Environmental, social, and governance (ESG) investing is quickly becoming one of the most visible and lasting megatrends in the oil and gas industry as momentum builds behind efforts to promote renewable energy, sustainability, and the energy transition. As the effects of ESG trends and climate change on the oil and gas sector is any indication of what may be in store, some companies may be in for a rough ride. With oil and gas producers coming under increasing pressure to prioritize spending on cleaner energy, listed companies are being expected to continue making up a shrinking share of global upstream investment.
In our recent report “The ESG Winds of Change Could Become A Tempest for Global Oil and Gas Producers”, we analyse the industry’s changing investment landscape as we expect to see sustained pressure on oil and gas producers’ core cash engines from many stakeholders, including shareholders and courts.
O&G companies ordered to deepen cuts
Environmental activists in the Netherlands won a startling victory in May in the Hague District Court. The court ruled that Royal Dutch Shell PLC (Shell), must reduce its greenhouse gas emissions by 45 percent by 2030. The landmark ruling could pave the way for additional lawsuits against other global oil and gas producers, as well as other industries that are known heavy polluters. Indeed, there are many such similar cases against TotalEnergies pending in France, and a total of about 425 pending climate lawsuits in various countries. The events in the Hague were followed by news that at Chevron Corp.’s annual shareholder meeting, 61 percent of shareholders approved a shareholder proposal to force Chevron into cutting its carbon emissions.
Focus on shareholder activism
In our previous report “Rising Shareholder Activism Mostly Harms Credit Quality” we have noted that the Covid-19 pandemic has focused many shareholders’ minds on leadership quality and spurred a twofold rise in public campaigns against boards and executives in 2020 compared with the previous year. Investors who considered companies to be mismanaged, unable to respond well to environmental and social challenges or adapt their business model to the post-pandemic world, laid down governance challenges. We have also seen an exponential growth in environmental and social campaigns since 2018.
Sector to be heavily scrutinised
These events regarding climate change underscores what has become a global concern among sovereign nations and investors and could serve as a wakeup call for an industry that is perceived by many to be slow to adjust to climate change and emission mandates. In our opinion, stricter regulations, substitution, and secular shifts in industry supply and demand fundamentals will contribute to a more difficult operating environment for fossil fuel producers and will likely augment the risk of stranded assets and significant asset writedowns. The events signal that oil and gas companies will likely face greater scrutiny from public stakeholders, potentially forcing oil and gas companies to reconsider where to allocate and deploy existing and future resources.
Several large integrated oil and gas companies based in Europe have made strategic decisions to alter their business models to become more of an energy company rather than just an oil and gas company recognizing the threat posed by climate change and renewable energy.
Industry risk remains heightened
S&P Global Ratings in January revised the risk assessment for the oil and gas integrated, exploration and production (E&P) industry to moderately high risk. The revision, which led to downgrades of several E&P companies including Exxon, Shell, and Chevron, reflected our concerns about the trajectory of oil and gas supply and demand and the impact on producers of fossil fuels, given the increasing adoption of and transition to renewable energy alternatives to address climate change. We highlighted that market share encroachment of renewable energy over time will have broad implications for hydrocarbon demand, prices, and producers of both fossil fuels. We noted that due to the social and economic risks posed from global warming, sovereign and local governments globally have been enacting stricter policies and regulations while providing industry subsidies aimed at reducing greenhouse gas and carbon dioxide emissions from the burning of fossil fuels.
The transition and the timing of peak hydrocarbon demand in our view, has and will continue to accelerate due to Covid-19 and the growing adoption of ESG investment mandates amongst global investors and financial institutions. We also cited that the risk of disinvestment and capital market access may become more challenging and costly for hydrocarbon producers.
Thomas Watters, Managing Director at S&P Global Ratings.
Written by Staff Writer
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Climate change consequences are serious for global oil and gas producers
As the effects of ESG trends and climate change on the oil and gas sector is any indication of what may be in store, some companies may be in for a rough ride
Environmental, social, and governance (ESG) investing is quickly becoming one of the most visible and lasting megatrends in the oil and gas industry as momentum builds behind efforts to promote renewable energy, sustainability, and the energy transition. As the effects of ESG trends and climate change on the oil and gas sector is any indication of what may be in store, some companies may be in for a rough ride. With oil and gas producers coming under increasing pressure to prioritize spending on cleaner energy, listed companies are being expected to continue making up a shrinking share of global upstream investment.
In our recent report “The ESG Winds of Change Could Become A Tempest for Global Oil and Gas Producers”, we analyse the industry’s changing investment landscape as we expect to see sustained pressure on oil and gas producers’ core cash engines from many stakeholders, including shareholders and courts.
O&G companies ordered to deepen cuts
Environmental activists in the Netherlands won a startling victory in May in the Hague District Court. The court ruled that Royal Dutch Shell PLC (Shell), must reduce its greenhouse gas emissions by 45 percent by 2030. The landmark ruling could pave the way for additional lawsuits against other global oil and gas producers, as well as other industries that are known heavy polluters. Indeed, there are many such similar cases against TotalEnergies pending in France, and a total of about 425 pending climate lawsuits in various countries. The events in the Hague were followed by news that at Chevron Corp.’s annual shareholder meeting, 61 percent of shareholders approved a shareholder proposal to force Chevron into cutting its carbon emissions.
Focus on shareholder activism
In our previous report “Rising Shareholder Activism Mostly Harms Credit Quality” we have noted that the Covid-19 pandemic has focused many shareholders’ minds on leadership quality and spurred a twofold rise in public campaigns against boards and executives in 2020 compared with the previous year. Investors who considered companies to be mismanaged, unable to respond well to environmental and social challenges or adapt their business model to the post-pandemic world, laid down governance challenges. We have also seen an exponential growth in environmental and social campaigns since 2018.
Sector to be heavily scrutinised
These events regarding climate change underscores what has become a global concern among sovereign nations and investors and could serve as a wakeup call for an industry that is perceived by many to be slow to adjust to climate change and emission mandates. In our opinion, stricter regulations, substitution, and secular shifts in industry supply and demand fundamentals will contribute to a more difficult operating environment for fossil fuel producers and will likely augment the risk of stranded assets and significant asset writedowns. The events signal that oil and gas companies will likely face greater scrutiny from public stakeholders, potentially forcing oil and gas companies to reconsider where to allocate and deploy existing and future resources.
Several large integrated oil and gas companies based in Europe have made strategic decisions to alter their business models to become more of an energy company rather than just an oil and gas company recognizing the threat posed by climate change and renewable energy.
Industry risk remains heightened
S&P Global Ratings in January revised the risk assessment for the oil and gas integrated, exploration and production (E&P) industry to moderately high risk. The revision, which led to downgrades of several E&P companies including Exxon, Shell, and Chevron, reflected our concerns about the trajectory of oil and gas supply and demand and the impact on producers of fossil fuels, given the increasing adoption of and transition to renewable energy alternatives to address climate change. We highlighted that market share encroachment of renewable energy over time will have broad implications for hydrocarbon demand, prices, and producers of both fossil fuels. We noted that due to the social and economic risks posed from global warming, sovereign and local governments globally have been enacting stricter policies and regulations while providing industry subsidies aimed at reducing greenhouse gas and carbon dioxide emissions from the burning of fossil fuels.
The transition and the timing of peak hydrocarbon demand in our view, has and will continue to accelerate due to Covid-19 and the growing adoption of ESG investment mandates amongst global investors and financial institutions. We also cited that the risk of disinvestment and capital market access may become more challenging and costly for hydrocarbon producers.
Thomas Watters, Managing Director at S&P Global Ratings.
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