Author: Mathias Lund Larsen

Analysis of international fossil fuel companies

This article provides an analysis of international cases of fossil fuel companies. It includes examples of companies that so far either been either successful (Engie & Ørsted), moderately successful (BHP Billiton, Eni, Shell, and BP), or unsuccessful (ExxonMobil, an ONGC). The purpose is to look into all the strategies applies by these companies to identify the best and worst practices to understand how the lessons can be used in a unique Chinese context. The article provides analysis of eight companies. This part measures the Paris alignment of the case companies’ business models over time, showing trends in green transition in practice and strategy.

Case companies included in the study:

•     ENGIE

•     Ørsted

•     BHP Billiton

•     ENI

•     Royal Dutch Shell

•     BP

•     ExxonMobil

•     ONGC

Sustainability trend in international fossil fuel companies

Across the global fossil fuel industry, performance towards decarbonization is misaligned with the requirements of the Paris Agreement. According to a survey conducted by Oxford University in 2019 across 132 of the world’s largest listed energy companies, while 54% acknowledge the aims of the Paris agreement and 39 support such aims, only 20% acknowledge the need to reach global net zero-emission and 10% have made commitments to reach zero emissions.[1] In terms of investments, this translates into merely USD 3.4 billion of renewables investment across the world’s 24 largest publicly listed oil companies, which is 1.3% of USD 260 billion of total capital expenditure (CAPEX).[2] Though these numbers have increased since 2019 as shown in each individual case, the numbers nowhere near further investments in fossil fuels. Comparing these companies with each other, figure 1 below provides a ranking based on TCFD’s framework composed of transition risks, physical risks, transition opportunities, and climate governance and strategy. As this uses a ranking methodology, it does not mean that the best ranked are necessarily Paris aligned. It merely means that they are the best in class amongst the 24 companies in the oil and gas industry. Also in this case, progress has been made since the launch of the report in 2018, though the cases below that progress is not fast enough.

Furthermore, figure 2 shows that the majority of  CAPEX is outside the scope of the Paris agreement. The scenarios used here are the 1.7-1.8C Sustainable Development Scenario (SDS) and the 1.6C Beyond 2 Degrees Scenario (B2DS) by the IEA, as well as the IEA’s 2.7C New Policies Scenario (NPS). While comparable data does not exist for gas and coal, the trend is the same across the fossil fuel industry as a whole. Despite such low ambitions and poor performance in the industry, a number of companies have been successful or moderately successful in aligning their business model with the Paris agreement, as the cases below illustrate.

ENGIE

Development of business model

Formed in 2008 through a merger between Gaz de France and Suez, ENGIE is in the process of transforming from a fossil fuel company to a low-carbon company. Renewables made up 27% of power production capacity in 2018, and coal assets have been reduced by 67% since 2015. Simultaneously, with 2019-2021 CAPEX of USD 13-14 billion for renewables and client solutions, the clean part of ENGIE’s energy mix continues to expand.[5] Since 2015 when the company’s low-carbon transition began, the company’s official goal is to be a leader in zero-carbon transition, working with clients throughout the supply chain. Based on both concrete performance and the company’s strategy, it stands out as a successful case of driving a green transition of a fossil fuel company. Although the company has far to go, the pace of transition is aligned with the reduction requirements of the Paris agreement.

External exposure to green finance policies and initiatives

As ENGIE’s assets span all continents, its business is exposed to a broad array of green finance policies. Yet, with 75% in Europe and 40% in France, these geographies have been most impactful. A key policy in the EU is the emissions trading scheme (ETS) covers much of ENGIE’s business, both its own power generation and emissions from industrial clients. With an EU ETS carbon price of EUR 7 in 2015, only growing from that level in 2018-2019 to EUR 40 in 2021[6], it cannot be mentioned as a key factor of pushing ENGIE’s policy shift in 2015, though it may be a key factor today. Another green finance policy with a direct impact on ENGIE is Article 173 in France, agreed in 2015 and implemented in 2016, requiring large investors to disclose their climate exposure and strategy, covering many of ENGIE’s shareholders. Based on the EU Directive 2014/95/EU, Engie has also been made to disclose their own social and environmental performance.[7] In terms of subsidies, with approximately EUR 55 billion in fossil fuel subsidies approximately the same for renewables in the EU, subsidies per kw/h have been higher for renewables providing decarbonization incentives for companies like ENGIE. These subsidy proportions have been similar in France, with EUR 7.8 billion subsidies for fossil fuels and EUR 6.08 billion for renewables.[8] Furthermore, while ENGIE is not exposed to mandatory environmental insurance policies, the EU’s Environmental Liability Directive includes a ‘polluter pays’ principle. This in itself provides a strong incentive to take insurance against such risks for companies such as ENGIE with exposure throughout the supply chain.

