A group of 12 of the world's largest oil and gas majors pledged on September 20, 2021 to reach net zero emissions from operations under their control (Scopes 1 and 2, Greenhouse Gas Protocol). They also updated targets for reducing the methane and carbon emission intensity of their upstream operations.1 The Oil and Gas Climate Initiative (OGCI) said it supports the goals of the Paris Agreement to limit global warming to well below 2°C and recognizes there is "a real urgency to act." The net zero target lacks a specific timeframe, however, and more answers are still required in order to reach the Paris Agreement objectives, the OGCI said.
This medium-sized oil and gas trading company located in Europe was inspired by the transformation they saw taking shape across their wider industry. A cross-company team came together in order to analyze and manage the risks and opportunities associated with a transition to net zero, and show the company's stakeholders that action was being taken.
Pain Points
The head of strategy, chief financial officer, and environmental analyst leading the net zero initiative each brought their needs to the table – obtain inputs for the company’s long-term strategy, understand emerging financial risks, and weigh in on the findings for reporting purposes to stakeholders. The three-person team was knowledgeable about the carbon market, but not about the emerging frameworks being used in this area and industry best practices. The team met with S&P Global Sustainable1 (“Sustainable1”) and set out four main objectives:
- Understand industry best practices and norms.
- Establish a baseline for the company’s carbon footprint from operations and across its value chain.
- Develop targets that align with science-based targets for the oil and gas sector.
- Follow reporting guidelines outlined by the Task Force on Climate-related Financial Disclosures (TCFD) for public disclosure and input into planning.
This oil and gas company realized that the industry was changing and that it needed to better understand and implement best practices for moving to net zero. It engaged with Sustainable1 to develop an action plan.
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The Solution
The company provided information on its oil and gas operations and upstream and downstream activities and worked with Sustainable1 to clean and validate the data. Sustainable1 would then:
- Look at the company’s operational footprint and trading activity to create a baseline for the carbon footprint.
- Leverage data and insight on how the company’s future markets were evolving in terms of technology, consumer demand, and regulation and what that could mean in terms of pathways to future achievement of the net zero ambitions.
- et targets considering the company’s forward-looking plans for its business models and technologies to drive a reduction of emissions over time.
- Look at physical risks from: a) acute physical hazards, such as more frequent and extreme weather events (e.g., storms, hurricanes and floods), and/or b) chronic and longer-term effects of climate change, such as changing weather patterns or sea level rise.
- Look at transition risks, which refer to the costs associated with the market, technological, policy, legal and reputational risks associated with adapting to climate change and transitioning to a low-carbon economy.
- Present all the findings to the Board and prepare a TCFD report.
Seasoned subject matter experts at Sustainable1 would draw on many proprietary datasets to conduct the work, enabling them to:
Evaluate today’s carbon intensity and create a baseline
Trucost Climate and Environmental Data provides quality-checked and standardized environmental data on more than 22,000 companies.2 Users can measure impact, identify exposure, and manage risks and opportunities across different asset classes, addressing the challenges of climate change, water use, waste disposal, and the over-exploitation of natural resources.
Understand the company's physical risks
Trucost Climate Change Physical Risk Analytic offers an asset-level approach to the assessment of physical risk at the company and portfolio level. These data provide detailed information to help understand the exposure of company-owned facilities and capital assets to seven climate-related physical impacts (i.e., flood, water stress, heatwave, cold wave, hurricanes, sea level rise, and wildfire) under different climate change scenarios and across different time horizons. Scores at an asset basis can then be aggregated to a company level.
Assess the ability of the company to absorb future carbon prices
Trucost Carbon Earnings at Risk Dataset can be used to stress test a company’s current ability to absorb future carbon prices and understand potential earnings at risk from carbon pricing at a portfolio level. Integral to this analysis is the calculation of the Unpriced Carbon Cost, which is defined as the difference between what a company pays for carbon today and what it may pay at a given future date based on its sector, operations, and a given policy price scenario.
Track progress across the value chain on meeting the Paris Agreement
Trucost Paris Alignment Dataset assesses company-level alignment with the Paris Agreement goal to limit global warming to well below 2°C from pre-industrial levels. This dataset enables investors to track their portfolios and benchmarks against the goal of limiting global warming to 1.5°C and 2°C climate change scenarios.
Review the company's trading activities
The Panjiva Supply Chain Intelligence platform provides access to 2 billion transaction records, 13 million company-to-company relationships, and approximately 40% of global merchandise traded by dollar value.3 The records include importer and exporter company names, product details, dollar values, harmonized international trade (HS) codes, and more.
Prepare a concise TCFD report
Customized TCFD reports discuss governance and strategy plans and establish different scenarios for physical and transition risks for use in public disclosures and as input into planning.
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Key Benefits
Seeing many benefits, the oil and gas team proceeded with the undertaking as outlined by Sustainable1. This included having the ability to:
- Rely on a seasoned group of experts with climate risk experience and an understanding of the current frameworks being used and industry best practices.
- Leverage extensive Sustainable1 datasets to dig deep into important issues regarding the journey to net zero.
- Anticipate the impact of weather-related events on the company and its supply chain and customer base.
- Better understand the company’s potential exposure to transition risks by examining the financial impact of increases in carbon prices.
- Use the findings and the TCFD report to engage with stakeholders on the company's climate strategy and net zero goals.
- Inform the longer-term business strategy, risk management, and corporate resilience.
- Identify transformative solutions for a more sustainable global economy.
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1"Oil majors pledge net zero target, update goals to cut methane, carbon intensity," S&P Platts, September 20, 2021, www.spglobal.com/platts/en/market-insights/latest-news/oil/092021-oil-majors-pledge-net-zero-target-update-goals-to-cut-methane-carbon-intensity.
2All data as of September 2021.
3The assumptions in this analysis are calculated using proprietary algorithms in addition to 2016 Global Merchandise Trade by Value data reported to UN Comtrade, the International Trade Statistics database, by the participating governments. Using a factor between 1 and 0.46, we have made these assumptions as of August 28, 2018, to calculate the global merchandise traded by dollar value.