[N.B. this article is mainly about climate change so if this is of no interest to you feel free to skip]
I think by now most people have some understanding
about climate change and the need to move away from fossil fuels to cleaner
forms of energy. To meet the Paris Agreement targets and keep global warming well below
2.0C our world needs to urgently decarbonise to avoid devastating climate
events. We are already seeing this at just 1.2C of warming with recent flooding in
Germany and China ( a years rain in a single day), wildfires in Siberia and the
west coast of US and Canada.
The use of fossil fuels (coal included) account for
around 75% of global carbon emissions so it is crucial to find ways to end our
reliance on this form of energy to prevent more warming. The private sector
companies will play a crucial role in this process of decarbonisation and
whilst many are starting to make promises to reach net zero emissions by 2050,
there is little signs of actual progress.
The World Benchmarking Alliance provides an
accountability mechanism to rank the progress of companies and hold laggards to
account. They have recently published a report into the oil & gas sector
looking at the world's 100 top companies - listed companies and state-owned companies.
The WBA Report Highlights
- Not one of the 100 companies have committed to stop exploring for new oil/gas
- They will collectively exceed the sector's carbon budget by 2037 - 13 years too early
- From 2014 to 2019 all increased either oil or gas production
- Only 13 of the 100 have low carbon transition plans which extend at least 20 years ahead
Vicky Sins, Lead Decarbonisation and
Energy Transformation at WBA,
commented:
"Every company, policy maker and investor is aware of the urgent need to prioritise decarbonisation and energy transformation, but awareness has not led to sufficient action.
In a world powered by a new era for energy production, oil and gas companies find themselves at a crossroads – transform or become redundant. They can no longer plead ignorance of how urgently change is needed. The industry must acknowledge the wholesale transformation required to survive and signal the steps it is taking to meet this challenge".
The ranking are A to E and assess each of the 100
companies alignment with the Paris Agreement and progress (mainly lack of) towards 1.5C of
warming.
None received an A ranking and only 2 were ranked
B...Neste of Norway and Engie of France; 9 companies received a C ranking
including BP, Repsol, Total and Shell. The next 20 or so were classed as D and the
remaining 66 oil companies (two-thirds) were place on the naughty step with an E rating including
Conoco Phillips, Petrobras of Brazil, Occidental (a favourite of Warren
Buffett), Chevron, Russia's Gazprom and Rosneft (BP has 20% stake), Exxon Mobil
and Saudi Aramco - the world's biggest oil producer.
Only 12 of these 100 companies provide information
on low carbon capital expenditure plans to 2024 and these planned investments
are not enough to move to a low-carbon economy.
There is an overall lack of transparency on climate
reporting with only partial data on scope 1 & 2 emissions and only one
third providing data on scope 3 emissions.
Basically, the sector as a whole is failing to
accept responsibility for carbon emissions. The carbon footprint of these companies is huge... Saudi Aramco scope 1,2 &3
emissions for example were higher than the combined emissions of Germany,
France, Italy and Spain!
Without immediate and decisive action, the oil & gas sector will prevent the world meeting it goal of limiting warming to 1.5C above pre-industrial levels by 2050.
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Changes 1880 to 2020 (globalchange.gov) (click to enlarge) |
Key Findings
So, the main recommendations from the report are :
1. Keep oil and gas in the ground. Instead of
pursuing a 'take what you can, while you can' approach companies should
transition away from oil and gas to not only keep our planet safe but also to
ensure their own survival in a low carbon future.
2. Stop using smoke and mirrors tactics to deflect
attention from their lack of action. Rather than rising to the challenges they
use lack of transparency and arms-length lobbying via trade associations to
undermine climate action.
3. Take responsibility for scope 3 emissions. Only 3
of the 100 have comprehensive emissions reduction targets in place.
4. Seriously ramp up capital expenditure into low
carbon solutions.
5. State-owned companies account for 56% of emissions
compared to publicly listed companies. Many of the states have made no
commitment to net zero emissions.
Human
Rights
Article 3 of the Universal Declaration of Human Rights
is short (link):
"Everyone has the right to life, liberty and security of person"
By continuing to drill for more oil and gas and
knowing the use of that process will result in more serious global warming, the
oil companies are compromising the right to life of our children, grandchildren
and future generations.
This was the conclusion of the landmark case brought
against Shell Oil by the Dutch people earlier this year. The court ordered
Shell to speed up its CO2 reduction targets from 20% by 2030 to 45%.
Shell will appeal the decision but it is now clear
that there are limits to what these companies can get away with and I expect to
see far more lawsuits filed against the fossil fuel companies going forward.