Internal usage of green finance tools

In terms of using green finance instruments, ENGIE has been involved with green bonds, green loans, and risk management and reporting. As the world’s largest corporate green bond issuer, ENGIE has issued seven rounds of green bonds since 2014, totaling USD 10.5 billion by the end of 2020[9]^,[10]. This has been a key strategy of signaling to investors that the company is at the forefront of fossil fuel companies supporting a zero-carbon transition. Engie has also taken its first green loan in December 2019 to finance 721MW wind and solar projects in Mexico in a joint venture with Tokyo Gas Company, though no details on the loan size have been disclosed.[11] Furthermore, ENGIE is a signatory to the TCFD and has set up an internal task force to ensure reporting is in line with TCFD recommendations. It also reports on sustainability to the UN Global Compact inspired by the framework of the Global Reporting Initiative, as well as completed the Carbon Disclosure Project’s annual questionnaire. In terms of working with green funds, Engie has been supported by the Green Climate Fund to invest in targeted companies with the purpose of expanding off-grid solar in Africa.[12] Lastly, Engie has carried out acquisitions of green companies, such as its acquisition of a majority stake in the California-based battery-storage company Green Charge Networks.[13]

As an important player in the green bond market and by getting involved in the nascent green loan market, ENGIE is unquestionably very active in actively using sustainable finance instruments to raise capital. Being active in most relevant, sustainable finance risk reporting and management initiatives, ENGIE performs beyond most fossil fuel companies on the pace and comprehensiveness of its transition.

Ørsted

Development of business model

In 2009, the company decided to radically transform its fossil fuel business and rely mainly on green energy. Back then, they expected to derive 85% of their energy from renewables by 2040, compared to 15% in 2006. To achieve this vision, in the last ten years, the company divested its oil and gas business, reducing carbon and coal consumption and investing in green energy technologies. They set long-term goals to meet the requirement of the Paris agreement by 2050 and medium-term goals that drive Ørsted’s actions in the short term. Every segment of their supply was equipped with ad-hoc strategies and targets to cut emissions: Scope 1 (Direct operational emissions) and Scope 2 (Indirect operational emissions) GHG emissions will be reduced by at least 98% by 2025, compared to the 2006 baseline, while Scope 3 (Supply chain indirect emissions) GHG emissions will be cut by 50% by 2023. Carbon neutrality of phases 1 – 3 is set to be accomplished by 2040.

Many of the goals set by Ørsted were met even before the target deadline. In 2016 the price of offshore wind generation was already lowered by 60% compared to the price of 2012, and in 2017, coal and carbon consumptions were reduced by 91% and 86%, respectively, compared to 2006 levels, in line with the plan to entirely phase-out coal by 2023. Thanks to its outstanding performance, in 2019, Ørsted was awarded by the Global 100 index as the most sustainable company overall in the world[14].

External exposure to green finance policies and initiatives

In 2018/2019, the Denmark-based company expanded its business overseas, starting operations in the US and in Taiwan. However, most of Ørsted activity is still under the influence of the EU financial and environmental regulations. The direct emissions that occur at Ørsted facilities are thus subject to the EU ETS, requiring the company to hold a permit[15]. At the national level, Denmark is considered one of the climate leaders in Europe for its efficiency in implementing and enforcing EU environmental regulations. In terms of subsidies, in 2018, the government of Denmark released an agreement to facilitate the transformation of the country into a low carbon society by covering its electricity consumption with renewable energy and completely phase out coal by 2030[16]. The agreement includes several financial initiatives, among which the immediate relaxation of electricity taxes and several funds dedicated to enhancing the use of renewable energy (EUR 54 million in 2025 and EUR 67 million annually after 2026). The measures also aim at expanding the production of biogas and organic biogas (EUR 537 million) and boosting climate research (EUR 134 million by 2024). For what concerns ESG data disclosure, in 2014 Ørsted was directly impacted by the EU Directive 2014/95/EU on the disclosure of non-financial information, that was implemented in Denmark by way of article 99a of the Danish Financial Statements Act. Although non-binding, the Guidelines require the disclosure of climate information, proposals of policies and business plans, and the identification of risks and of key performance indicators[17].

Internal usage of green finance tools

2019 has been a promising year for the green financial sector. In fact, in the green bond newsletter, Ørsted announced that “where possible, all our future financing will be in a green form.” The plan seems to match the actions of the company that, in the last three years, has used a wide range of green financial instruments. In the biennium 2018-2019, Ørsted implemented the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), assessing the impact of climate change on their business and introducing Key Performance Indicators (KPI) for the Executive Board (CEO and CFO).  This included a “ cash-based incentive scheme [for] green energy and carbon-emission reductions” and conducting scenario analysis to assess the resilience of their power plants.

In 2019, the company expanded its business in Asia, launching its first green loan facility in Taiwan to finance the offshore wind industry. 15 Taiwanese banks[18] joined the NTD25 billion facility that will finance the Great Changhua project, which will generate a capacity of 900MW, “enough to supply around 1 million Taiwanese households with green power”[19]. In 2018, Ørsted had also expanded its business through the acquisition of the US firm Lincoln Clean Energy (LCE), acquired for $580 million (EUR500 million). LCE is currently the only onshore wind plant of the company[20]. Though it is not Ørsted’s own fund, the company has been working with the EU Hydrogen Fund, receiving support for green hydrogen[21]. In 2017, 2018, and 2019 the company made extensive use of green bonds, and by January 2020, a total of DKK 17.9 million green bond proceeds had been allocated to seven offshore wind projects, avoiding 2.1 million tons CO₂ emissions. The allocation of the proceeds of the green bonds is decided every year in January by the Sustainability Committee, and the emission of green bonds as well as the creating of other financial instruments is regulated by the ‘green finance framework” created by Ørsted[22].

