by Justin Gundlach

In 2017, a majority of Duke Energy’s shareholders voted to instruct the energy and utility company to draft what The 50/50 Climate Project has called a “2 degree analysis.” As a result, on or before March 30, 2018, Duke will issue a report on the risks facing the company in a world where governments adopt policies necessary to meet the goal, articulated in article 2 of the Paris Agreement and modeled by the International Energy Agency, of keeping global average temperatures well below 2°C above pre-industrial levels. It will be the latest addition to a growing list; other reporting companies include (but aren’t limited to) Chevron, ExxonMobil, Occidental Petroleum, Pioneer Natural Resources, PPL Corporation, Shell, and Total SA.

What do these reports say? What spurred the companies to issue them? How might they be used, now and in the years to come? Some answers are below the jump.

  1. What climate policy means for these businesses, according to these businesses

Companies that are financially exposed to changes in the price and permissibility of greenhouse gas emissions – such as those in the oil and gas sector, carmakers, and electric and gas utilities – do not all take the same approach when answering the question, How are you positioned to respond to policies that would achieve the emissions reductions required to achieve a 2°C scenario?

ExxonMobil says that it is unconcerned, primarily because it expects the dominance of oil and gas in the energy and transportation sectors to persist notwithstanding policy efforts, but also because it could readily shift its business away from fuels that are susceptible to substitution by renewables or avoidance by energy efficiency. Notably, Exxon is also skeptical that policy will actually achieve a 2°C scenario; it anticipates a 2.4°C scenario instead. (Others, like Pioneer, echo this point, albeit less bluntly.) Further, Exxon cautions against a policy mix that seeks to drive toward decarbonization “inefficiently,” and favors a unified mechanism like a carbon tax. As at least one critical review has pointed out, Exxon’s analysis was able to arrive at these soothing conclusions largely by ignoring extreme climate scenarios and demanding policy environments.

Occidental states that a 2°C scenario would have “no significant impacts to our business” for several reasons. Its portfolio of reserves (i.e., the oil and gas it can access via leases it has already secured) includes investments that can be extracted quickly or have seen limited development and so present limited financial risk should Occidental decide they are not worth extracting. It has invested heavily in know-how and technologies related to carbon capture—used to date to enhance oil and gas recovery but useful for carbon capture and sequestration as well. Occidental also points to internal metrics used to track emissions and energy intensity, and developments like substitutes for the hydrofluorocarbons (HFCs) used in refrigeration and cooling systems.

Total, a French firm with global reach, opens its report, Integrating Climate Into Our Strategy, by establishing the pair of premises that guide its plans: on the one hand, “oil is a mature market facing long-term decline,” but on the other “we must not embrace the unrealistic idea of an abrupt transition.” Total’s immediate priority, according to the report, is to divest its coal assets and to develop replacements that draw on natural gas and renewables. As a partner in the Oil and Gas Climate Initiative, Total is sponsoring R&D into CCS/U capabilities, reducing inefficiencies and fugitive emissions in the natural gas supply chain, and seeking improvements to energy efficiency in the industrial and transportation sectors.

The two dominant themes across firms and sectors in the reports I reviewed seem to be these: oil will remain in the energy supply for the foreseeable future, and much of the reduction in greenhouse gas emissions intensity will come from the substitution of natural gas for coal and (to a lesser degree) heating oil. Several reports emphasize their respective firms’ efforts to improve the efficiency of oil and natural gas development and transmission, but none of them acknowledges the very real possibility that natural gas’s emissions profile only appears superior to that of coal because we don’t accurately track how much methane escapes into the atmosphere as fugitive emissions at each stage in the oil and gas supply chains.

