Engine No. 1, an American impact-focused hedge fund, made headlines around the globe in 2021 for forcing two members off the board of energy giant, Exxon Mobil Corp. The hedge fund’s campaign compelled the company’s leadership to take accountability for failing to align its business strategy with global climate efforts. Engine No.1’s campaign, supported by Exxon’s larger institutional investors – BlackRock, Vanguard and State Street, reflects a new era of shareholder activism, aiming to inculcate responsible leadership that prioritizes impact as much as profits.
This shareholder activism zeitgeist is prominent against the backdrop of climate change, and is particularly material to companies in the Oil and Gas (O&G) sector, which is responsible for 42% of indirect and direct global GHG emissions. The presence of O&G companies across various economic sectors, such as electricity, aviation, and shipping, exacerbates climate change at a larger scale than some other industries. Therefore, O&G companies possess the capacity to transit to a low-carbon economy. This capacity has been realised through increasing climate commitments made by O&G companies in the recent past. For instance, British O&G company, bp, has committed to net-zero emissions by 2050 or sooner. Indian O&G companies are not far behind. For instance, the country’s largest private O&G producer, Cairn Oil & Gas, has announced plans to achieve net-zero emissions by 2050.
However, O&G companies’ headway in climate action has been called into question. According to Carbon Tracker, investors of the world largest 10 O&G companies are not confident about these companies’ alignment with the Paris Agreement. This may be due to the emphasis on achieving net-zero emissions, rather than actively reducing emissions. With increased investor scrutiny, growing feasibility and prominence of renewable energy and unprecedented demand drop post COVID-19, preparing and equipping the leadership of O&G companies to answer the crisis of climate change is critical.
The transition to low carbon engenders issues that make responsible leadership within O&G companies imperative. Such companies face several imminent transition risks, demonstrating ill-preparedness for a low-carbon economy. For example, policy changes in line with India’s NDC commitments, bring a potential ban on fossil fuel-powered vehicles, affecting the operations of every company involved in the supply chain. Other policies, such as a greater thrust to electric mobility, renewable energy, or phasing down coal might, also be imminent. Moreover, transition risks and investor pressure are likely to result in stranded assets and a subsequent plummet in value, impacting the company’s profitability. A disorderly transition might ensue, affecting employees and stakeholders. Therefore, it is important that an O&G company looks beyond mere climate targets and develops an integrated climate strategy that futureproofs its business.
A comprehensive climate strategy embeds sustainability at the core of its business. Areas like risk management, disclosures, and governance can act as a launchpad for the same. Firstly, integrating ESG and climate risks would help O&G companies gain a comprehensive understanding of the risks that can materialise in the future, and accordingly, aid mitigation measures. Secondly, non-financial disclosures, such as the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), result in greater accountability, making them a key reference point for investors. Non-financial disclosures aid investment decision making, as they are proof of the company’s ESG and sustainability performance. Strong performance on the ESG and sustainability fronts can result in continued investment and stronger investor trust. What brings these areas together, is governance. Effective board and management oversight is central to determining the success of an O&G company’s climate strategy, its risk management, and disclosures.
In essence, to ensure their sustainability, O&G companies need to implement a well-rounded climate strategy that communicates its climate preparedness and aids its low-carbon transition. Responsible leadership, through governance, strategy, risk management and disclosures, would strengthen climate action in this sector.
auctusESG LLP is a global advisory and enabling firm, that provides specialized advisory at the intersection of finance, investments, and sustainability. With a goal to accelerate global sustainable finance and climate transition, the firm works with asset owners, asset managers, companies, banking associations, governments, multilateral and bilateral agencies, and academia, to design and develop sustainable finance products, climate strategy, ESG and climate risk integration, and knowledge and innovation products on thematic areas. Find out more about auctusESG here.