Recently, Climate Action 100+ launched its updated Net Zero Company Benchmark and related Alignment Assessments for the 170+ companies that are subject to engagement by investors with over $68 trillion assets under management. Carbon Tracker is one of four data providers to Climate Action 100+, supplying assessments for upstream oil and gas business and utility companies, as well as the extent to which focus companies across all sectors are integrating climate-related matters into their financial reporting.
Climate Action 100+ (CA100+) represents an unprecedent effort by investors to require investee companies to decarbonize by setting goals aligned with the Paris Agreement and establishing governance and disclosure practices to support those efforts. For the world’s largest emitters, these plans are whole-company efforts. Carbon Tracker’s role is to provide assessments that go beyond what companies are saying they do and examine what they are in fact doing.
For the sectors and subjects we cover, our focus is on data that can demonstrate real progress – or the lack thereof.
For upstream oil and gas, the key issues require looking forward. In other words, the development of new projects that are not needed in an energy transition, i.e., projects that are unaligned with that transition and potentially expose investors to the risk of stranded assets. For utilities, we must look both forward and backward. Firms must avoid building new coal and gas generation assets and accelerate the retirement of legacy ones, which are increasingly economically uncompetitive. And for accounting, we consider both how the accounts that contain forward-looking estimates and assumptions, and the independent auditors of such accounts, have considered how those estimates and assumptions will be radically transformed by the energy transition.
This year’s results (available here), represent a mixed bag. Below, we include a sample of the results.
Upstream Oil and Gas:
Our CA100+ upstream oil and gas indicators[1] evaluate 30 large producers on four key issues. We endeavor to understand whether companies are, will, or have the potential to sanction oil and gas projects that will take us beyond global climate targets and whether they are testing existing projects against long-term falling oil prices that might accompany long-term declines in demand.
- How compatible are the projects the company has actually sanctioned in the past year with the International Energy Agency’s (IEA’s) energy transition scenarios?
- How compatible are the company’s potential future projects with those scenarios (i.e., undeveloped projects in which they have an interest)?
- Would the company, investing in a “business-as-usual” (BAU) pathway, produce substantially more hydrocarbons than on a net-zero aligned pathway?
- Does the company disclose the forward-looking prices it uses to test its assets for impairment, and does it project declines in oil prices as the energy transition unfolds, or assume that long-term prices will rise or stay constant?
Despite the IEA’s unequivocal statements about there being no need for new oil and gas projects, we continue to see investments in new upstream oil and gas projects that, on a cost basis, are inconsistent with both the Net Zero Emissions by 2050 Scenario (NZE) and even the less stringent Announced Pledges Scenario (APS).
Of the 30[2] companies covered, 65% invested in projects inconsistent with the NZE. The total capex associated with these newly sanctioned projects is estimated to be over $54bn. However, examining the $54bn in unaligned projects through the lens of the less stringent APS, we can see that just over $10bn of that capital expenditure is unaligned with APS and is concentrated in eight companies. Focusing just on the oil majors, we see a split with some companies (Chevron, ENI, Shell, and TotalEnergies) sanctioning higher-cost projects, while others (ConocoPhillips, Exxon, and Repsol) have refrained from doing so.
That said, we did identify 11 companies that do not appear to have made significant investments in new NZE-unaligned projects (ENEOS Holdings, EOG, EQT, Occidental Petroleum, OMV, Origin Energy, Petroleos Mexicanos, Reliance, Sasol, Suncor, and Woodside). This is either because they have restrained/exercised capital discipline, or because their investment focus has been on smaller-scale shale projects that we have not been able to capture. These results show that the largest exploration and production (E&P) companies are continuing to invest in new projects.
Looking forward at the companies’ potential future projects, we consider what a BAU investment program would look like and the extent to which it is compatible with the NZE out to 2030. Barring acquisitions and divestments that might change a company’s opportunity set, the potential projects it currently holds are an indication of what we might expect companies to develop next.
