What's Next for Oil ESG Pressures? Adam Matthews Q&A

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The last few months have seen climate-conscious investors make ever-greater demands of oil and gas companies. Investor engagement has moved from simple disclosure of emissions, to requests to set goals for carbon reduction and now is focused on proving a realistic plan to achieve those targets. Energy Intelligence caught up with Adam Matthews -- chief responsible investment officer at the Church of England Pensions Board, co-chair of the Transition Pathways Initiative and co-lead on engagement with Royal Dutch Shell for the Climate Action 100+ investor group -- to understand where things are going next. Q: It seems most companies are recognizing the need to have plans to reduce their emissions, but each is going about quantifying it in a different way. Will there be a single accepted methodology for climate accounting in the near future and what should it look like? A: Taking a step back, four, five years ago when we set up the Transition Pathway Initiative [TPI], we could not have measured an oil and gas company on public disclosures aligned to the benchmark or aligned to below two degrees. We couldn't measure that. They were not disclosing in a fashion that enabled us to do it. Now, in a relatively short space of time, we got to the point where we could start to do that with a handful of European oil and gas majors, which captured their Scope 3 emissions. They started disclosing relevant information and data that meant the TPI could start to assess that. We've now had the Net Zero company benchmark, which is based very heavily on TPI data which has taken this to another level of disclosure requirement and complexity. And it also introduced new indicators on things like capital expenditure and demonstration of alignment to the goals of the company. Again, very few companies actually came out on disclosing on that positively because it's a new disclosure request. I still believe that we need to go a further step in defining a standard of what net zero means for the sector. And we have been working on that and that will be launched in the not-too-distant future. I feel that that standard will be very significant in recognizing that we need to really enhance some of the disclosure requirements for the oil and gas sector bespoke to it, to really enable the diversity of responses that company can have to be captured and to set those standards. So I think it, we're not terribly far from achieving that. Once we have that, I think that will inform the rest of the engagement. Q: We are seeing investor engagement progress from asking companies to have a goal for emissions reductions to having a plan of how to achieve it. What are acceptable components of those plans? Are carbon offsets acceptable? What about carbon capture and storage (CCS)? A: There are key questions once you get beyond, "does the company have a target?" You're walking down a path where you are raising new issues that require a perspective from investors. Clearly offsets are an important part of how we're going to fund reforestation, and equally things like the Great Green Wall in Africa. So I think they've got a really important role. High-quality offsets with a fair price that respects human rights and land rights, et cetera, they've got an important role in the whole climate response. Now, to what extent they can be deployed by oil and gas companies? I think there's a lot of work to be done to determine what's right here. Clearly, offsets can play and will play a role. I think there's further work to be done in determining to what extent that's appropriate and equally the standards that need to sit alongside that, along with a disclosure and evidence that the aspirations are deliverable. We've been talking about CCS for a long time. It's proven; it's not an unknown. It's just, is this a realistic expectation? They're saying, right, we're going to use CCS to reduce this element to our emissions. OK, fine. Conceptually, absolutely fine. Demonstrate to me, you've got the pipeline. Demonstrate to me that this is financially feasible. That's where it is now with some companies, not all companies, because some companies haven't even set credible targets. So when you get to that level, you'll naturally [move] into those kinds of questions where you're going into sort of needing to make determinations as investors around what is credible and what isn't. Q: This year, we saw more traditional activists like Follow This gain traction with large investors. Would you expect that dynamic to continue? Are there limits to the alignment between more activist groups and large investors like yourselves? A: I think there's a distinction between activist investors and active owners. We would class ourselves very much as active owners. We have a long-term commitment to the way that we steward the companies we work with. We recognize change takes time. We are willing to use the tools available to us to achieve change, but we also make judgments at certain points on that journey as to whether there's sufficient change. Activist investors come with a very particular agenda and sometimes there's alignment and sometimes there's complementarity in the way that you can approach a particular issue. I think there are different agendas here and different responsibilities. We have a responsibility to provide a pension fund, um, and within which we need to navigate transition as a material threat to our ability to provide that pension fund and at the same time playing a constructive role in driving change in the interests of the world, in which our beneficiaries [are] going to retire. We have supported activist interventions. We've co-filed with activist entities in the past. But we've also voted against them where we think that actually we can achieve these things through our own engagement or through global initiatives like Climate Action 100. So I think there's a role for both. Q: You’ve highlighted in the past that you don’t feel that measures to address hydrocarbon demand are getting enough attention, relative to those aimed at addressing hydrocarbon supply. Is there an investor role on the demand side and what does it look like? A: I'm chairing roundtables with trucking companies, with steel companies. We're doing the same with shipping and aviation, et cetera, et cetera. We are, under the Climate Action 100 umbrella working with Calpers with Swedish pension funds, looking at sector pathways in these key value chains of oil and gas companies to change the demand and understand what their net-zero paths are, what the roles of technologies are, what's the implication for regulation. Once you’ve got all that, you can understand what the financing need will be for transition finance as well. I think that's hugely important in reshaping demand. So that then oil and gas companies can provide [oil and gas] in the context that they know it's on a net zero-aligned path. Q: How has the Dutch court’s ruling that Shell must accelerate its decarbonization goals impacted investor thinking around corporate climate risk? How do you think Shell should respond? A: Litigation and regulatory risks are things that clearly we are concerned about. That's part of the narrative that companies need to have credible plans to manage the transition because regulators and courts will step in where there is inaction. I welcomed that the company has said that they're going to rise to the challenge. I think that's important. But obviously it has huge implications. I think everyone's still digesting, what does that mean when the courts are willing to rule on an individual company, in the way that they have.

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