The inconvenient truth about oil and gas giants

In an era when we’re confronted with the realities of climate change every day, the latest findings from Carbon Tracker expose a stark discrepancy in the oil and gas industry. A comprehensive analysis of the 25 largest listed fossil fuel companies reveals that their business plans are fundamentally incompatible with the goal of limiting global warming to 1.5be degrees Celsius, as set out in the Paris Agreement.

This insight is particularly crucial for asset managers and stewardship professionals who are at the forefront of balancing financial returns with sustainable investment practices. With the spotlight intensifying on the oil and gas sector’s role in climate change, the report by London-based think-tank Carbon Tracker offers an indispensable perspective for those navigating the future of energy investments.

Universal misalignment

Carbon Tracker’s ‘Paris Maligned II’ report employs a grading system from A to H to evaluate how closely these companies align with the climate goals established by the Paris Agreement. Astonishingly, not one company among those assessed scored near an A. In fact, the highest score was a D, attributed to BP, while industry giants like Saudi Aramco, Petrobras, and ExxonMobil found themselves at the lower end with G ratings. ConocoPhillips received an H grade, indicating a path aligned with catastrophic warming scenarios.

This grading reveals a concerning trend of planned expansions and increases in production across the industry, starkly opposing the urgent need for climate action recognised globally. Even as some companies, including BP and Shell, have announced plans to cut carbon emissions and shift towards less carbon-intensive energy sources, the report underscores a significant discrepancy between these commitments and their actual impact on emissions and the transition to renewable energy.

Asset managers beware

For asset managers and investors, the implications of these findings are profound. Maeve O’Connor, Carbon Tracker Oil and Gas Analyst and report author, highlights the expected decline in oil demand and the financial risks of investing in companies that are entrenched in scenarios leading to excessive global warming. Investments in the oil and gas sector risk yielding returns that are lower than expected due to these misalignments with global climate objectives.

“If you’re an oil and gas company aligned with a very high [global] temperature scenario, your portfolio as an investor could be at risk of generating a lower anticipated return,” O’Connor said in an interview. “The impacts of climate change are being felt throughout their portfolios.”

Furthermore, O’Connor points out that while diversifying into renewable energy sources such as wind and solar is often touted as a step towards sustainability, it does not automatically ensure alignment with the goals of the Paris Agreement. The fundamental issue lies in the absolute production of oil and gas—the key determinant of a company’s alignment with the objectives to combat climate change.

The path forward: A call for realistic and responsible investment

The findings from Carbon Tracker call for a reevaluation of investment strategies within the energy sector, emphasising the need for a balanced and orderly transition away from fossil fuels. This aligns with the discussions at the COP28 UN climate conference, which advocated for a significant increase in renewable energy capacity.

For asset managers and stewardship professionals, the path to Paris alignment is laden with challenges, yet navigating these with strategic foresight and a deep sense of responsibility is crucial. A key aspect of this journey involves stewardship and active engagement with energy companies to advocate for transparent, sustainable business models and practices that are in line with the Paris Agreement. This approach requires a thorough assessment of energy companies’ business models, pushing for investment in genuinely sustainable projects, and a steadfast commitment to the principles of the Paris Agreement.

Through proactive engagement and stewardship, asset managers can influence corporate behaviours, driving the transition towards a low-carbon economy and ensuring that investments are future-proofed against the evolving regulatory and physical impacts of climate change.

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