Under this approach, where BAU production is significantly in excess of NZE production, we would anticipate investments to also exceed what is needed in the NZE. Where BAU is more closely aligned with the NZE, the risk is lessened.
The analysis shows that only three companies (ENEOS Holdings, Origin Energy, and Sasol) hold portfolios that are not incompatible with the NZE. Meanwhile, 18 companies have BAU portfolios that would exceed NZE production by between 0-50%; the remaining eight companies of the 29 assessed under this indicator all have potential project portfolios that would yield production that would exceed NZE production by more than 50% out to 2030 if they follow a BAU-like business plan.
Finally, we look at the forecast commodity prices that companies use to test for asset impairments. The use of high prices will result in higher estimates of future revenues, and lower prices lower ones. High prices can therefore mask potential impairments that may result if those prices fail to materialize.
We also look at the shape of the forecast curve as a proxy for how the companies believe the energy transition will unfold. Under the assumption that lower demand may lead to lower prices, we examine the shape of the companies’ price curve – do they anticipate price declines in later years, or sustained or higher prices for the coming decades? We also compare these curves to the price forecasts in the two IEA scenarios.
There is also the issue of financial disclosures: Some companies have asserted that these prices are commercially sensitive. That said, 14 of 30 companies now disclose this information, with non-disclosure occurring primarily from companies based in North America and Asia. Notably, this is not a result of differences in regulatory regimes. While not included in the 30 companies, we also note that companies such as EOG and EQT have provided such disclosures.
Of the 14 companies that disclose impairment price forecasts, we find that no companies use prices compatible with those in the NZE; this is consistent with corporate expectations that the NZE will not be achieved but may mask potential impairments if the price environment the scenario describes prevails.
Comparing the prices curves with the less stringent IEA APS scenario, we can see eight of 14 companies have price forecasts that approximate that scenario with the remaining six[3] companies using price forecasts that are higher than the APS price deck. Here, we see a clear split; excluding Teck Resources, the companies with lower oil prices forecasts are all based in Europe (bp, Eni, Equinor, OMV, Repsol, Shell, and TotalEnergies), whereas those with higher price forecasts are based in Canada, Latin America and elsewhere (Ecopetrol, Petróleo Brasiliero, Santos, Sasol, Suncor, and Woodside).
Electric Utilities:
We evaluated 31 utilities from around the world, examining whether they are aligning their power-generating capacity with the low-carbon transition. Importantly, our focus is not just on the fleet that they are building, but the pace at which they will retire emissions-producing generation that is incompatible with a low-carbon future. For both coal and gas-fired generation, we ask:
- Has the company announced retirements of existing coal and gas capacity that is consistent with Carbon Tracker’s interpretation of the IEA’s Net Zero Emissions by 2050 Scenario (NZE)?
- Is the company’s total coal and gas power-generating capacity aligned with this scenario?
Overall, our analysis[4] shows that 23% of utilities assessed have announced or already phased out their unabated coal assets in accordance with the NZE. However, for those companies still clinging to coal, we see that in generation capacity terms, they are falling further out of alignment with the NZE.
With respect to coal generation, 52% of the companies have provided dates by which they will retire all coal-fired generation assets, and seven of the 16 companies that have announced full-coal retirement have done so on schedules consistent with the NZE.
Perhaps unsurprisingly, Europe leads the way. With 12 companies in the CA100+, 10 have announced full coal retirement, with only PGE (based in Poland) and EDF (based in France) failing to deliver a plan to retire all coal generation. These results were helped by Fortum, CEZ and RWE, all scheduling the full retirement of coal fleets (though none of those are yet on pace with a 1.5°C aligned outcome).
North America lags its European peers in coal retirements, with four of 13 countries having announced the full retirement of all coal generation. But laggards also abound, with nine companies yet to even schedule the full retirement of all coal-generation assets – much less on a path consistent with the NZE.
In the rest of the world, only two Australian utilities (AGL and Origin) have announced full coal retirements, though neither is consistent with the NZE. This suggests more work needs to be done to push these utilities along.