BHP Billiton

Development of business model

Known as one of the world’s number one mining companies, BHP Billiton started its environmental data disclosure and emission cut efforts in the 1990s, setting new goals every year, such as emission targets and carbon price systems. In the 2014 Climate Change Position Statement[23], the company declared its compliance with the Intergovernmental Panel on Climate Change (IPCC) assessment of climate change, engaging to reduce its operational greenhouse gas (GHG) emissions, invest in low emissions technologies and use its political influence in favor of environmental regulations worldwide. BHP is currently working to keep Scope 1 and 2 GHG emissions in FY2022 at or below FY2017 levels[24]while achieving a net-zero GHG operational emissions “in the latter half of this century.” To meet its objectives, BHP started looking for alternatives to remove fossil fuels and replace them with renewables. After leaving the World Coal Association (WCA) in 2018, in 2019, the company announced the possible divestment of its thermal coal assets, which only accounted for 4% of the company’s earnings in 2019 and only 1% of its EBITDA in the same year[25]. To replace the fossil fuel business, BHP chief executive, Andrew Mackenzie, is bidding on low emissions technologies (LETs). In 2019, the company announced a US$ 400 million investment plan (from FY2020 to FY 2025) to advance green energy technologies and reduce the company’s GHG emission from Scope 1 to 3. During FY2019, BHP has already financed various concrete projects to offset its CO₂ emissions, like the air capture mechanism developed by Carbon Engineering Ltd (US$ 6 million) and the CO2CRC subsurface storage technology (US$ 5 million). From 2017 to 2019, the Transition Pathway Initiative (TPI) evaluated BHP as one of the best companies for GHG management and environmental risk assessment, awarding the company with a “level 4” ranking[26]. However, while the company is trying to reduce its emissions, in the FY 2017/18, the group was still responsible for 16.5m tons carbon dioxide-equivalent emissions and BHP’s long-term strategy to achieve net-zero operational emissions in the “latter half of the century” exceeds the time limit set by the Paris Agreement. The data of FY2019 also show the importance of reducing Scope 3 emissions that in 2019 were 40 times bigger[27] than Scope 1 and Scope 2 altogether[28]. Moreover, BHP’s strategy of reaching operational net-zero emissions in the “latter half of this century”[29] seems to be inconsistent with the Paris Agreement target for 2050.

External exposure to green finance policies and initiatives

While BHP Billiton is a multinational energy company operating worldwide, its financial activities are tied to the Australian jurisdiction, where the HQ is registered. In 2016, BHP was impacted by the Australian Safeguard Mechanism, which set a limit to large GHG emitting companies to ensure that facilities with Scope 1 emissions greater than 100,000 tCO₂-e kept their direct emissions below a certain baseline[30]. As part of the Australian Government’s Emissions Reduction Fund (ERF), the Safeguard Mechanism is administered by the Clean Energy Regulator through the existing National Greenhouse and Energy Reporting (NGER) scheme[31]. However, in 2019 the efficiency of the ERF was questioned after “the first post-election auction from the fund dedicated less than $1m to just three emissions reduction projects”[32] corresponding to 0.01% of Australia’s GHG emissions. The Safeguard Mechanism has also been blamed for inconsistency last February, after BHP was allowed to extend the carbon emission limit of 13% in three years. The baseline was originally set at FY2017 levels until 2022, and, according to The Guardian, a 13% increase in emissions for every BHP facility would result in an increase in national emissions of 425,689 tons a year. The new target was also exceeded at two sites, triggering a fine that was paid by BHP through the purchase and submission of 81,000 carbon credits[33].

In 2019, a study led by the Sydney University of Technology highlighted the lack of a centralized plan for sustainable finance comparable to the 2018 EU Action Plan in Australia, calling for clarification and enforcement of investors’ duties and disclosure requirements [34]. Between 2007 and 2014, the political uncertainty surrounding environmental laws determined the failure of two attempts to establish a cap-and-trade emissions trading scheme in Australia. The first one, the Carbon Pollution Reduction Scheme (CPRS), was launched in 2007 by the Rudd government but never entered into force after being rejected twice by the Senate in 2008. A second attempt was made in 2010 with the Carbon Pricing Mechanism (CPM) launched by the Gillard government as part of the Clean Energy Futures Package (CEF) that was repealed in 2014 by the Abbott government[35]. While the recent wildfires showed the great threat posed by climate change in the region, the Australian government has been reluctant to take decisive action, and environmental laws have been implemented inconsistently depending on the parties in charge, discouraging fossil fuels giants from embracing a decarbonization path[36]. If the response of the government has been inadequate, major incentives to reduce BHP’s carbon footprint might come from financial institutions that are dumping their shares in pollutant industries. With Sweden’s central bank dumping its holdings of Australian Bonds in 2019 and BlackRock’s decision of unloading more than half a billion dollars in thermal coal shares from its portfolio, other major financial institutions might follow this trend, threatening the financial interests of fossil fuel companies like BHP[37].

Internal usage of green finance tools

As a consequence of the Australian government’s failure to create incentives for companies to develop a comprehensive green financial plan, the BHP strategy to achieve emissions targets has mainly relied on green investments in LETs. However, the company has recently started experimenting with some green financial tools in association with international organizations. In terms of disclosure, BHP has been one of the first companies to align with TCFD recommendations for climate-related financial risk disclosure that are made available by the company throughout their annual reports.

