The COP26 climate conference in Glasgow should have made uncomfortable viewing for fossil fuel executives.
With coal and fossil fuel subsidies in the spotlight, a host of other initiatives will also put the sector under pressure in coming years, ranging from a pledge to cut methane to plans to phase out internal combustion engine vehicles.
We’re already starting to see the impacts – from the “pause” of the Cambo project in the North Sea by Siccar Point to a sharper focus on climate transition plans in investor engagement programmes.
CDP now gives greater weight to company disclosures that include Science Based Targets, part of the growing demand for companies to collect and report more, and better quality, data.
ESG Investing growth and development
It’s clear that the events of COP26 reinforce the existing shift in investor momentum from fossil fuels to renewable energy. “The wording around the shift away from fossil fuels and the renewed focus on 2030 climate targets strengthens the investment case for renewable energy companies, in particular those in the solar and wind sectors,” said Craig Cameron, Portfolio Manager, Templeton Global Climate Change Fund.
Impax Asset Management agreed that “the speed and scale of power network decarbonisation is set to accelerate globally, providing tailwinds for renewables developers whilst stranding fossil fuel assets”. The markets for energy efficiency and emissions control will also grow strongly, it added.
SEB bank and financial services shifting to Energy Transition investing
Swedish bank SEB will focus all of its future activity on the energy transition, said Thomas Thygesen, head of strategy. “This is not just because we want to see a better world. If we want to still be relevant in 10 years’ time, we have to change the way we work.”
But while some investors are focusing on companies with the best Environmental, Social, and Corporate Governance (ESG) scores as a way of decarbonising their portfolios, Thygesen says the energy transition is “dirty, super-risky and expensive” and that investors need to address the sectors that are the biggest carbon emitters and are in sectors that are hardest to abate, such as steel, cement, shipping and aviation. “A pragmatic approach means engaging with parts of the economy that are engaging with the future transition, but where the technologies do not yet exist. There’s a huge need for capital – $4,000bn a year more than is being spent today.”
The high barriers to entry and the vast capital needed for investment in innovation mean “incumbents are likely to drive a transition financed by debt, creating selective opportunities in fixed income,” Impax added.
Clean Energy Economy
The agreement between South Africa and the US, UK, France, Germany and EU to help Africa’s most advanced economy to make the transition from coal to a “clean energy economy” over the next five years could provide a model for not only other coal-dependent economies but also countries with significant oil and gas power capacity.
The Glasgow Financial Alliance for Net Zero (GFANZ), whose members’ $130 trillion of assets are all now looking to invest in clean energy, not fossil fuels, is a strong pointer to the future direction of capital flows – over time, there will be a presumption towards clean energy and away from fossil fuels.
This trend will be reinforced by tighter regulations.
Zehrid Osmani, portfolio manager at Martin Currie Global Portfolio Trust, said that one outcome of the Glasgow summit could be “a more co-ordinated approach towards carbon emissions tax and credits, which highlights the need for investors to have a detailed assessment of carbon emissions intensity for each business that they are invested in, as well as a good knowledge of how each corporate is tackling the path to net zero, and what it will mean for their costs and investment in capital expenditure”.
In other words, investors will want to see more, and better quality, data from companies, not just about their past and current carbon emissions, but also about their future plans for addressing the energy transition.
The International Sustainability Standards Board
This is a task that will be made easier by the creation of the International Sustainability Standards Board, which further consolidates the sustainability reporting landscape as the Value Reporting Foundation mergers with the Climate Disclosure Standards Board.
The ISSB, due to be released towards the end of next year, will complement measures such as the EU Green Taxonomy and its forthcoming UK counterpart, which will make it much clearer to investors what constitutes sustainable investing.
The SEC in the US is due to publish details of its climate disclosure requirements early next year, while the EU has just released the second part of its Fit for 55 climate package, which includes a focus on the social and labour aspects of the energy transition.
As well as issues with access to finance, fossil fuel companies can expect increased investor scrutiny over how they plan to address the need for a ‘Just Transition’.
Important COP26 initiatives
Two further initiatives launched on the outskirts of COP26 gained far less publicity than the headline announcements, but which may turn out to have just as big an impact on the oil and gas sector.
Beyond Oil and Gas Alliance (BOGA)
The first was the Beyond Oil and Gas Alliance (BOGA), which was convened by Costa Rica and Denmark, and whose members range from France, Ireland and Sweden to Greenland, Quebec and California (as an “associate member”). The alliance aims to “deliver a managed and just transition away from oil and gas production”.
It accounts for just 0.2% of global oil production, but it highlights a few important issues. The alliance is partly about squeezing future production options, with nations committing to end new concessions, licensing or leasing rounds. As Eamonn Ryan, Irish environment minister said, Ireland may not have much current production, but it has a large, potentially exploitable offshore area that it plans to fill with offshore wind turbines rather than oil platforms. Meanwhile, Greenland has significant potential reserves that will now never be explored.
Signatories also agree not to invest in fossil fuel production, which could have a significant impact on the industry’s options for raising capital if, as expected, membership of the alliance expands. Andrea Meza, Minister of Environment and Energy of Costa Rica, acknowledged that “this is about early movers, about courage to start doing something”. But as we have seen with other climate initiatives, they have a habit of picking up pace rapidly from unpromising beginnings.
“There may not be any big producers in there, but it’s the signal it sends,” said Mark Campanale, founder of Carbon Tracker. “It’s a first recognition by governments that they have to give up production.
The Global Registry of Fossil Fuels
BOGA’s mission benefits from another new initiative, the Global Registry of Fossil Fuels. “We’re in a climate crisis caused by fossil fuels,” Campanale pointed out. “We can’t solve the climate crisis while handing out new licences. The registry will allow the identification of countries and projects that will take us beyond our carbon budget.”
So, everyone will be able to see if proposed projects are set to tip us over into dangerous climate change, and companies will have to explain – to investors, to regulators, to consumers and civil society – why they think that is a good idea.
The COP26 climate change conference does not signal the end of the oil and gas era. But it starts the conversation about it and that conversation will only get louder in years to come.