Oil companies face battle for hearts, minds, and pockets of fund managers
Wide variations in the way oil companies report their efforts to reduce carbon emissions make it difficult to assess the risk of holding their shares as the world shifts away from fossil fuels, according to senior fund managers.
Investors have poured money into so-called sustainable funds, which take into account companies’ environmental, social, legal, and other standards. Funds are now under pressure from their customers and authorities to make those standards robust.
Fund managers are also applying environmental, social and governance (ESG) criteria more widely in traditional investments to help them judge how companies will fare over the long term.
There is a growing realisation that some companies’ profits will shrink faster than others as governments prioritise low-carbon energy to meet the UN-backed Paris Agreement’s goal of cutting emissions to “net zero” by the end of the century.
But oil and gas companies are among the biggest dividend payers, and major funds are reluctant to divest from them, arguing that by staying in they are in a better position to pressure companies to improve.
“Do investors have the data that we need? No, I don’t think we have the data that we need at all,” said Nick Stansbury, investment strategist at Legal & General’s investment management unit, Britain’s biggest asset manager with around $1.3trn under management.
“Disclosure is not necessarily so we can seek to change the numbers, but so we can start understanding and pricing the risks,” Mr Stansbury said.
There are many voluntary initiatives and frameworks to unify carbon accounting and target setting; some overlap, but none have been universally adopted. Further projects exist for other greenhouse gases such as methane.
The Greenhouse Gas Protocol is one such set of standards, established by NGO and industrial groups in the 1990s.
Firms can report their progress in line with these standards through non-profit CDP, formerly known as the Carbon Disclosure Project, which then ranks them. Norway’s Equinor comes first in its list of 24 oil major companies, but not all of them report in every year.
There is also the Task Force on Climate related Financial Disclosures (TCFD), created by the G20’s Financial Stability Board, as well as industry bodies, in-house models at oil firms and banks and third-party verifiers and consultants.
“There are a thousand ways to Paris,” BP’s outgoing chief executive Bob Dudley said at a Chatham House event earlier this year referring to the 2015 accord aiming to keep global warming well below 2C.
BP finance chief Brian Gilvary said the oil major would welcome more consistency within the sector to show what oil companies are doing about emissions and that an industry body, the Oil and Gas Climate Initiative (OGCI), was discussing carbon accounting.
A plethora of third-party ESG verifier companies were emerging with varying ways of measuring ESG metrics, he said, adding that some such firms would say to an oil company: “We believe your score is this, and, by the way, if you spend $50,000 we’ll show you how you can improve that score.”
UBS, with $831bn of invested assets, has $2bn in its Climate Aware passive equity strategy, which is in part based on a company’s emissions reporting.
In that strategy, “we tilt towards companies that are better performing on a range of climate metrics and away from companies that do not perform so well in this respect,” said Francis Condon, executive director for sustainable investing.
Global sustainable investment reached $30.1trn across the world’s five major markets at the end of 2018 — nearly half of all assets under management. Mr Condon said most investors were still more focused on returns than sustainability, but were concerned that they may be exposed to climate-related financial losses in the future.