In 2016, in collaboration with the International Finance Corporation (IFC) and Conservation International (IC), BHP supported the emission of a first-of-its-kind US$152 million Forest Bond (issued by IFC) to finance the United Nations REDD+ program to reduce emissions from deforestation. Investors can choose between a cash or carbon credit coupon, and when coupon payment is due, IFC uses carbon credits bought from REDD+ to make payments. Investors can retire the credits to offset corporate greenhouse gas emissions or sell them on the carbon market. BHP provides a price support mechanism of US12$ million “to assure that the project will sell a predefined minimum quantity of verified carbon units (VCUs)” until the bond matures[38]. Aiming at expanding the scope of the initiative, in 2018, in partnership with CI and Baker McKenzie, BHP launched the Finance for Forests (F4F) initiative “to help encourage replication of these investments and the exploration of other innovative private finance tools.” In 2019, BHP launched Finance for Forests 2.0 (F4F2.0) to keep channeling private investments in REDD+ through green financial tools[39].

Extending the use of green finance to other instruments (such as green bonds) might represent a good strategy to meet Paris Agreement target and develop pioneering strategies for other fossil fuel companies in the area, supplying to the lack of adequate policies.  This is particularly important as a mining company as the industry has no climate champions

ENI

Development of business model

To contribute to the Sustainable Development Goals (SDGs), Eni launched a Long-Term Strategic Plan to 2050 and a medium-term Action Plan 2020-2023 to face the challenges posed by the world increasing energy demand and climate change-related risks. The business model proposed by Eni rests on the opportunities offered by innovative technologies and digitalization processes to support the growth of developing countries while achieving carbon neutrality in the long term. With its presence in more than 60 countries, Eni has launched several ad-hoc programs to cut emissions deriving from deforestation, break down water pollution and diversify the energy mix of developing countries.

Since 2003, the Italian company took part in the CDP Climate Change questionnaire, obtaining an A- rating for the third year in 2019 as a reward for its efforts to abate emissions[40]. However, when in March, Eni presented its long and medium-term strategies for 2023 and 2050, criticism was raised as the plan revealed the incompatibility of the company’s financial objectives with the targets set by the Italian government to meet the Paris Agreement requirements. According to the plan, in the medium-term, Eni will invest EUR 32 billion in fossil fuels and EUR 2,6 billion in renewables. The long-term plan instead suggests that before 2050 Eni will reduce its GHG emissions by 80%, increasing the renewable mix by 55 GW (while the worldwide renewable energy increase in 2018 was 171 GW)[41].

External exposure to green finance policies and initiatives

As any other European energy company, Eni is subject to the EU ETS regulations, enforced in Italy since 2013 with the Legislative Decree 111/2013[42]. In 2018, more than 50% of Eni direct emissions were subject to carbon pricing mechanisms. In 2019, the company purchased approximately €290 million allowances, corresponding to 11.6 million tons of CO₂ emissions[43]. For 2020, the amount of allowances is expected to increase to 16 million due to stricter regulations of the European ETS mechanism. The price for CO₂ emissions is likely going to experience an additional increase during the period 2021-2023, as a consequence of the 2018 Market Stability Reserve renewal act that reinforced the European ETS mechanism[44].

Concerning non-financial information (NFI), based on the EU Directive 2014/95/EU, Eni releases data in accordance with the Italian Legislative Decree 254/2016 and the “Sustainability Reporting Standards” of the Global Reporting Initiative (GRI). The risk management section of Art. 3.1 contained in the Legislative Decree 254/2016 regulates the disclosure of environmental risk management information and carbon neutrality[45]. In line with the EU environmental objectives and the state aid rules, the European Commission periodically approves subsidies to support electricity production from renewable sources. The last financial support scheme was approved in 2019, and it is valid until 2021, with a budget of EUR 5.4 billion that is beneficial for Italian companies as a premium on top of the market price for clean energy. The scheme pushes energy companies to divest traditional polluting businesses to invest in renewable energy assets[46].

Internal usage of green finance tools

In order to comply with the Italian law on NFI, Eni has voluntarily become a member of the Task Force on Climate-related Financial Disclosures (TCFD) since its foundation, representing a milestone for the history of information disclosure of oil and gas business.[47] Apart from NFI disclosure and energy mix diversification, the company has turned to green finance to boost the productivity of its green investments[48]. In association with international organizations and other energy companies around the world, Eni is promoting public-private partnerships and other financial tools to channel private funds into sustainable projects. As for BHP Billiton, Eni started a collaboration with the REDD+ to support the Luangwa Community Forests Project (LCFP) in Zambia. The project, launched in 2014, “is managed by BioCarbon Partners in collaboration with the Zambian government and local communities.” It is one of the biggest REDD+ projects in Africa, and it is the first one to gain the “Triple Gold” Standard Certification for its “outstanding social and environmental impact[49].”

Eni committed to acquire certified carbon credits under Verified Carbon Standard (VCS) and Climate Community and Biodiversity Standard (CCB) standards until 2038 to guarantee “the long-term success of this REDD+ project.” As a founding member of the Oil and Gas Climate Investment (OGCI) project, Eni is also a co-founder of the US$1 billion-plus fund created by OGCI member companies to develop and scale-up technologies and business models to fight climate change[50]. To increase the share of renewables in the energy mix of the company, in 2019, Eni signed an agreement with L&B Capital to acquire 70% of Evolvere S.p.A., a company leader in the Italian photovoltaic sector with 11,000 PV plants[51].

In late 2020 Eni restructured EUR 4,35 billion of existing debt into a sustainability-linked loan tied to the company’s performance towards the SDGs[52]. According to J. P. Morgan, the next step for Eni might be the issue of green bonds. In fact, the energy company has lagged behind other Italian competitors in the energy market – such as Enel and A2A – that released green bonds in the European markets. According to J. P. Morgan, the reasons behind Eni’s underperformance in the green bonds market might be found in the geopolitical instability threatening the energy sector and in the scarce performance of the company in 2018[53].

