The UK's Department for the Environment, Forestry and Rural Affairs (Defra) has opened a consultation seeking to introduce a due diligence requirement for companies whose supply chains may be contributing to deforestation.
This engagement addresses the risks faced by a global range of upstream oil & gas companies as part of a transition to a low-carbon economy. It builds on research by Carbon Tracker that illustrates the company-level risks associated with unneeded capital expenditure.
This PRI-coordinated engagement askes companies to respond to the risks they face as a result of constraints to oil and gas use going forward. The initiative will make use of research by Carbon Tracker (see below for details) to gauge how companies are evaluating future capital expenditure and production, as well as the governance behind this decision making.
The objectives of this PRI coordinated engagement are aligned with the three high-level goals of the Climate Action 100+ (namely on Governance, Disclosure and Action with regards to climate change risks). More details on the relation to CA100+ can be found below.
Together with the Advisory Committee, the PRI has developed the following objectives this oil and gas engagement working group:
- To explore how companies are comprehensively assessing their exposure to climate-related transition risks.
- To ensure companies are planning appropriate actions in response to future policy and technological shifts which may limit their ability to exploit their assets (i.e. under a 2 degree scenario as per the Paris Climate Agreement).
- To better understand how companies are evaluating future capital expenditure and production, as well as the governance behind this decision making.
- To encourage improved disclosure aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) – especially with regards to scenario analysis.
CARBON TRACKER RESEARCH AND TARGET COMPANIES
In June 2017, the PRI launched a new research report - 2 degrees of separation: Transition risk for oil & gas in a low carbon world. This was produced by the Carbon Tracker Initiative and the PRI, in partnership with PKA, PGGM, AP7, FRR and Legal & General Investment Management. This research provides investors with a detailed analysis of 69 oil and gas companies' alignment with a scenario where global warming is limited to 2 degrees Celsius. It also includes estimates of the proportion of future capital expenditure and production that falls outside a 2 degree carbon budget.
From this, 39 companies were targeted for engagement based on their exposure to a 2 degrees carbon budget. The list of target companies can be found attached on the right ahnd side of this post. In the joining form, investors will be asked which companies they would like to engage with.
RELATION TO THE CLIMATE ACTION 100+
Climate Action 100+ is a five-year investor initiative to engage with the world’s largest corporate greenhouse gas emitters to curb emissions, strengthen climate-related financial disclosures and improve governance on climate change.
The initiative acts a global coordination body between five investor networks: Asia Investor Group on Climate Change (AIGCC); Ceres; Investor Group on Climate Change (IGCC); Institutional Investors Group on Climate Change (IIGCC); and Principles for Responsible Investment (PRI). The aim is to coordinate engagement activities and unify messaging of dialogue with 100 of the world’s most systemically important carbon emitters.
Participants of the initiative endorse a public sign-on statement that outlines three high-level engagement goals. These seek to secure the following commitments for company management:
- Governance: Implement a strong governance framework which clearly articulates the board’s accountability and oversight of climate change risk.
- Disclosure: Provide enhanced corporate disclosure in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and sector-specific Global Investor Coalition Investor Expectations on Climate Change guidance.
- Action: Take action to reduce greenhouse gas emissions across their value chain, consistent with the Paris Agreement’s goal of limiting global average temperature increase to well below 2 degrees above pre-industrial levels.
Under this umbrella body, the PRI coordinated engagement on oil and gas will be an affiliated sub-initiative at the network level. It sits separately to the global forum CA100+ working groups due to its sector specific specialisation and focus on capital expenditure risks (see org chart). However it is still part of the broader CA100+ umbrella and this PRI engagement will include a selection of the CA100+ companies (highlighted in the engagement target list), for which lead investors will provide high-level updates to the global forum. It will also include a number of oil and gas companies outside the CA100+ scope.
Note that CA100+ includes a range of other sectors in addition to oil and gas companies. The separate PRI Climate Action 100+ Global Working Group will cover these additional sectors.