Firms’ characterizations of the regulatory landscape are less well aligned. As noted above, Exxon and Pioneer take the view that climate policy will affect their business minimally in the foreseeable future and intend to continue on their current paths. In Exxon’s case, this view rests substantially on skepticism that the necessary steps will be taken, as doing so would require “unprecedented policy action as well as effort and engagement from all stakeholders.” Pioneer, for its part, leaves such doubts to implication, emphasizes how cost-effectively it can produce oil and opens the Corporate Strategy section of its 2017 Sustainability Report by stating that it “has set an ambitious goal of producing 1,000,000 barrels of oil equivalent (BOE) per day by 2027.” Other firms, like PPL (an electricity and gas utility that operates in the UK, Pennsylvania, Kentucky, Tennessee, and Virginia), express less certainty about the longevity of existing policy approaches and describe more explicitly how regulatory changes could affect them. Discussing its assets in Kentucky, for instance, PPL states “we anticipate that the financial risk of continuing to operate the existing coal units will be minimal so long as they are operated consistent with approved regulatory frameworks and are economically justifiable to Kentucky regulators.” And Total, which anticipates material and persistent impacts of national, supranational, and international climate policy on its business, aligns itself with policymakers. This makes for a marked contrast to Exxon’s grudging acknowledgement that “[p]olicy has a place here, too.” Another European energy company, Norway’s state-owned Statoil, is like Total in this respect and has just announced that it will change its name to Equinor – a move intended to signal a move away from a primary focus on oil.

  1. Spurs to publicly disclosed scenario planning

In the EU, legal requirements are driving firms to reduce their greenhouse gas emissions and to tell would-be investors and others about their plans for doing so. Those requirements include carbon pricing (at both the EU and, in some instances, national level), as well as of financial reporting (again, by the EU and also some national governments). In the US, where the Trump Administration is working diligently, if not always effectively, to erase climate change from the federal government’s regulatory agenda, shareholder resolutions are a key spur for climate scenario planning. The one that prompted Exxon’s 2018 report is characteristic: it was proposed jointly by the New York Common Retirement Fund and Church of England, and supported by public pension funds in California, Florida, Texas, and Canada, as well as by BlackRock and Vanguard, the country’s #1 and #2 asset management firms. It is thus also an example of the influence of large, private sector asset managers. A recent report from The 50/50 Climate Project highlights the influence wielded by the largest financial asset manager firms, noting that while some, like Morgan Stanley, consistently push for greater climate-related disclosure, the largest firms (Morgan Stanley is only ranked #24 by size) do so just a fraction of the time. According to the report, the proxy votes of firms like BlackRock and Vanguard have determined the outcome of disclosure proposals in both directions and will likely continue to do so.

A less direct but still significant impetus for US firms to publish analyses of their sensitivity to climate policy is the fact that increasingly ambitious climate policies are either being adopted or discussed in ways that hint at impending adoption. In particular, the quietly smoldering discussion of how to assign a price to carbon emissions, whether at the state or federal level, has persisted and even gathered steam notwithstanding the adamant opposition of a Republican-controlled Congress and the Trump Administration to such policies. According to their public statements, many of the firms that would be exposed to carbon pricing seem to support such a step for the sake of regulatory certainty and what Exxon, for one, calls “efficiency” and “lowest societal cost.”

Interwoven with these trends of shareholder pressure and anticipation of more demanding public policy is an increasing level of subscription to voluntary emissions disclosure platforms like CDP and The Climate Registry. These facilitate benchmarking among firms and promote public (and investor) awareness of different entities’ approaches to emissions and climate change.

  1. Uses and likely evolution of corporate climate scenario reports

First and foremost, the reports considered here have been crafted to reassure investors of the continued profitability of firms that rely heavily – or entirely – on selling fossil fuels or providing services that currently rely on fossil fuels. Should policies create or tighten limits on fossil fuel development, greenhouse gas emissions and/or emitting activities, these reports will provide a baseline for several purposes. They will help investors and the public to assess a firm’s response to the policy change. They will invite questions about what sources of information the firm relies on and also whether the firm adjusts as new information comes to light. (The volume of methane emitted by natural gas extraction, transmission, and distribution is a key example of this: as improved understanding follows from ongoing study of fugitive methane emissions and their impacts, will firms that profess the virtues of natural gas over coal stay that particular course?) They will also help to assess the credibility of a firm’s projections. Exxon and Chevron, for instance, have both been conspicuously bullish on persistent global demand for oil and gas notwithstanding climate policies. Should changes to policy and technology in the US and elsewhere undermine the assumptions that inform those projections, future reports will need to deploy new explanations for why Exxon and Chevron expect to remain profitable.

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