Royal Dutch Shell

Development of business model

As one of the world’s largest companies and with more than 100 years of history, the low-carbon transition of Shell’s business model has been under scrutiny for decades. From an oil-based company, Shell has transitioned to focus more on gas and is today the world’s largest provider of liquified natural gas. While gas is less carbon-intensive than coal and oil, the Paris Agreement requires a reduction to net-zero, meaning that Shell needs to further reduce emissions to be climate-compatible. As part of an increased climate awareness in the company, renewable energy investments have been increasing over the past years. For example, Shell told investors in 2017 that they would invest USD 1-2 billion a year up to 2020 in clean energy. However, as of the end of 2019, less than USD 3 billion has been spent, while spending USD 120 billion in fossil fuel projects.[54] Furthermore, Shell spends almost USD 50m a year lobbying to delay, control, or block policies to tackle climate change.[55]

While emission reduction commitments have improved over the last years, most lately with an announcement in April 2020 and continuous clarified since committing to be a  net-zero energy company by 2050. However, clarity on what that means and how it will be done remains. While cutting oil production, Shell still aims to expand its gas business by 20%, and while the company can ensure its internal, scope 1 and 2, emission get to net zero, they seemingly don’t account for when their customers burn the fuel, i.e., scope 3[56]. Shell promises such scope 3 emissions will be reduced by 65% by 2050.[57] This is problematic as this is the majority of Shell’s emissions

Additionally, Shell has been publishing energy scenario outlooks since the 70s, all scenarios concluding that the global 2100 energy mix would be fossil fuel-driven. However, the 2020 version of the outlook includes a new scenario that is Paris aligned, suggesting that while difficult, it is technically possible to do a global low carbon transition. Still, in this scenario, while fossil fuel usage is reduced, it remains substantial, and net-zero is in turn reached by carbon sinks such as carbon capture and storage.[58] As an influential publication and as based on Shell’s internal research, this suggests a shift may be happening in the organization as a whole. In total, despite rhetoric suggesting increasing low-carbon ambitions, this has not translated into practice, and consequently, Shell is so far unsuccessful in transitioning to become a green energy company.

External exposure to green finance policies and initiatives

As a global company, only a quarter of Shell’s revenue stems from Europe and has been subject to the EU ETS. That, combined with historically low prices in the EU ETS, has limited its effect on Shell. Still, as prices have increased substantially over the last years, it may change in the future. In fact, estimates suggest that the price may quadruple by 2030, in which case that would incentivize all fossil companies in Europe to speed up their low-carbon transition.[59] With fossil fuel subsidies in the EU at a similar level as with renewable energy subsidies, and while the subsidy is greater per kw/h for renewables, this has shown to be an inadequate incentive from Shell’s perspective. In particular due to the stability of fossil fuel subsidies and fluctuations in renewable subsidies. In the US, where Shell has a quarter of their business, they’ve received USD 2 billion in subsidies, including tax breaks since 2003. Divestment campaigns have also impacted Shell over the last years. For example, its 2017 annual report mentions that certain groups are pressuring investors to divest from fossil fuels and that this could have a diverse effect on the price of securities. According to 305.org, similar pressures from protests, litigation, and regulatory efforts will only increase over the coming years, putting increasing pressure on Shell to change its business model. Furthermore, as the positive link between ESG and financial performance becomes clearer, companies like Sustainalytics have reduced Shell’s rating resulting in the stock being taken out of a number of indexes with minimum ESG scores. Providing information for such ratings, Shell must mandatorily disclose social and environmental performance under EU Directive 2014/95/EU.

Internal usage of green finance tools

In terms of the active usage of green finance instruments by Shell, the company has been engaging on a number of fronts. For example, Shell officially supports the TCFD work and has published the Shell Energy Transition Report in response.[60] Furthermore, Shell has taken on the world’s so far largest sustainability-linked loan at USD 10 billion, tied to reducing the company’s carbon footprint. The loan was issued by a syndicate of 25 banks, led by Bank of America and Barclays.[61] So far, no green bonds have been issued. However, the carbon reduction requirement is set at Shell’s own ambition of reducing GHG intensity in products by 30% by 2035 and 65% by 2050 are not nearly enough to be aligned with the Paris Agreement. Though insufficient, Shell’s reduction commitments have increased over time, in part due to pressure from shareholders such as through Climate Action 100+.[62]

BP

Development of business model

BP is one of the world’s biggest oil and gas companies with a vertically integrated supply chain. This means that the company owns the assets all the way from exploration to customer sales. While historically reluctant to change business model to address climate change, BP’s strategy has undergone substantial change with the new CEO, Bernard Looney, in office since early 2020. BP now commits to net-zero by 2050 both by its operations and from consumers burning its fuel. It further promises to reduce oil production by 40% by 2030. These targets are much more ambitious than the most comparable competitor, Shell, which doesn’t include scope 3 or a promise to reduce fossil fuel production[63]. BP further promises to increase low-carbon spending from USD 500 million a year today to USD 5 billion by 2030.

Though these are impressive goals, they are not necessarily enough to be compatible with the Paris Agreement. For example, BP’s investments of 2019 were USD 500-750m in low-carbon and USD 14 billion in oil and gas. As they don’t promise to reduce fossil fuel commitments, this has given them room to increase emissions even with a 40% reduction target by 2030 since BP could simply sell of assets after developing them. Furthermore, BP does not promise to have no fossil fuel business but rather to be net-zero, implying a substantial amount of negative emissions such as from CSS. Without clarifying these issues in its strategy, BP is still not ambitious enough in its promises. Rather than being subject to divestment, BP is, in fact, divesting from fossil fuel assets itself as part of a promise to get rid of USD 25 billion of fossil fuel assets by 2025. For example, in February 2021, BP sold its USD 2,6 billion stake in a gas project in Oman to a Thai energy company[64].

External exposure to green finance policies and initiatives

In terms of subsidies in the UK, BP has received funding for both its fossil fuel business, though substantially more for the latter. This is because the UK gives the most fossil fuel subsidies in Europe, namely GBP 12 billion for fossil fuels and GDP 8,3 billion for renewables[65]. As BP is still primarily a fossil fuel company, this means they have mostly received fossil fuel subsidies. With substantial business in the US, BP has also received substantial fossil fuel subsidies there, similar to the situation for ExxonMobil. BP has further been exposed to the EU carbon market as they have substantial business in the EU even after the UK left the block. The UK may eventually decide to stay part of the EU ETS, which is being discussed in the UK and negotiated with the EU in 2021[66].

Despite strategy promises, BP faces pressure from ESG rating agencies who continue to see the company as a high-risk asset. For example, Sustainalytics labels the company as ‘high risk,’ and though it performs amongst at top 25% of the oil and gas producers category, the company is only in the bottom 15% of all companies[67]. This makes it difficult for some investors to hold and excludes the company from most ESG funds. With substantial activities in the EU and as the UK only recently left the union, BP has mandatorily disclosed social and environmental performance under EU Directive 2014/95/EU.

Internal usage of green finance tools

BP has been exposed to shareholder activism for more than a decade, which has arguably had a role to play in its recently increasing climate ambitions. Today, the pressure continues as sustainable investors use the general meeting to push for more concrete actions in BPs strategy[68]. Though BP has not yet issued green bonds, its increasing ambition has caused speculation that such as issue is forthcoming as comparable companies in the European energy industry are already issuing. Similarly, BP has not received any labeled green loans. As opposed to the inactivity on green bonds and loans, BP has invested USD 70 million in a green equity fund in India. Although the amount is small compared to the green investment ambition of BP, it is a promising sign that could form the basis for scaling up similar investments in other countries and regions.

In terms of green mergers and acquisitions, BPs has made explicit that its strategy is to form partnerships in projects and technologies rather than expand in green sectors through acquisitions[69].  An example can be seen in the recent green hydrogen partnership with Ørsted, for which the two companies applied for EU funding from the Innovation Fund[70]. Lastly, BP is an active supporter of TCFD and discloses metrics recommended for energy companies[71].

ExxonMobil

Development of business model

Headquartered in Irving, Texas, USA, ExxonMobil is one of the world’s largest oil companies as well as the 9^th largest company in the world. While historically working against taking action on climate change and even funding groups questioning the science behind climate change, ExxonMobil today officially supports reaching the goals of the Paris agreement. That being said, the current trajectory of business model development in the company does not reflect that support. For example, while only 1/5 of currently known oil reserves can be used while meeting the Paris Agreement, ExxonMobil continues to expand oil exploration, and amongst its main achievements listed in its 2019 annual report are six deep-water oil discoveries, including the largest in the industry.[72] Concretely speaking, the company to increase oil production by 20% by 2025.[73]

As an indication of the business model development, ExxonMobil’s future energy mix scenarios include continued expansion of both oil and gas with a slight reduction in coal consumption, which the report acknowledges will not meet the Paris Agreement’s 2-degree warming scenario.[74] Contrary to its official support of the Paris Agreement, and in a similar fashion to Shell as mentioned above, ExxonMobil spends more the USD 40 million a year in lobbying against taking policy action on fighting climate change.[75]

At the same time, ExxonMobil has launched a number of initiatives to reduce emissions. For example, the company has spent USD 10 billion since 2000 to develop lower-emission technologies such as CCS and promised to spend USD 100 million in US government research laboratories to developed emission-reducing technologies.[76] The company is simultaneously one of the world’s largest buyers of electricity from renewable energy sources. Still, the companies lack long-term ambitious emission reduction targets. Its only commitments, as announced in 2019, are to reduce methane emissions from operations by 15 % and flaring by 25 % by 2020 compared to 2016 levels, as well as reducing the GHG intensity at Canadian oil sands facilities by 10 % by 2023 compared to 2016 levels.

External exposure to green finance policies and initiatives

With the majority of its business in North America, ExxonMobil has not been exposed to carbon taxes on its products. Only indirectly from lower demand for oil products in their business in the EU. Nor have they been exposed to mandatory environmental information disclosure policies for most operations. While not being exposed to a carbon tax, ExxonMobil simultaneously receives as much as USD 1 billion per year in subsidies in the US alone[77], providing a clear incentive to continue its business as usual. Pushing in the other direction, divestment has hit ExxonMobil hard, with, for example, Goldman Sachs recommending to sell the stock and the London Pensions Fund Authority divesting.

