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Over the course of the past five years, the use of
environmental, social and governance (ESG) metrics and targets has
moved in from the periphery to the mainstream of many investment
strategies. The prioritization of ESG concerns has also coincided
with a marked intensification in the social and political pressure
for climate change action since the 2015 Paris Agreement. Investors
are looking more closely at operational indicators to better
understand company performance in reducing emissions. In response,
companies have had to put the management and disclosure of
indicators relating to emissions - including consideration of
scenarios consistent with the Paris Agreement goals, internal
carbon price assumptions, and greenhouse gas (GHG) emissions and/or
intensity metrics - at the center of their ESG strategies.
The primary reason for including performance indicators, such as
emission intensity, in corporate reporting is to help stakeholders
assess a company's general exposure to climate-related issues, to
demonstrate progress in developing or adapting their strategies for
those issues, and to inform comparative assessments of regulatory
and reputation risks. Yet, emissions data is meaningful only when
and if equivalent metrics are employed.
This equivalence is not evident across the energy industry
today. IHS Markit tracks environmental data published by oil and
gas producers. This work highlights a rapid proliferation of
performance indicators since 2015. It also highlights that the
quality and variability of emissions estimates is extensive.
In a recent research initiative involving the Energy and Climate
Scenarios and Oil Markets, Midstream and Downstream teams, the
upstream emissions intensities of a selection of the 10 largest oil
and gas companies by output and market capitalization were
analyzed. In this analysis, the 10 companies studied employ 9
different methodologies. The points of divergence include:
· System Boundaries. Companies used different
boundaries to report upstream emission intensities, with evidence
of direct and indirect emissions, Scope 1 and 2 respectively,
evident in varying degrees. The definition of upstream activities
was also rarely specified in the company reporting reviewed. This
makes it impossible to assess which specific activities are
included in emission estimation and/or reporting.
· Units of measurement. The computation of
production volumes can also be based on different units of
measurement; each equally valid on their own, but nevertheless
complicating comparisons. Examples include, kgCO2e per barrel of
oil, kg/CO2e per barrel of refined product, gCO2e/megajoule.
Companies are also making different choices around Global Warming
Potential values.
· Ownership. Oil and gas companies routinely
report operated and/or equity-based information. In setting the
relevant boundary for GHG emissions disclosure, companies consider
the approach best suited to their business activities. Given the
complex ownership structures of the oil and gas industry, the
choice of the emission counting approach can have substantial
consequences for a company's GHG intensity.
As a result of this variance, comparison of the GHG emissions
intensity published by companies could result in incorrect
conclusions. Different companies employ different methods and
definitions in the development of their emissions metrics. The lack
of standardization in emissions intensity accounting practices
and/or reporting does not allow for meaningful peer comparison at
present. This implies ESG investors looking at the oil and gas
sector are unlikely to make reliable "apples to apples"
comparisons. It follows that ratings or rankings of companies based
on different methodologies are not "apples to apples"
assessments.
These differences might appear subtle but choices in this area
can affect the final assessment of a company's emissions footprint
and they complicate making comparisons. IHS Markit is advancing an
initiative in this area in an attempt to develop industry best
practices.
