We have been engaging with companies and policy-makers on a range of climate changerelated issues ahead of the UN climate change summit in December 2015, including on emissions reduction pledges, carbon pricing and methane emissions.
International negotiations in the run-up to the UN Conference on Climate Change – the 21st Conference of the Parties (COP21) – in Paris in December 2015 have been built on four pillars. These are: national pledges to reduce emissions, non-state contributions by regions, cities and businesses, climate finance and the overarching legal agreement of the climate deal.
High-profile figures – such as Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change (UNFCCC) and US president Obama – have called on companies to make a commitment in the battle against climate change by publicly pledging emissions reductions across their businesses.
To date, 81 companies – with a combined market capitalisation of over $5 trillion, just under two thirds of the S&P 500’s total market capitalisation – have made commitments under the American Business Act on Climate Pledge. These included companies such as Apple, Coca-Cola, Microsoft and Wal-Mart.
By signing the American Business Act on Climate Pledge, the companies are voicing support for a strong outcome at COP 21, demonstrating an ongoing commitment to climate action and setting an example to their peers. Pledges can include efforts to reduce emissions, increase lowcarbon investments, deploy more clean energy and take other actions to build more sustainable businesses and tackle climate change.
We welcome the announcements by US and – as part of the UNFCCC1 and the We Mean Business Coalition2 initiatives – European companies on their plans to cut carbon emissions and encourage others to follow suit, as the potential for a positive impact on the climate change summit and its aftermath is substantial.
Making commitments to the reduction of greenhouse gas emissions is partly about reducing the risk companies are exposed to as a result of climate change, for example in the event of an applicable cost of carbon on emissions. But companies also benefit from making climate change pledges by improving their reputations, particularly in consumer-facing industries.
While we are supportive of greenhouse gas emissions reduction targets and aware of their significance in helping to build political momentum, we realise that the quality of pledges can vary significantly. However, even so-called greenwash pledges acknowledge the challenges climate change presents to businesses and can be seen at least as the start of the process of taking climate change into account in a company’s strategy and operations.
Furthermore, corporate greenhouse gas emission reduction targets can be just as difficult to set as those commitments made by countries. Both are struggling with the same issues when setting targets, such as different timeframes, objectives and whether to set relative or absolute reduction targets. Our view is that carbon pledges by companies should be SMART – in other words specific, measurable, attainable, realistic and timely. They need to be value-enhancing as well as sufficiently stretching over a five to 10-year period.
With the UN Climate Change Conference in Paris fast approaching, countries have been busy preparing and submitting their voluntary emissions reduction commitments, so-called Intended Nationally Determined Contributions (INDCs). Although guidelines exist, the nature and scope of the INDCs is intentionally flexible and emissions targets agreed as part of a climate deal in December 2015 are unlikely to be binding. The same applies to the carbon reduction pledges made by companies – they are voluntary and non-binding but shareholders may hold companies to account for the promises they have made. As the success of the climate summit depends significantly on the ability of the private sector to deliver, actions by companies have been increasingly in the spotlight.
A poor example we have seen was a company pledge to a 20% reduction in carbon emissions per GBP of sales. Inflation and increasing revenue have created favourable tailwinds that will help it meet a large part of this target without any change to its business model. After allowing for these factors, the company’s own contribution to reduce its absolute emissions is a much more modest figure of approximately 5%.
As part of our corporate engagement programme, we scrutinise the pledges made by companies. We also encourage companies to update existing pledges, incorporate these into their wider environmental and business strategies and publish them where this has not been the case to date. We expect companies to be clear on their strategic plans to move to a carbon-constrained world in their disclosures and in their discussions with us.