Internal usage of green finance tools

In terms of disclosure, ExxonMobil’s Energy & Carbon Summary 2020 report is aligned with the core elements of TCFD but lack details on how Exxon would mitigate both transitional and physical climate risks.[78] While some shareholders have promoted ExxonMobil to report on climate risks, but such resolutions have continuously been defeated at shareholder meetings. This is in contrast to both Shell and BP, with 99% of BP’s shareholders calling for the company to meet the Paris Agreement.[79] However, this has shown signs of changing by late 2020 as shareholders pushed through a plan to reduce greenhouse gas emissions.[80] In terms of sustainable financing solutions, ExxonMobil has not taken use of any bonds, loans, insurance, or other tools available, providing a clear indication that the company so far does not see green financing as useful to its business model.

Oil and Natural Gas Corporation (ONGC)

Development of Business Model

ONGC is a state-own company founded in 1956 by the government of India. The company currently produces 75% of India’s crude oil and 80% of its natural gas, while its international subsidiary, ONGC Videsh, has operations in 19 countries around the world and multiple ongoing exploration projects^[81].

As emphasized by the annual reports released by the company, ONGC has covered the country’s growing energy demand with an increasing number of new drills and exploration projects. However, though the company is claiming its concerns for climate change, it seems that little effort has been put into greening its operations and reducing GHG emissions. In the 2019 Sustainability Report, the company has declared full support for the targets set by the Paris Agreement, but no concrete strategy has been defined to cut emissions^[82]. In the last years, ONGC has also tried to diversify its energy sources with solar and wind plants, but in FY 2019, the share of renewable energy of the company accounted for only 0.27% of the total energy consumption^[83]. As part of a vague strategy to reduce emissions, the company has also invested in new technologies to reduce emissions intensity in their plants while planning to increase the share of natural gas and decrease the use of other fossil fuels. However, according to Moody’s, the company’s profit will still be driven by oil consumption in the coming years^[84]. In terms of reduction targets, ONGC is theoretically aligned with the government of India that aims at reducing “its energy-emissions intensity by 33-35 % by 2030 and raise the share of non-fossil fuels in its electricity mix to more than 40 % by 2030”^[85]. In reality, the company has not planned any Paris-aligned strategy for GHG reduction.

External exposure to green finance policies and initiatives

Environmental regulations in India are not very strict or non-existent. One of the major problems is that the level of implementation varies in each jurisdiction[86]. Many regional authorities have imposed emissions monitoring systems and some degree of environmental liability, but these measures are not enforced everywhere in the country. To reduce GHG emissions intensity and raise the non-fossil fuel share of the country’s energy mix, the government of India provides green subsidies for private citizens and enterprises for the installation of solar panels and the purchase of electric vehicles. However, the country has failed to create an efficient green financial system to support the switch to a low-carbon economy. No carbon trade system is in place, and the enforcement of environmental regulations is limited by shoddy data collection or corruption[87]. Environmental NGOs and think tanks actively advocate for fossil fuel divestment[88] even if rating agencies are still skeptical about the country’s transition to renewable energies[89].

Internal usage of green finance tools

The lack of a national green financial system has negatively impacted the environmental performance of ONGC. To date, the company has not issued green bonds, nor has it subscribed or participated in green funds or green loans. Voluntary reporting is the only internal green finance tool used, as ONGC has committed to release information on Scope 1 and 2 GHG emissions according to the World Resource Institute (WRI) and to compile reports following the GRI guidelines[90]. The company does not disclose in accordance with the TCFD recommendations.

Lessons learned on green finance exposure and usage

While the usage of green finance tools is only one of several components of fossil fuel companies’ transition, it is possible to analyze which types of applications have been most successful and how these cases can be used in a Chinese context. The above cases, as summarized in the tables below, provide key examples of tools and companies to provide such an assessment.

References:

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[18] Bank of Taiwan, Mega International Commercial Bank, Chang Hwa Commercial Bank, Land Bank of Taiwan, Taiwan Cooperative Bank, First Commercial Bank, Hua Nan Commercial Bank, Taiwan Business Bank (Stated owned banks),  BILLIONP Paribas, Cathay United Bank, E. Sun Commercial Bank, Taishin International Bank, CTBC Bank, KGI Bank, Deutsche Bank AG (Private banks)

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[27] In 2019 Scope 3 emissions accounted for 538 million tons CO2-e, while Scope 1 and 2 altogether accounted for 14,7 million tons CO2-e (per cent below our FY2017 target baseline).

[28] BHP Billiton (2021). BHP Annual Report 2020.

[29] BHP Billiton (2021). BHP Sustainability Report 2020.

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[33] The Guardian (2020). Australian Government Granted BHP Repeated Approval to Increase Carbon Emissions.

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[52] Eni (2020). Eni links its financial instruments to the United Nations Sustainable Development Goals. Retrieved from: https://www.eni.com/en-IT/media/press-release/2020/12/eni-links-its-financial-instruments-united-nations-sustainable-development-goals.html

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[54] The Guardian (2020). Royal Dutch Shell may fail to reach green energy targets. Retrieved from: https://www.theguardian.com/business/2020/jan/03/royal-dutch-shell-may-fail-to-reach-green-energy-targets

[55] The Guardian (2019). Top oil firms spending millions lobbying to block climate change policies, says report. Retrieved from: https://www.theguardian.com/business/2019/mar/22/top-oil-firms-spending-millions-lobbying-to-block-climate-change-policies-says-report

[56] Guardian (2021). Shell to expand gas business despite pledge to speed up net zero carbon drive

Retrieved from: https://www.theguardian.com/business/2021/feb/11/shell-grow-gas-business-energy-net-zero-carbon

[57] Edie (2021). Shell reaches peak oil and emissions as it plots net-zero pathway. Retrieved from: https://www.edie.net/news/6/Shell-confirms-that-its-oil-production-and-emissions-have-peaked-as-it-plots-net-zero-pathway/#:~:text=Unlike%20many%20other%20energy%20majors,of%2030%25%20set%20for%202035.

