Market & reputational risks

Market risks: Approximately half of the value of oil and gas companies in the industry lies in the assets they have yet to exploit – their reserves. However, a range of studies suggest that only 20-35% of remaining known oil & gas reserves can be used if the world is to stay within 2 degrees of global warming. Therefore, as lower oil prices and the prospect of ‘peak oil’ increase the risk of stranded unproductive assets, investors are demanding stricter capital discipline. There is also increasing investor and reputational pressure to reduce upstream and downstream CO2 emissions. By exploring some of the options that the sector has for reducing GHG emissions, oil & natural gas companies can not only stay ahead of regulatory and economic developments but also potentially profit from them

Stranded assets

- Loss of revenue in upstream operations, where much company value is derived from the future potential to exploit reserve assets. - - Without commercially viable carbon capture and storage, the asset value of reserves is likely overstated.

Metric: Embedded carbon in reserves

Lower demand for oil

- The disruption caused by Covid-19 and the gradual recovery will bring forward the peak oil demand from the road transport sector.
- U.S., Europe, Japan and South Korea demand has already peaked, as alternative drivetrains and fuel-economy mandates have impacted these markets first.

Metric: New exploration and production capex

Carbon liabilities

- Under-reported fugitive methane emissions leave investors vulnerable to uncertain liabilities under a carbon price.
- Increased coverage of carbon taxes. According to the World Bank, carbon taxes or trading systems cover 20% of global emissions, compared with 15% in 2017.

Metric: Total scope 1 and 2 emissions

Investor pressure

- Investor demand for greater transparency and better carbon risk management from their portfolio companies.
- An increasing number of climate risk shareholder resolutions being passed e.g. requests for scenario analysis consistent with achieving 2 degrees warming.

Metric: Number of shareholder resolutions

Opportunities: Staying on top of market risks can improve energy efficiency with new technologies e.g. source energy from lower-emission or renewable sources. There are also new low carbon goods and services to sell.

Reputational risks: The investment community is increasingly considering the environmental track record of companies, alongside other metrics. To make a financing decision, investors will take into account all available evidence of reputational boosts or breaches that demonstrate the company’s true stance on climate change. Similarly, increasingly environmentally-conscious customers are keen to purchase from companies that have made progress on sustainability. Brands that can show leadership in reducing carbon emissions or other environmental impacts are now more likely to win new business. Having a strong environmental message can also help with hiring, especially from the Millennial generation, who will make up three-quarters of the workforce in six years.

Capital flight

- Investors are increasingly hesitant to finance projects and companies that do not demonstrate resilience to risks related to climate or transition.
- Companies that do not attend to their environmental reputation may also find investors divesting.

Metric: Divestment (threats) by investors

Customer loyalty

- Real or perceived failures of governance or regulatory compliance could lead to a reduction in customer retention, or limit the ability to attract new customers.
- A clean reputational record is often a condition of winning new contracts, or renewing existing ones.

Metric: None

Brand value

- Reputational damages arising from real or perceived failures of governance or regulatory compliance can significantly impact brand value.
- A weak environmental track record is a missed opportunity to differentiate company products and services to potential customers.

Metric: Value of intangible assets

Talent retention

- In a 2019 Fast Company survey, nearly 40% of millennials chose their job because of a company’s sustainability credentials. Therefore a bad reputation could limit access to the best talent.
- A poor environmental record could also reduce staff retention.

Metric: Ambition of emissions target

Opportunities: Addressing reputational risks can attract and retain new investors, increase brand value and improve customer loyalty. There is also an emerging opportunity to raise sustainable finance and attract the best talent.