As much as we need companies to support government action, we also want to see them taking and sharing leadership on climate issues. This is particularly important in view of the new Clean Air Act in the US, which may lead more US states to introduce carbon pricing. Some oil and gas majors have stated the importance of widespread and effective pricing of carbon emissions to replace coal with gas in power generation3, while Canada’s oil industry has called for an enhanced carbon price that already exists in the province of Alberta. More importantly, renewable energy will also receive a boost. A coalition of 120 investors, representing over CAD4.6 trillion (€3.1 trillion) in assets under management, including Hermes EOS, has written to the prime minister of Alberta to voice support for the planned increase of its carbon price from CAD15 to CAD20 in 2016 and to CAD30 in 2017, as this would make the province a favourable investment jurisdiction.
We welcome the efforts of companies to improve long-term business resilience by factoring a cost of carbon into their investment decisions. We also urge companies, if they have not done so already, to advocate publicly for the implementation of a cost of carbon across large parts of the economy. Although it is not the only policy measure required, we believe that without this mechanism, businesses will fail to understand the true costs of alternative actions.
In our longstanding engagement with Exxon Mobil, we have welcomed its greater willingness to engage deeply in the debate on climate change, which presents a significant step forward for the company and the industry. In line with the International Association of Oil & Gas Producers (IOGP), Exxon believes that a revenue-neutral, marketbased carbon pricing system is the best mechanism to reduce carbon emissions but like the IOGP it falls very slightly short of publicly advocating a carbon price. We have encouraged the company to support carbon pricing publicly and to use its influence on the IOGP to follow suit. Some of the other oil and gas majors have made such apublic commitment and we believe that Exxon should be at the edge of evolving best practice in the industry in order to minimise the risks it is exposed to from changing climate regulation.
The introduction of a carbon price will help the industry reduce the risk of more disruptive public policy action and pave the way for investment in carbon capture and storage and other technology that will reduce the industry’s own direct emissions and those of its customers, reducing the long-term risk to asset owners. The Oil and Gas Climate Initiative has been prominent in seeking change on this. We look forward to continuing our dialogue with Exxon Mobil and other important players in the climate change debate.
We also engage with companies on the issue of methane in an effort to curb the effects of climate change. Over a 20-year time horizon, methane has far greater greenhouse gas effects than CO2 – it is at least 84 times more potent, according to the Climate and Clean Air Coalition’s (CCAC) Oil and Gas Methane Partnership. Cuts in methane emissions can therefore lead to important and quick reductions in global warming.
Methane is lost in upstream oil and gas production, as well as further downstream in pipelines and distribution, transmission, storage and processing. While it is relatively easy to incorporate best practice into new well designs, it is more challenging for old facilities. Due to the low gas price, there is less economic incentive to invest in retro-fitting and without a local market and infrastructure that allows the capturing of methane, the cost of capturing may be too high, meaning that it is easier and cheaper to flare it.
About 140 billion cubic metres of gas – mainly methane – per year are burnt off by the oil industry in flares, according to the World Bank, causing more than 300 million tonnes of CO2 to be emitted to the atmosphere. According to the World Bank, the gas estimated to be flared annually is equivalent to nearly 20% of US and over 30% of the EU’s gas consumption.
We engage with various initiatives on methane, such as the CCAC Oil and Gas Methane Partnership, which is attempting to build a best practice coalition to reduce methane emissions in upstream oil and gas operations, and the Zero Routine Flaring by 2030 initiative by the World Bank.
By endorsing the World Bank initiative, governments, oil companies and development institutions recognise that routine gas flaring is unsustainable from a resource management and environmental perspective. They have agreed to cooperate to eliminate ongoing routine flaring as soon as possible, and no later than 2030, and completely forgo the practice in new oil field developments. In addition, they promise to publicly report their flaring and progress towards the target on an annual basis.
US energy company Southwestern Energy is leading on this issue. It is the only US member of the CCAC Oil & Gas Methane Partnership and targets less than 1% well-to-wheel methane emissions. The company acknowledges that the benefits of buying gas over coal disappear if methane emissions make up over 1% of that limit and has set ambitious environmental targets.
In our engagements with oil and gas companies, we encourage them to endorse the Zero Routine Flaring by 2030 initiative and join the CCAC Oil & Gas Methane Partnership, publish their policies on flaring and seek to stop this practice.