There is growing attention on the potential impacts of climate-related risks on the upstream oil and gas sector

A 2019 report by the Network for Greening the Financial System (NGFS)[1], a coalition of 34 central banks and supervisors working to “contribute to the development of climate related risk management in the financial sector”, highlighted that the potential losses to the energy sector as whole from transition-related climate risks is between USD 1 trillion to USD 4 trillion.

The financial sector, from regulators to investors to listed and publicly traded companies, is beginning to turn its attention to these risks, and in particular to those sectors most likely to be materially impacted. Companies seeking to profit from the extraction and use of fossil fuels, such as the upstream oil and gas sector, are of principle concern, and are likely to be exposed to a significant proportion of the USD 1 trillion to USD 4 trillion quoted above.

Corporate reporting and disclosure aims to bring transparency to current and future investors of the material risks that a company is exposed to. This includes the identification of risks that may have yet materialised and a discussion of management’s views on the key challenges the company faces, how they evaluate and monitor those challenges, and how they intend to address them. Climate-related risks are clearly material to the upstream oil and gas sector, and therefore warrant disclosure.

We have designed a model disclosure for the upstream oil and gas sector

A fossil fuel company’s ability to generate future net cash inflows is largely dependent on its ability to continue to find new economically recoverable hydrocarbon resources and develop these into producing assets; a process which requires significant ongoing capital expenditure.

Carbon Tracker research has shown that it is future resources and reserves that have not yet been developed into producing assets that are at greatest risk of stranding in a 2°C world[2]. However, current accounting and disclosure practices offer investors little visibility over this.

We have therefore designed a model disclosure for the upstream oil and gas sector that aims to give investors transparency over the long-term climate-related risks that the sector is exposed to, by addressing three key reporting issues:

  • Resources are largely held off balance sheet (with the exception of some costs associated with exploration and evaluation activities);
  • Reserve disclosures (generally located in supplementary information outside of the financial statements) do not include resources and only sometimes include probable reserves; and
  • Management commentary generally focuses on proved reserves.

Financial statements are largely backwards-looking and therefore our model disclosure is for inclusion in the front-half of the annual report

A recent speech by the Chair of the International Accounting Standards Board[3] (IASB) outlined that, given that climate-related financial risks will likely only emerge in the long-term, and that financial statements are largely backwards-looking, climate-related risks will often ‘escape’ the financial statements. Therefore, broader financial reporting, i.e. reporting outside of the financial statements themselves, plays an important role in communicating these risks to investors; this reporting is generally more forward-looking in nature, and provides investors with broader context for the financial statements.

Investors require disclosure of material information that will allow them to assess the potential extent of an entity’s future exposure to stranded assets through their continued exploration activities

Not all exploration activity will result in the discovery of resources that are commercially viable; from a climate-perspective, it is the resource discoveries that are deemed commercially viable, and hence are most likely to be developed into producing reserves, that are important.

As such, the focus of this disclosure is largely on the exploration activities of the entity and the decision-making process employed by management when approving reserves and resources for development.

Climate-aware investors are interested in the extent to which management are factoring climate-related considerations into their strategy and decision-making process. Arguably, it is more important for investors to understand if management are not considering these factors than if they are; the more that a company is incorporating climate-related factors into their strategy and risk management processes, the better prepared it is likely to be for the transition to a low-carbon economy.

The presented disclosure includes decision-useful information that allows investors to assess management’s short, medium and long-term capital expenditure strategy, and the associated factors that may affect this and the future financial performance of the entity.

The model disclosure aims to be realistic

We believe that the information contained within the disclosure is readily available to the management of upstream oil and gas companies.

We have tried to strike a balance between providing information at a sufficiently granular level so as to be useful to investors, without triggering concerns regarding commercial sensitivity.

Ultimately, in order for the disclosures to be useful, these disclosures would need to be provided by all companies operating within the upstream oil and gas sector. If all companies were making the same, or similar, disclosures, then any deemed competitive disadvantage from disclosure would be further diminished. Further, over time, it may in fact become the case that companies that are not disclosing this information are at a competitive disadvantage, since investors will not be able to sufficiently assess the degree of climate-related risk that the entity is exposed to.

[1] Network for Greening the Financial System, 2019. First Comprehensive Report. A call for action: Climate change as a source of financial risk. Available from:

[2] Carbon Tracker, 2017. 2 degrees of separation – Transition risk for oil and gas in a low carbon world. Available from:

[3] Hans Hoogervorst, 2019. Speech: IASB Chair on what sustainability reporting can and cannot achieve. Climate-Related Financial Reporting Conference, Cambridge University. 2 April 2019. Available from: