Two companies with an identical carbon footprint today can have completely different strategies for managing emissions in the future. While the carbon footprint is an important starting point to understand a portfolio’s exposure to climate risks, it is a static measure and is backward-looking by nature. A company may face significant shifts in its business opportunities and risks, irrespective of its carbon footprint today.
We take a forward-looking view of a company’s potential response to environmental concerns by looking at indicators such as:
- Three-year greenhouse gas (GHG) emissions trend
- Environmental targets, such as GHG reduction and energy efficiency targets
- Programmes and initiatives to achieve targets
- Alignment of environmental reporting to the Task Force on Climate-Related Financial Disclosures (TCFD) framework
The oil & gas industry: A pillar of the energy transition
According to the International Energy Agency (IEA), the energy sector is responsible for two-thirds of global greenhouse gas emissions. To achieve the Paris Agreement adopted at the 2015 UN Climate Change Conference – limiting the global average temperature rise to 1.5°C above pre-industrial levels – the world’s energy systems need to change. We believe that the oil & gas industry can provide solutions to address the challenges posed by climate change.
Some companies have been shifting towards cleaner energy, pushing their business models beyond petroleum to gain a foothold in the electrification of the economy. This has translated into investment in renewable energy and electric vehicle charging points for some, while others have focused on developing cleaner fuels.
To achieve the Paris Agreement, these efforts will need to be complemented by technologies that reduce the amount of carbon in the atmosphere, such as forest management and carbon capture and storage (CCS), a technology that could lead to a 14% reduction in greenhouse gas emissions by 2050, according to the International Energy Agency. CCS is expensive, and could not be developed without the investment that big oil companies are currently committing to. Through engagement, we seek to support companies that are leading the way forward, while encouraging laggards to plan effectively for the energy transition.
Case study: Total
Total has been a leader in the transition to a low-carbon economy.
Our engagement with the company has been very positive, with Total demonstrating the strategic planning and evolution of its business model that we expect from large oil & gas firms.
The company’s strategy relies on three pillars:
- Decreasing the reliance on oil
- Increasing the share of gas as a transition energy
- Investing in renewables and low carbon businesses.
In 2011, as part of its renewable investment pillar, Total acquired a 60% stake in SunPower, a solar panel manufacturer.
Total is demonstrating the strategic planning and evolution of its business model that we expect from large oil & gas firms.
In 2016, it also took control of Saft, a company that provides battery solutions for a broad range of industries. Total is also committing 10% of its R&D budget to carbon capture and storage (CCS).
We continue to engage with Total to support its business model evolution, while monitoring progress on its strategy.
Case study: Repsol
Repsol, the Spanish oil major that also operates fuel stations, is one of the companies that we believe have started to prepare for a global shift in energy consumption dynamics.
We have engaged regularly with Repsol over the last few years. Following the company’s sustainability day in late 2017, we had concerns over its long-term vision for the energy transition. We felt that the strategic focus on energy efficiency was insufficient: in our view, energy efficiency is a facet of operational management, rather than a strategic goal. We also believed that Repsol’s internal carbon price for new projects was too low, fixed at USD10/t (below its peers) and set to progressively increase to USD40/t by 2025.
In 2018, Repsol unveiled a strategic update, with “thriving in the energy transition” as a key pillar. The company aims to become a multi-energy provider, including investment in both renewables and in the electricity supply chain, such as charging points and batteries for electric vehicles. The internal carbon price was revised upwards to USD25/t.
Repsol has begun to build a business model that could prove resilient through energy transition.
Repsol has begun to build a business model that could prove resilient through energy transition. We believe shareholder engagement has played an important part in the process – an illustration of the benefits of engaging for positive change.
Going forward, we expect to see Repsol further strengthen its business model, shifting its capital allocation plans for renewables and raising its targets for carbon reduction.
The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.
