Working towards a sustainable environment

The world’s largest oil and gas firms must disclose more information on the financial risks that climate challenges will pose to their business, or face losing investment and stakeholder trust.

Carbon Tracker has warned oil and gas firms about being too

Carbon Tracker has warned oil and gas firms about being too “backward-looking” in their disclosures to investors

That is the key finding of a new Carbon Tracker report, which concludes that no large corporates within the global oil and gas sector are currently providing “anything close to an ideal level of disclosure” around climate-related risks and opportunities.

Produced after an extensive analysis of key financial and sustainability statements and reports from the sector’s largest 30 companies, the study found that oil and gas firms typically post information on past spending and impacts through these documents, failing to communicate their plans for minimising their environmental impact or surviving in the low-carbon economy of the future.

Specifically, it concluded that such companies tend to exclude the cost and impact of resources from their balance sheets and to resources and omit probable reserves from non-financial publications. It additionally found that commentary from board-level managers generally focused on proved reserves only.

Carbon Tracker has always maintained that oil and gas facilities and reserves which are yet to be developed at the facilities are at greatest risk of becoming stranded assets if the world aligns with the Paris Agreement’s 2C trajectory. In light of its new research, it is now warning that companies which fail to disclose information to help investors weigh up climate concerns with financial gain will face a level of stranding that could impact their future production and long-term viability.

The body claims it has made this assertation amid a backdrop of regulatory changes, the rapid emergence and upscaling of new clean power technologies and an increased investor and public awareness of climate challenges, bourne off the back of publications such as the Intergovernmental Panel on Climate Change’s (IPCC) landmark report on global warming and the BBC’s Climate Change: The Facts documentary.

In a bid to help the oil and gas sector bridge the disclosure gap, Carbon Tracker has used its report on the study’s finding to provide a best-practice model for climate-related disclosures. The model provides a framework for companies looking to embed climate-related factors into their strategy and gives advice on how to disclose this alignment, covering issues such as carbon taxes; government emissions regulations; long-term demand; long-term price estimates and the potential impact of new technologies such as renewables and energy storage. It urges all oil and gas firms to include expected future expenditure on exploration and development; information on material assumptions underpinning their upstream strategy and sensitivity analysis in all disclosures.

“Investors want reassurance that upstream oil and gas companies are factoring climate-constraints into their capital expenditure strategy,” Carbon Tracker’s senior accountant Kate Woolerton said.

“We believe that they could be doing a lot more to communicate this to their investors and our model disclosure illustrates what companies could do, if they applied their best efforts.”

The findings of the study echo those of the Task Force on Climate-related Disclosures (TCFD), which found through its recent analysis of the disclosure practices of 1,800 companies that many businesses are failing to translate climate impacts into business risk. It recommends that corporates analyse and disclose the performance and resilience of company strategy under a range of different future climates – known as scenario analysis.

Investor demands

The publication of the study comes at a time when the oil and gas industry is estimated to account for more than half of the global greenhouse gas emissions associated with energy consumption, with some research suggesting that the sector is responsible for as much as 71% of global CO2 emissions.

While the transition away from carbon-heavy technologies, services and products is underway, the sector’s 24 largest publicly listed firms spend just 1.3% of their combined capital expenditure (CAPEX) into low-carbon technologies and projects between January and October 2018, according to CDP.

This is despite an ever-growing demand for climate-related disclosures and actions from the investment community, amid warnings that the next financial crash is likely to be spurred by climate challenges.

Several firms within the finance sector are making moves to align their respective portfolios with the aims of the Paris Agreement, for example, after Dutch bank ING announced that it would help the companies it invests in to adopt 2C emissions targets last year. Since then, a coalition of almost 400 investors with $23trn in collective assets pledged to step up its climate action plans in a bid to help the global finance sector meet the aims of the Paris Agreement.

And more recently, 36 central banks and regulators, including the Bank of England and the World Bank last month called on all stakeholders in the finance sector to bolster their climate actions and help to co-create a low-carbon global economy. Issued by the Network for Greening the Financial System (NGFS), the rallying cry came just days after the Bank of England’s governor Mark Carney and the Banque De France’s governor Villeroy de Galhau warned stakeholders across the finance sector that the global financial system will collapse without urgent, climate-focused reform.

Sarah George