Investors and asset managers should incorporate the risks of climate change into their investment decisions as the implications of this crucial issue become ever more apparent. The Oil & Gas sector is particularly exposed to the associated risks of climate change, given its vulnerability to a low-carbon world and the fact that its operations, services and products make it a leading contributor to global warming. As such, NN Investment Partners (NN IP) focuses on the sector to encourage companies to be transparent about their activities and report the risks they face.
NN IP analysed 49 companies in the Oil & Gas sector globally and observes that 40 of them do indeed publish an annual climate or sustainability report that provides policies on climate change. However, NN IP notes that there is significant variety in the level of detail that they disclose. European Oil & Gas giants, for example, are far more transparent about the integration of climate-related risk into their models than their American counterparts. Oil & Gas companies in emerging markets appear even more reluctant to publish details.
The company believes it is important for Oil & Gas companies to explain to investors their future strategies to deal with potential disruptions resulting from climate change. However, only eight of the 49 companies in NN IP’s analysis had conducted any form of stress-testing their businesses.
While international Oil & Gas companies have invested in low carbon technologies, NN IP believes sharper focus is still required on the need for companies to consider their long-term diversification and growth strategies. The analysis also found that research and development by Oil & Gas companies into new technologies such as Carbon Capture Storage (CCS) and acquisitions or investments into the renewable sector vary in ambition and scope, depending on the size of the company and location, with a clear divide between Europeans and the rest of the world.
The Oil & Gas sector faces several risks due to climate change. As the world moves towards a low carbon economy and transitions from fossil fuels to greater use of renewable energy, the demand for their core products will inevitably decline. Supplies of fossil fuels must dwindle to a point when it becomes unprofitable to extract them while Oil & Gas companies face the risks of regulatory actions because of environmental damage and carbon taxes.
As such, Oil & Gas companies must be transparent in explaining to key stakeholders how they plan to evolve in the 21st Century, addressing the risks they face due to climate change and adapting their business strategies.
NN IP takes climate-related risks in the Oil & Gas sector seriously and we acknowledge our societal role as an investor. We have developed engagement targets to encourage Oil & Gas companies to carve out transition plans but the inconsistencies in declarations between companies in the sector does make this difficult.
To play its part in transforming the world’s energy sector, the engagement targets NN IP has set itself on behalf of its investors include:
Governance: NN IP expects companies to be transparent on how board members and management processes ensure there is adequate oversight of climate-related risks. NN IP uses its votes at annual general meetings to push for this;
Scenario analyses: Companies should explain how they will survive in a low carbon world. NN IP encourages the development and serious pursuit of such strategies;
Transparency and disclosure: We push for more publication of sustainability and climate reports and encourage companies to integrate these into their annual reporting. Companies must report their Scope 1, 2 and 3 emissions, and develop targets and ambitions on all three levels, for example;
Engagement with public policy makers: We strongly support companies that actively engage with public policy makers and make constructive suggestions as to how policy measures can support their plans to accommodate climate-related risks in their business models.
Faryda Lindeman, senior corporate governance specialist at NN Investment Partners