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Investors should ask if carbon promises are just hot air

by  Natasha Landell-Mills, CFA  |  19 May 2020

Eiffel Tower, Paris

Published in the FT, 18 May 2020.

Pledges by oil majors to protect the planet often clash with capital spending plans

Total just came in from the cold. This month the French oil major announced plans to get to net-zero carbon dioxide emissions by 2050, thus joining other European oil and gas companies that are promising to wind down their fossil-fuel businesses to tackle climate change.

This ambition by one of the world’s largest energy producers is to be applauded. But a sceptic might be forgiven for asking whether this apparent enthusiasm to protect the planet can be consistent with continued multibillion-dollar investments into fossil fuels.

On closer inspection, while Total has promised to get to net zero for its direct emissions, the company’s ambition applies only to sales in Europe — which covers just over half its total emissions. If you add back other global activities, the true “ambition” is a 60 per cent reduction in carbon intensity by 2050.

Needless to say, that is not net zero. In fact, Total’s absolute carbon emissions could potentially rise, even if intensity — carbon emissions per unit of sales — were to fall. This would be achieved by selling more clean energies such as renewables. That is, of course, welcome, but it is not enough to confront the climate crisis. To halt global warming we must stop, not just slow, our greenhouse gas emissions.

Total’s ambition follows BP and Shell, both of which recently proclaimed their intention to become net-zero businesses by 2050 in line with the global Paris agreement. Again, these aspirations are a good thing, and offer evidence that engagement by members of Climate Action 100+, a coalition of investors committed to promoting alignment with the Paris goals, is having an impact.

But just like Total, both statements should be subject to closer inspection. BP leaves out the rising proportion of its oil and gas business that it trades, rather than produces. It seems that where the company is an intermediary for oil and gas deals, it can turn a blind eye to these emissions.

Shell, for its part, makes clear that, when it says “net zero”, what it actually means is a 65 per cent reduction in the carbon intensity of its products by 2050. Again, intensity targets are not the same as delivering absolute reductions. To get to a 100 per cent cut, the company says it will refuse to serve customers that do not commit to Paris alignment. This is certainly a big commitment, and takes Shell beyond anything promised by other oil and gas majors.

However, there is a catch. The disclaimer at the end of Shell’s announcement makes plain that Shell will not change its strategy or capital deployment plans in line with this ambition until “society” acts. That amounts to promising to jump when you are pushed.

As if to drive home this point, Shell last week announced the approval of a new liquefied natural gas processing unit in Nigeria, which should enable the company to pump out 30m tonnes of LNG a year to meet demand that it expects to double by 2040. One might wonder how this project is compatible with bringing down emissions to net zero by 2050. And this development is not a one-off.

According to the think-tank Carbon Tracker, the largest listed western oil and gas companies approved an estimated $50bn of investments from 2018 to September 2019 that are not consistent with the Paris goals.

Why does this matter?

First, it matters because corporate statements influence investors’ decisions. Some of those fund managers might otherwise sell their shares or decline to provide credit, but feel comfortable in the knowledge that they are supporting companies that are acting to counter climate change.

Second — and more importantly — it matters because, if empty promises are used as cover for inaction, it could cause irreparable harm to our planet. Investors must do more than call this out. They need to establish beyond doubt that companies’ commitments to deliver net zero are for real. As a first step, they should do this by demanding that Paris alignment is added to companies’ articles of association, not just as an ambition — as recently implemented at Barclays, the UK bank — but as a commitment.

Such a step is typically achieved by the passage of a special resolution at a company’s annual meeting of shareholders, and would compel directors to implement strategies in keeping with global climate goals. For directors being pulled in multiple directions, this would offer clarity; for shareholders it would provide certainty; and for society at large, a sustainable future.