Oil majors and big miners have been falling over themselves to promise better behavior when it comes to greenhouse gases. A significant number now say they are targeting zero emissions. Unfortunately, not everyone agrees on exactly what that means. It leaves investors clear on good intentions, but far less so on how to price transition risk, compare strategies and judge success.
The real trouble sits with the widest and most significant category of emissions — those that don’t come directly from operating a well or mine, but are produced indirectly when oil, gas, iron ore or coal is burned or processed by customers. For outfits like BP Plc and BHP Group, these so-called Scope 3 emissions can add up to as much as 90% of their total footprint. They’re also far harder to control, as they aren’t produced by the reporting companies themselves.
Resources giants, even poorly performing oil majors, have the scale and financial clout to manage a transition to a carbon-light economy — should they choose to. The rapid destruction of value in segments of the coal sector has left few in doubt of how quickly they could be left behind if they ignore such downstream emissions. This week’s collapse in oil prices is another memento mori for carbon-intensive businesses.
That doesn’t mean everyone has embraced the idea of targeting Scope 3 emissions. Rio Tinto Group, for one, has said it can’t set targets for its clients, though it will engage in as yet unspecified projects with the likes of China Baowu Steel Group Corp. BHP will produce numbers later this year. Others, like BP, have promised to eliminate Scope 3 emissions where they’ve drilled the oil, but won’t commit to doing the same if they’re only doing the refining. Spain’s Repsol SA is among the few to be promising an absolute zero target for all three sets of emissions.
In this flurry of green activity, what should investors be demanding?
The first thing should be transparency. Many of the biggest emitters have yet to make full Scope 3 disclosures, including such pillars of developed-market stock indexes as Exxon Mobil Corp., Anglo American Plc, and Fortescue Metals Group Ltd. At this point, that decision is almost churlish: It isn’t hard for investors to do their own calculations. Those that don’t face up to the reality of decarbonization will increasingly be treated like any other business that’s careless about its medium- and long-term liabilities.
A second point is comparability. Although the overwhelming majority of Scope 3 emissions for resources companies come from the processing and combustion of their products, the standard incorporates a range of other activities such as waste disposal, product distribution, and even business travel and staff commuting.
To add to that complexity, companies can replace the standardized emissions factors used to produce the figures with bespoke ones if their customers operate particularly efficient plants. Without full transparency about where those savings come in, companies could reduce their footprint by leaning on overly generous assumptions, and claim credit that more rigorous competitors would miss out on.
There is also the unsolved question of how to manage double-counting, when, for example, coking coal and iron ore are sold to a producer that will use both in making steel.
Investors should demand the means to measure progress, and success. Laying out ambitions for emissions 30 years hence is all but meaningless unless you’re also describing a path to get there. If investors are to take these numbers seriously, they’ll want to see plans for the steps along the way.
That won’t be easy. For oil majors, it will require nothing less than a reinvention of their entire businesses, moving into industries that have historically produced lower returns than fossil fuels, as former BP Chief Executive Officer Bob Dudley has pointed out.
Mining giants that have depended on revenues from high-volume bulk commodities such as coal and iron ore will have to either push their customers to switch to new technologies such as hydrogen-reduced steel, or depend on less lucrative base metals, specialty commodities and agricultural inputs.
Providing too much detail about the road ahead risks disclosing a company’s business strategy, too, or tilting the market. How much of the reductions will come, as with Glencore Plc, from allowing mines and wells to deplete naturally as their reserve base is used up? How much will depend on selling assets, such as BP’s near-20% stake in Rosneft? How much will rely on technology that exists, but is not yet used on a wide scale, like carbon capture and storage?
The last point on fund manager wish lists should be consistency. Investors will benchmark talk of long-term ambitions against performance on actual, shorter-term activity.
Gabriel Wilson-Otto, head of stewardship, Asia Pacific, at BNP Paribas Asset Management, suggests that will mean keeping an eye on capital spending: Projects that generate downstream emissions decades into the future should be attracting more scrutiny. Similarly, corporate lobbying will be monitored for evidence it is allowing organisations to flash up green ambitions but still campaign against action on climate.
None of this should be a burden on good governance. The CDP, a nonprofit research group that pushes for greenhouse disclosure, found in 2014 that the return on investment for companies that do so was 67% higher than for those that didn’t.
The winds of decarbonization are blowing through the commodities industry. Companies that don’t bend in the face of these changes will break.
(By Clara Ferreira Marques and David Fickling)