Critically, of the utilities that have established retirement plans for coal-generation, many are not sufficiently ambitious. We measure this in terms of relative alignment, that is, the proportion of each company’s generation portfolio that is inconsistent with the NZE. Of the 16 utilities that have announced plans to phase out coal capacity, seven score poorly on relative alignment, having less than 75% of their coal generation capacity assigned with planned phaseout dates that comply with the NZE.
The landscape for gas-generation retirements remains bleak, with only First Energy and Origin providing full retirement schedules and, of these two, only First Energy’s plan is consistent with the NZE. Concerns about the need for future gas peaking capacity may be driving hesitance to announce retirements of these assets, though the current trajectories for operating and planned gas capacity remain significantly above forecasts for future peaking requirements.
As with coal capacity, we see the gap widening on gas for those companies that lack retirement schedules. In a race to decarbonize power, standing still means falling behind.
Climate Accounting and Auditing:
In assessing the financial statements (and related audit reports), Carbon Tracker uses seven metrics that are rolled up into three sub-indicators.[5] We assess both how companies and their auditors are assessing climate related risks and whether they are meeting investor expectations to sensitize reported financial information to net zero outcomes:
- Are companies consistently integrating the financial impacts of material climate-related risks into their financial statements and disclosing the relevant, forward-looking estimates and assumptions that they use?
- Are company auditors identifying and assessing relevant financial statement items for climate-related risks and identifying any inconsistencies in company reporting?
- Are companies and auditors either aligning the accounts with a 1.5°C trajectory or providing sensitivities of the key items to one?
This year, we assessed 140 CA100+ companies, of which 126 published annual reports in time for the current review.[6] Overall, our assessment shows that many more companies are discussing or considering the impacts of climate-related matters in the accounts, but much of this discussion still falls short of providing decision-useful information.
This year, CA100+ introduced a ‘partial’ score at the metric level for the accounting and audit assessments. Previously, the scoring was a binary of ‘yes’/ ‘no.’ This resulted in some changes to scoring, with many companies now receiving ‘partial’ scores to reflect current efforts. That said, a total of 80 companies (63% of those reviewed), failed to even obtain a ‘partial’ score for any of the seven metrics. This disappointing result in the face of guidance from market regulators and standard setters that climate-related risks should be incorporated into the accounts rests with both companies and their auditors.
Despite this, we do see some improvements and unlike in other reviews, no worsening of scores.
With respect to companies integrating climate-related risks into their financial statements, 8 companies improved their disclosures, leading to an improvement in scores (Airbus, BMW, E.ON, Ecopetrol, Fortum, L’Air Liquide, Renault, and Compagnie de Saint-Gobain). These were due to new discussions of the way in which climate-related matters will impact financial statement line items, the disclosure of quantitative assumptions and estimates that will be impacted by climate-related matters, and/or addressing potential inconsistencies between the climate-related risks the company has identified, or climate-related targets the company has set, and how those matters intersect with specific financial-reporting items.
With respect to auditors, progress is slower, with only three auditors improving their scores because of better disclosure (Anglo-American (PwC), L’Air Liquide (KPMG and PwC[7]), and Stellantis (Ernst & Young).
Finally, in terms of incorporating net-zero targets into the financial statements and/ or providing a sensitivity to net-zero aligned assumptions, 4 companies, all European oil and gas companies, improved their scores (OMV, Repsol, Shell, and TotalEnergies). These may reflect the intensity of investor engagement with these companies, the direct manner in which the energy transition can be expected to impact oil and gas producers, and availability of third-party benchmarks and forecasts for this sector.
As with prior years, improvements in scores remain heavily concentrated in Europe, with only Ecopetrol and Woodside sitting outside this region.
In the coming months, we will be diving more deeply into these results, but you can find summaries of select accounting and audit assessments here, and related methodology here. You can also find the upstream oil and gas assessments on the CA100+ website here and related methodology here, as well as our utilities assessments here and related methodology here.
