Net-zero and the sustainability of the O&G industry
Black Rock’s CEO, Larry Fink stated in his 2021’s letter to investors “There is no company whose business model won’t be profoundly affected by the transition to a net zero economy… we are asking companies to disclose a plan for how their business model will be compatible”. As the financial system is reallocating the global investment portfolio to sustainable assets, O&G activities are now facing restrictions to access capital unless they align their operations with this trend. In this One Pager we explore greenhouse gas (GHG) emissions accounting as the standard to align emission reduction targets toglobal financial sector requirements.
Global finance is now linked to GHG emissions
On April 21st, 2021, the Net-zero Banking Alliance was launched. This alliance brings together 57 banks from 29 countries and represents almost a quarter of global banking assets (US$ 38.6 trillion). Its mission is to accelerate global net zero goals by committing to align their lending and investment portfolios with net-zero emissions by 2050, focusing their efforts in the sectors that are most GHG-intensive with in them, such as O&G projects.
What this means to the O&G industry is:
- Reduce climate risks, to access capital.
- Improve Environmental, Social and Governance (ESG) profile.
- Become more transparent and better prepared for climate change.
With the Net Zero transformation, O&G companies must start now investing in reducing their GHG emissions and removing those already in the atmosphere.
Comprehensive carbon reporting is essential to improve capital access conditions. The GHG Protocol (GHGP) has become the go-to standard for this purpose. It is now the most widely used accounting tools totrack GHG emissions, providing a standardized framework for measuring and managing emissions from operations, value chains, and products. The gold standard when it comes to carbon reporting includesaccurately calculating your GHG inventories, including Scope 1, Scope 2, and Scope 3 emissions. Having a sound emissions inventory is the first step in setting reduction targets.
Business strategies require setting targets for revenue and sales and comparing actual results against those targets. Likewise, effective GHG management involves setting an achievable GHG target. The following are the steps to setting and achieving such targets.
O&G companies should aim to eliminate emissions within their value-chain in a volume and a time frame that matches net- zero targets of financial institutions. While their priorities should be in eliminating sources of emissions within their control (scope 1 and 2), they must also implement actions to abate their scope 3 emissions since, according IEA, the global O&G industry accounts for 42% of GHG emissions: 9% from their operations (scope 1 and 2), and the fuels they produce generate an additional 33% (scope 3).
Having a GHG inventory that follows a standardized method to accounting and reporting emissions fulfills the dual labor of helping companies manage their emissions, and support environmental claims to stakeholders, including financial institutions. Many companies are on the path to net-zero having effective GHG accounting at the core of their decarbonization strategies as these inventories allow companies to become clear about their scope of impacts and choose appropriate actionable response to those impacts.
According to the World Economic Forum, the larger risk to humankind is global warming in both consequence and likelihood. Global financial system is internalizing this risk and funding to O&G projects has been increasingly restricted. O&G companies are already responding to this restrictions and moving towards activities with a more balanced emissions profile. It is in this balance that O&G can become sustainable, and why net-zero goals is relevant.
Is the ideal state at which the Green House Gas (GHG) emissions going into the atmosphere are offset by an equal amount of emissions being removed (by any possible means) from the atmosphere. In fewwords, any company will achieve Net Zero when its emissions are not greater than the carbon it removes from the atmosphere.
GHG inventories and target setting
The major international oil companies have already set net-zero targets for 2050 to align both with the Paris Agreement targets and with the new international finance policies, but there is still a long road ahead for the rest of the oil and gas companies across the globe, who have yet so set their emissions reduction targets.
Setting targets requires a deep understanding of your operations and value chain, and where and how many emissions you are generating. This can be determined by adequate measuring.
How to set boundaries according to GHGP
- Control (as operators)
- Equity share (as financial participant)
- Scope 1
- Scope 2
- Scope 3
GHG type boundary:
- Other gases (CH4, N2O, HFCs, etc.)
From reporting to setting net-zero targets