TJ Conway - Jan 12, 2021

The latest Energy Intelligence ESG Climate Risk Benchmark study provides a new set of oil company rankings that show clearly how companies are responding to mounting investor demands, with those under greatest investor pressure tending to perform best in terms of their environmental, social and corporate governance (ESG) scores related to climate change. What’s also becoming clear is the divergence between global oil and gas companies, with the European majors pulling ahead, national oil companies (NOCs) crowding the lower ranks and US firms populating the middle tier. Among the big changes from the previous benchmark were BP and Occidental Petroleum. Both enacted significant strategic shifts last year, improving their standings markedly. Among the more progressive European contingent, Total and Equinor have improved their scores to stay on top, while Oxy and ConocoPhillips stand out among US firms making progress. NOCs typically face little stakeholder pressure and have made minimal changes.

Looking ahead into 2021, investor demands are rising for companies to align their strategies with the Paris climate goals. With firms increasingly adopting the standards set by the Task Force on Climate-related Financial Disclosure (TCFD) on governance, strategy and risk management, there will be growing attention to the key metrics in the benchmark: emissions targets and carbon performance.

The ESG Climate Risk Benchmark is an independent assessment of how companies rank against investor requirements, reflecting and expanding upon standard frameworks such as TCFD. Twice a year, companies are scored on 14 factors in five categories, with 26 companies in the latest benchmark. The weighted categories include four that assess levels of engagement: 1) policy stance, 2) governance & risk management, 3) strategy & portfolio, and 4) emissions disclosures & targets. A fifth category, with a heavier weighting, assesses companies' reported operational (Scopes 1 and 2) emissions intensity and the life-cycle emissions intensity of each company's products (Scopes 1, 2 and 3), as estimated by Energy Intelligence.

European firms have made the most progress in setting targets that are focused on life-cycle emissions cuts, reducing both emissions intensity and absolute levels. More US players have started to follow suit, led by Conoco’s net-zero operational emissions goal and Oxy’s Scope 3 target for emissions from the company's products, the first ever by a US energy firm. The question now is whether investors will push other US firms to follow Oxy’s example and adopt Scope 3 goals.

A key driver for these changes is rising pressure on the oil and gas industry from US banks and institutional investors. Private equity giant BlackRock joined Climate Action 100+ one year ago and is moving toward mandatory TCFD disclosures as it engages more with companies. State Street is also joining Climate Action 100+ and JPMorgan Chase intends to align its financing activities with Paris, adding its voice to the chorus of calls for companies to cut emissions by 2030 -- a watershed year for the goal of keeping the rise in global temperatures within sight of 2°C. Another collective spur to action is the Net-Zero Asset Managers Initiative, which commits investors managing over $9 trillion worth of assets to the 2050 net-zero greenhouse gas (GHG) emissions goal.

It is not only investors who need placating. Policymakers are also calling for clearer strategic alignment with the goals of the Paris Agreement, with the incoming Biden administration in the US likely to try and tighten climate-related disclosure rules, while the UK intends to make TCFD disclosures compulsory by 2025. In a step-by-step process, the initial corporate engagement efforts, which focused on governance and disclosure, are nearing completion. But it’s an uneven process with companies that were already in the lead continuing to improve, while others continue to lag. Among the improvers BP stands out, as does Oxy. But US firms largely remain in the middle tier due to their limited action. Among the national oil companies, the publicly traded ones tend to score higher and will likely be the first to ramp up their action, whether that’s in response to investors or to their majority state owners who may be looking to burnish their national commitments to a lower-carbon future.

Comparing the companies' levels of engagement on climate issues and their actual carbon performance highlights some key trends. For example, among the Europeans leading the index, two distinct groups have emerged. The two leaders, Total and Equinor, get their top marks in different ways; Total ranks first on engagement while Equinor scores best on carbon performance. Then there were notable shifts among those further down the rankings -- companies that showed strong engagement but scored weaker on carbon performance. Royal Dutch Shell’s fall from first to sixth place reflects its relative deterioration as others have boosted their action, such as BP, which climbed from seventh to fifth after its strategic overhaul, which included aggressive new emissions targets. Eni remains a top player due to a consistently strong carbon performance. Apart from Equinor and Petrobras, NOCs continue to score at the bottom, with generally weak engagement and varied carbon performance scores.

With the Europeans topping the rankings, Conoco raised the bar for its US peers with the 2050 net-zero Scope 1 and Scope 2 emissions targets it set in October. Oxy then upped the ante considerably in November with its Scope 3 target. Exxon Mobil’s emissions goals released in December marked a big shift in posture, even if the target -- which is in line with Chevron’s -- is less ambitious than Oxy and Conoco’s.

The pressures are not going to let up in this year. As climate concerns rise and more companies set emissions goals, carbon performance is going to become ever more central. Getting operational (Scope 1 and Scope 2) emissions to net zero will be a rising priority for all publicly traded firms. And, given the wide variation in operational GHG intensity across the benchmark, the poorer performers will likely attract intense pressure. Yet, as the life-cycle GHG intensity estimates show, even firms with low Scope 1 and Scope 2 emissions intensity have massive Scope 3 GHG footprints. As a result, investor attention on Scope 3 will grow across the industry. Here, data limitations remain a big issue, underscoring the need for greater transparency and standardization of reporting.

TJ Conway is head of energy transition research at Energy Intelligence. This article is adapted from the latest edition of the ESG Climate Risk Benchmark, which is part of the Energy Transition Service, which also includes as core deliverables the Vulnerability Index and the Low-Carbon Investment Tracker.