Companies pivoting to environmental goals
Move thought to bring in more investors amid scrutiny
Oil companies are pledging to disclose carbon emissions levels and reduction efforts to attract investors concerned about the growing risk of climate change on the future of fossil fuels.
About three-quarters, or 37, of the nation’s 50 largest oil companies have set environmental, social and corporate governance goals, including reporting greenhouse gas emissions and their progress toward reducing them, according to an analysis of company financial filings by consulting giant EY.
Analysts say oil companies that have set these so-called ESG goals expect they can more easily attract investors, employees and customers as the industry faces increasing scrutiny over climate change. Environmental groups, however, say they are skeptical that the industry is truly serious about following through on these environmental goals.
“There’s always been a certain level of emissions reporting going on,” said Mitch Fane, an EY principal overseeing the firm’s U.S. oil and gas clients. “But in the past year, when you look at larger commercial banks and hedge funds, they’re demanding more transparency over greenhouse gas emissions and ESG scores.”
ESG has become a major focus of the oil industry after Wall Street fled the sector in the wake of the pandemic-driven oil crash, which helped the energy sector to become the worst-performing of the U.S. stock market last year.
Oil companies hoping to woo back investors are finding that capital comes with more strings attached, chiefly company disclosures on carbon emissions and plans to avoid the worst consequences of climate change.
Vanguard, Blackrock and State Street — three of the largest oil investors with a combined $22.3 billion invested in the 30 largest oil companies — have pledged to invest in net-zero emission companies.
Reporting on ESG also is a public relations move, analysts said. Oil companies, which face challenges recruiting younger workers, will need to demonstrate progress on environmental goals to draw the next generation of employees, said Allison Hoeinghaus, managing director with consulting firm Alvarez and Marsal.
“It’s obviously a generalization, but millennials tend to really care about climate change,” Hoeinghaus said.
The stakes are high for oil companies. Implementing environmental goals is not only a matter of access to capital or recruitment of employees and clients, but also maintaining control over the company itself. A climate-minded activist investor in May won three seats, or one-quarter, of Exxon Mobil’s board, and shareholders at rival Chevron backed a climate proposal urging the oil giant to cut customers’ carbon emissions.
As a result, oil companies are increasingly promising to track and report greenhouse gas emission levels, flaring, power consumption and water, and methods of transporting crude, whether by pipeline, rail or trucks. In addition, companies are using drone and radar technology to monitor leaks, and are installing solar panels to operate drilling and production equipment. Some companies are going so far as to tie executive compensation to environmental performance.
Haynes and Boone, a Dallas-based law firm with an office in Houston, said it expects more robust ESG disclosures from oil companies amid mounting investor pressure.
“Over the past year, environmental, social and governance (ESG) has been a transformative force in the oil and gas industry, driving company decisionmaking and impacting nearly every aspect of oil and gas production,” Haynes and Boone said.
Previous targets
Environmental targets are not new in the oil industry. For decades, oil companies have set targets around health, safety and the environment, or HSE, in response to oil spills and concerns about worker safety.
ESG, however, has gained more traction over the past year as climate change has become a major focus for the Biden administration. In his first days in office, President Joe Biden brought the U.S. back into the Paris Agreement, which aims to limit global warming to below 2 degrees Celsuis. He also convened world leaders for a virtual meeting on climate change, and temporarily halted new oil and gas leases on federal lands and waters. In November, world leaders are set to gather in Glasgow, Scotland, to discuss how to accelerate progress toward reducing carbon emissions.
All of the oil majors, including Exxon, Chevron, BP and Royal Dutch Shell, have published environmental sustainability reports, while 65 percent of large independent oil producers have issued ESG reports, according to EY.
It’s difficult, however, to compare ESG reports across the oil industry.
There are no set standards that companies have to follow when it comes to reporting environmental performance.
Some oil companies, chiefly in Europe, have pledged to track carbon emissions from energy sources and by customers, while other companies mainly in the U.S. have promised to only track greenhouse gas emissions from their own oil and gas operations. Some companies, such as BP, are disclosing carbon emissions from oil and gas projects that it has invested in but doesn’t operate, while others are excluding emissions from such projects.
Many oil companies have pledged to reduce emissions relative to their production levels, known as emissions intensity, but most have not set absolute targets to reduce their emissions. Only a handful of oil companies, including BP, Shell and ConocoPhillips, have announced ambitions to become net-zero emissions companies, meaning all carbon emissions are offset by renewable energy or some form of carbon sequestration.
“It’s a really, really complex exercise, and in fairness, you need all of that
data to draw a comparison between one company versus another,” Fane said. “So there’s going to be some tension between accuracy up front versus trying to get some type of relative benchmark we can use for comparison and transparency.”
Federal regulators and industry leaders are working on setting reporting standards for ESG metrics. They also are working to set up a framework that would account for emission mitigation efforts like carbon capture and storage used to offset companies’ carbon emissions.
In the absence of standard ESG reporting practices, oil companies have turned to consulting firms to determine how their peers are tracking carbon emissions across their vast
businesses and implementing plans to reduce emissions. Alvarez and Marsal recently launched an ESGfocused group to help companies set environmental targets and report their progress. Other consulting firms, such as EY, are helping oil and gas clients navigate the global shift from fossil fuels toward renewables.
“Everybody wants to know what everyone else is
doing when it comes to ESG,” Hoeinghaus said. “We’re fielding a lot of questions on what metrics to use, how much do we weigh them and what defines success for those metrics.”
How will they do it?
Environmental groups welcome the oil industry’s increased transparency over carbon emissions, but question how companies are planning to reach their emissions targets.
While some companies, such as BP and Shell, have acknowledged they ultimately will need to lower oil and gas production to meet global climate goals, many U.S. oil companies are doubling down on fossil fuels, betting that the world’s thirst for oil and gas will continue for many more decades. That runs counter to some global oil demand forecasts, including by the highly respected International Energy Agency, which called for no new drilling if the world were to meet Paris climate targets.
It’s not enough for oil companies to set environmental targets, said Mike Coffin, head of oil and gas for Carbon Tracker, a London-based think tank studying the risk of climate change to industry. Oil companies must make dramatic shifts to their operations to avoid being left behind in the energy transition and stranding investments.
More than 70 percent of 107 of the world’s largest carbon emitting companies, a third of which are oil and gas companies, failed to disclose climate risk in their audited 2020 financial statements, Carbon Tracker said.
“Climate change is an existential threat to the oil and gas industry,” Coffin said. “It’s not just an environmental issue. They should care from a financial perspective, protecting the value of their investments.”
Some oil and gas companies are tying executive compensation, including annual bonuses, to progress on emissions targets. These environmental goals typically represent about 10 to 20 percent of total executive compensation, according to Alvarez and Marsal.
“It’s still a small portion of the annual bonus, and we saw very few companies with ESG in their long-term incentive plans,” Hoeinghaus said. “But tying these initiatives with compensation does make people take it more seriously. But it has to be done the right way. If it’s just a check-the-box, that tends to backfire.”
Ultimately, oil companies are the canary in the coal mine for other carbonintensive industries, such as transportation, aviation and cement and steel manufacturing.
“ESG is coming to all kinds of public companies,” Fane said. “The advantage that oil and gas is going to have is they’re going through some of that learning curve first. (Oil and gas) is working at the front end of the ripple, but it absolutely will impact everybody.”