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Oil Sector Climate Plans Face Growing Scrutiny 

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Oil companies' energy transition plans will likely face increased scrutiny at upcoming shareholder meetings regardless of current supply crunch fears and soaring oil and gas prices. Most have "failed to show progress" toward achieving the climate targets they have announced, according to the latest assessment by the $70 trillion strong Climate Action 100+ (CA100+) investor alliance. And although the Ukraine war will probably allow some projects targeting security of supply to be cleared more easily than pre-crisis, at least in Europe and the US, investors and lenders are also increasingly questioning investment in new oil and gas resources.

Of the 39 oil and gas companies covered by CA 100+, only five — Eni, Equinor, Occidental, Shell and TotalEnergies — have announced fully satisfactory 2050 emissions targets, and none have set adequate short- or medium-term targets. The influential group points to the "continued absence" of indirect Scope 3 emissions in many companies' goals, and says it is "alarming" that "the vast majority of companies" have not set medium-term emissions reduction targets consistent with the 1.5°C warming goal, nor fully aligned future capital spending plans with the Paris Agreement's goals.

CA 100+ notes too that almost two-thirds of companies "are still sanctioning projects inconsistent with limiting global warming to less than 2°C" even though the International Energy Agency's 2050 net-zero roadmap "made it clear that there can be no new oil and gas exploration and production if we are going to keep 1.5°C within reach." This sets "urgent engagement priorities" for the alliance ahead of upcoming annual shareholder meetings in the US and Europe.

Lender Pressure

Banks are still financing fossil fuels generously, but things may change very soon. Most members of the UN-convened Net-Zero Banking Alliance (NZBA) are expected to disclose 2030-35 targets for the most carbon-intensive sectors in their portfolios later this year, including oil and gas, in line with the alliance's deadlines for doing so. "Given the importance and complexity of decarbonizing the oil and gas sector, and the tremendous amount of work required in doing so, it is reasonable to expect that many banks will set targets for this sector at the earliest possible opportunity," the alliance recently stated.

The banking sector is under pressure to get moving from other corners, too: The world's largest banks financed almost $750 billion in fossil fuel activities in 2021, according to the annual Fossil Fuel Finance Report published by a group of NGOs. This is in line with the 2016-20 average and seems to contradict most banks' commitment to align their portfolios with net-zero climate goals, the authors of the report warn.

Taking Steps

The UK's HSBC announced in February it will reduce oil and gas-financed emissions by a third over 2019-30. It plans to soon disclose similar targets for other sectors such as aluminum, cement, iron and steel, automotive, aviation and shipping. Likewise, France's Credit Agricole plans to announce detailed targets and action plans to 2030 in July, focusing on its 10 most carbon-intensive sectors. Those include oil and gas, but also retail businesses such as auto and home financing.

For each one of these sectors, Credit Agricole intends to set targets and a 2030-50 trajectory to reduce financed emissions down to net zero. Clients will be assigned a "transition rating" to help the bank determine a strategy, which could range from ending relationships with laggards to engaging with most and developing green businesses with some. In retail segments, Credit Agricole could for example choose to no longer finance the least energy-efficient cars and homes, while charging discounted interest rates to the most efficient ones. The bank has developed its own methodology to assess financed emissions. It includes each client's direct Scope 1 and 2 emissions and as much as possible of its indirect Scope 3 emissions in a way that avoids double counting across sectors and value chains.

NZBA was launched in April last year and has grown to include 110 banks from 40 countries representing almost 40% of global banking assets. NZBA banks commit to align greenhouse gas (GHG) emissions attributable to their lending and investment portfolios with pathways to net-zero by 2050 or sooner. Within 18 months of joining, they are due to set 2030 targets and intermediary goals every five years from 2030 onward. Banks' initial 2030 targets are expected to focus on priority GHG-intensive sectors such as oil and gas or power, with further sector targets to be set within 36 months.

Engagement Versus Divestment

In response to the Fossil Fuel Finance report, NZBA said it is "unsurprising" that financing over 2016-21 "appears inconsistent" with the net-zero target as "many of the alliance's members are mere months into their decarbonization journey and are still laying the groundwork for an orderly transition."

More specifically, NZBA insists that while it "does not support the financing of fossil fuel expansion," it recommends "client engagement and education" as opposed to immediate divestment from existing fossil fuel positions. That's because divestment would "not necessarily bring about the required real economy decarbonization" and could generate "extreme market shocks."

To set targets, NZBA banks are instructed to use "credible and well-recognized" external scenarios aligning with 1.5°C pathways, with no or limited climate overshoot. Those mostly include the International Energy Agency's net-zero emissions (NZE) scenario and the Intergovernmental Panel on Climate Change's most stringent 1.5°C scenarios. Unlike the NZE, some of those possibly allow limited investment in new fossil fuel resources. But they all involve dramatic cuts in oil and gas demand over 2010-50 — from at least 50% to over 75%.

NZBA banks should also use "reasonable assumptions" on carbon sequestration achieved through nature-based solutions such as forestry. Offsets "can play a role" but should be restricted to balancing "residual emissions where there are limited technologically or financially viable alternatives," the alliance emphasizes.

While the Fossil Fuel Finance Report shows that total financing to fossil fuels did not change much over 2016-21, it finds that funding fossil fuel expansion has shrunk to under $200 billion in 2021, down from an average $300 billion per year in 2019-20. And while the Ukraine war could trigger an expansion of investment in new fossil fuels in the next year or two, this is unlikely to be sustained, according to James Vaccaro, head of the Climate Safe Lending Network group of banks, NGOs and investors.

Philippe Roos is a senior reporter at Energy Intelligence based in Strasbourg, France. Versions of this article originally ran in EI New Energy and Petroleum Intelligence Weekly.

Topics:
ESG, CO2 Emissions, Equity and Debt Markets
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