounting Standards Board (SASB and the Climate Disclosure Standards Board (CDSB provide ESG metrics and targets appropriate for energy companies and climate targets. Adherence to these guidelines and reporting frameworks can provide a minimum threshold in judging corporate climate action; nonetheless emissions intensity should ultimately be the yardstick with which to compare global energy companies in their transition efforts.

Investing in solutions: To meet higher energy demands globally by 2050, $13.3 Trillion in new investments are necessary, of which 77% will have to go towards renewable energy solutions.8 Additionally, $843 Billion would go towards batteries and $11.4 Trillion towards transmission and contribution. Energy companies can marshal and orchestrate investments of such scale. They will have to participate to channel those resources. Yet, each investment on the margin must lower an energy company’s emission intensity. Doing so meaningfully requires aggressive decarbonization of their oil & gas portfolios, integrating renewable and alternative energies into operations, and deploying carbon sinks and more circularity into their products. The nature of alternative/renewable assets is also financially appealing; new technologies have lower capital intensity and faster payback periods, which can improve return on capital. For example. Equinor, Norway’s largest energy company, is harnessing their experience with offshore rigs to roll-out wind projects in the North Sea and US East Coast. Total has clearly articulated targets for their energy portfolio to become net-zero (Scope 1 and 2) by 2050; with the ultimate portfolio being a combination of liquids (including biofuels), gas (including green hydrogen and biomethane), and renewable electricity (primarily wind and solar). Royal Dutch Shell on the other hand, is building coalitions and partnerships with airlines, airports, governments and regulators to share their energy use data and reduce its own Scope 3 emissions.

There is no clear answer to whether investors should continue to invest in energy companies, particularly those in the oil & gas industry. Nonetheless, these massive companies have sophisticated operational value chains and can marshal and shift hundreds of billions of dollars of capital to decarbonize the energy industry. Those with climate-aligned governance, clear incentives and commitment to benchmark their emission intensity, and management teams that aggressively invest for the future, can have a strong investment appeal even for climate-aware investors.

The information provided is as of September 2020 and does not constitute investment advice and should not be relied on as such. The information and opinions expressed in this material was derived from internal and external sources believed to be reliable. However, Promethos cannot guarantee its accuracy or completeness. This material may contain “forward-looking” statements and there is no guarantee that any forecasts will come to pass. Reliance upon information in this material is at the sole discretion of the reader and Promethos does not accept any liability for such reliance.

  1. In GICS classification
  2. Global oil and gas upstream capital spending was USD 497 bn in 2019.
  3. DNVGL (2017) Oil and Gas Forecast to 2050
  4. The EU Economy is preparing to be climate neutral by 2050. Source:
  5. Net carbon intensity for an energy company: , where CCS is Carbon Capture and Storage (Transition Pathway Initiative).
  6. Transition Pathway Initiative (2020) Carbon Performance of European Integrated Oil & Gas Companies. Galp, BP and OMV are among the European O&G companies that have yet to release targets for 2050 and have claimed to release long-term targets this year.
  7. O&G scope 3 GHG is estimated to be about 20 Gtpa, equivalent to 35-40% of total global anthropogenic emissions. Source: JPM Energy Transition 2020
  8. BNEF (2020) New Energy Outlook 2019