[58] Shell (2020). Sky: Reaching the goals of the Paris agreement. Retrieved from: https://www.shell.com/promos/business-customers-promos/download-latest-scenario-sky/_jcr_content.stream/1530643931055/eca19f7fc0d20adbe830d3b0b27bcc9ef72198f5/shell-scenario-sky.pdf

[59] Carbon Tracker (2018). EU carbon prices could double by 2021 and quadruple by 2030. Retrieved from: https://carbontracker.org/eu-carbon-prices-could-double-by-2021-and-quadruple-by-2030/

[60] Shell (2020). Shell Energy Transition Report. Retrieved from: https://www.shell.com/energy-and-innovation/the-energy-future/shell-energy-transition-report.html

[61] Shell (2019). Shell Signs USD 10 billion innovative revolving credit facility. Retrieved from: https://www.shell.com/media/news-and-media-releases/2019/shell-signs-innovative-dollar-10-billion-revolving-credit-facility.html

[62] Shell (2018). Joint statement between institutional investors on behalf of Climate Action 100+ and Royal Dutch Shell plc (Shell). Retrieved from: https://www.shell.com/media/news-and-media-releases/2018/joint-statement-between-institutional-investors-on-behalf-of-climate-action-and-shell.html

[63] Financial Times (2020). New BP boss Bernard Looney pledges net zero carbon emissions by 2050.  Retrieved from: https://www.ft.com/content/e1ee8ab4-4d89-11ea-95a0-43d18ec715f5

[64] WorldOil (2021). BP sells Oman gas stake in push to divest $25B of fossil fuel assets. Retrieved from: https://www.worldoil.com/news/2021/2/1/bp-sells-oman-gas-stake-in-push-to-divest-25b-of-fossil-fuel-assets

[65] The Guardian (2019). UK has biggest fossil fuel subsidies in the EU, finds commission. Retrieved from: https://www.theguardian.com/environment/2019/jan/23/uk-has-biggest-fossil-fuel-subsidies-in-the-eu-finds-commission

[66] Bloomberg (2020). EU Carbon Market Has Chance to Link With U.K. After Brexit Deal. Retrieved from: https://www.bloomberg.com/news/articles/2020-12-28/eu-carbon-market-has-chance-to-link-with-u-k-after-brexit-deal

[67] Sustainalytics (2021). BP p.l.c.. Retrieved from: https://www.sustainalytics.com/esg-rating/bp-p-l-c/1008272712/

[68] S&P (2020). BP, activist investor group to jointly craft shareholder climate resolution. Retrieved from: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/bp-activist-investor-group-to-jointly-craft-shareholder-climate-resolution-57789538

[69] GTM (2020). BP Signals Imminent Hydrogen and Offshore Wind Plays. Retrieved from: https://www.greentechmedia.com/articles/read/bp-flags-imminent-hydrogen-and-offshore-wind-plays

[70] Barrons (2020). BP Launches Green Hydrogen Project With Danish Energy Giant Ørsted. The Stock Is Surging. Retrieved from: https://www.barrons.com/articles/bp-launches-green-hydrogen-project-with-danish-energy-giant-rsted-the-stock-is-surging-51605012886

[71] BP (2021). TCFD Energy Group Metrics. Retrieved from: https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/sustainability/bp-tcfd-2020.pdf

[72] ExxonMobil (2019). 2019 Summary Annual Report. Retrieved from: https://corporate.exxonmobil.com/-/media/Global/Files/investor-relations/annual-meeting-materials/annual-report-summaries/2019-Summary-Annual-Report.pdf

[73] Financial Times (2020). Why ExxonMobil is sticking with oil as rivals look to a greener future. Retrieved from: https://www.ft.com/content/30ffa51b-2079-400e-84f1-2e45991194c8

[74] ExxonMobil (2019). Outlook for Energy: A Perspective to 2040. Retrieved from: https://corporate.exxonmobil.com/-/media/Global/Files/outlook-for-energy/2019-Outlook-for-Energy_v4.pdf

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[77] Subsidy Tracker (2020) ExxonMobil. Retrieved from: https://subsidytracker.goodjobsfirst.org/parent/exxon-mobil

[78] ExxonMobil (2020). 2020 Energy and Carbon Summary. Retrieved from: https://corporate.exxonmobil.com/-/media/Global/Files/energy-and-carbon-summary/Energy-and-carbon-summary.pdf

[79] Reuters (2019). Exxon shareholders reject resolutions on climate and splitting CEO, chairman roles. Retrieved from: https://www.reuters.com/article/us-exxon-mobil-agm/exxon-shareholders-reject-resolutions-on-climate-and-splitting-ceo-chairman-roles-idUSKCN1SZ22Z

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[89] Livemint (2019). Natural gas not to drive ONGC’s profitability in near term: Moody’s. Retrieved from: https://www.livemint.com/industry/energy/natural-gas-not-to-drive-ongc-s-profitability-in-near-term-moody-s-1559645202637.html

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