The Role of Investors
I think most investors would want to avoid making
profits from companies that make instruments of torture used by oppressive
regimes. But what about companies that compromise the future of life as we have
known it for thousands of years?
The big oil companies have to take responsibility
for their operations and emissions. So far, they have been slow to act in a
climate-responsible way. Many investors will hold many of the large oil
companies in their portfolio...either directly or indirectly via index funds or
investment trusts. Most people with a pension will unknowingly be investing in
these companies via their works pension fund or SIPP. We are a therefore part
owners of these companies we also have a responsibility if we care about the
future well-being of the planet for our children and grandchildren.
"Once climate change becomes a defining issue for financial stability, it may already be too late" former governor of the Bank of England Mark Carney.
Divest
One way to take action is to divest your portfolio
of fossil fuel companies. Apart from the ethical arguments, many investors are
aware of the increased risks of continuing to hold on to fossil fuel companies.
Renewable energy is now cheaper than oil, gas and coal and in 2020 overtook
coal as the world's largest source of installed power capacity. The big risk
for investors is that of stranded assets as demand for oil and gas falls away.
Many coal companies filed for bankruptcy in 2016 after just a 2% reduction in
global demand for their product.
There is also the increased risks associated with
litigation as Shell found out last month. Expect much more of this over the
coming few years.
In 2018, I took the decision to divest my personal
portfolio of fossil fuel companies. This involved the sale of some of my
largest holdings such as Vanguard Lifestrategy which, due to their size, hold
large quantities of all the global fossil fuel companies.
There are now fossil-free index funds such as iShares World SRI and Vanguard ESG Global All Cap
For further reading here's a link to Ethical Consumer on Carbon Divestment
Pressure
from the Big Fund Managers
The likes of Blackrock and Vanguard currently have a combined
$16 trillion of assets under
management and therefore could wield shareholder power and shape the agenda to
hold companies to account when it comes to engagement and voting at annual
meetings.
These two fund managers have the capacity to become
climate change leaders and there is now increasing demands for them to step up and
take more responsibility and take firmer action against boards of directors who
are consistently failing to make progress on climate.
They are now starting to offer fossil-free funds
which give investors more climate-frienly options but they need to ensure all
their ESG funds are truly sustainable and exclude for example the banks which finance the
operations of the worst climate offenders.
To be fair, CEO Larry Fink clearly recognises the issues in this 2021 annual letter to global CEOs
"I believe that the pandemic has
presented such an existential crisis – such a stark reminder of our
fragility – that it has driven us to confront the global threat of climate
change more forcefully and to consider how, like the pandemic, it will alter
our lives. It has reminded us
how the biggest crises, whether medical or environmental, demand a global and
ambitious response.
In the past year, people have seen the mounting physical
toll of climate change in fires, droughts, flooding and hurricanes. They have
begun to see the direct financial impact as energy companies take billions in
climate-related write-downs on stranded assets and regulators focus on climate
risk in the global financial system. They are also increasingly focused on the
significant economic opportunity that the transition will create, as well as
how to execute it in a just and fair manner. No issue ranks higher than climate
change on our clients’ lists of priorities. They ask us about it nearly every
day".
Conclusion
We are currently at an average 1.25C above pre-industrial levels. We are on course for 1.5C by 2030 and the UK Committee on Climate suggest another 0.6C warming by 2050. This is already baked in even if we were to stop carbon emissions now. The scenes of devastating flooding in parts of Germany, Belgium and China last week will become more frequent and more widespread due to more and more warming.
But of course no big surprise to learn the fossil
fuel industry is dragging it's heels on climate change. They understand the
climate science but have consistently tried to avoid responsibility for the
past 30 or 40 years. This obviously needs to be addressed with more urgency.
Climate change poses an existential threat to us all and a corresponding threat
to the global economy. We need to get to net zero carbon emissions by 2050 and
this message will be repeated at the COP 26 gathering of world leaders in Glasgow later
this year. This will not be possible whilst the big oil companies continue with
'business as usual'.
The state-owned companies are obviously
out of reach for the investment community but we can and should do much more to
try to bring the listed companies into line. Everyone has a part to play in the
process no matter how small or insignificant it may appear.
Let's not say in 10 years time that we did not
understand the scale of the problems posed by climate change or have regrets
that we did not do more at the time to mitigate the looming crisis. "Do
your little bit of good where you are; it's those little bits of good put
together that overwhelm the world" Desmond Tutu.
Over
to you...what do you think about the big oil companies? How best to bring about
a change? Have you considered divesting fossil fuel companies from your
portfolio? Maybe you think it doesn't make a difference. Leave a comment below
and share your thoughts, hopes, fears with others.