To address growing climate-related portfolio risk, investors increasingly expect companies to set greenhouse gas emissions reduction targets aligned with the Paris Agreement’s 1.5o goal and to report their reduction progress. Fundamental to target setting and reporting, however, is accuracy. Reported progress must reflect real-world emissions cuts. Unfortunately, this isn’t always the case.
When polluting assets are transferred from one company to another but continue operating, their emissions should not be counted toward the selling company’s emissions reduction goals. To do so would be to take credit for climate progress where none has occurred.
The world’s largest asset managers have begun warning of the potential consequences of oil and gas companies “decarbonizing” by selling their assets. Cyrus Taraporevala, the former head of State Street Global Advisors, wrote in the Financial Times in 2021 about the risk of “selling off the highest-emitting components of businesses to private equity and hedge fund actors.” He argued that this could lead to public markets appearing to reach net-zero emissions while global emissions actually increase. In his 2022 letter to CEOs, BlackRock’s Larry Fink wrote that “passing carbon-intensive assets from public markets to private markets…will not get the world to net zero.”
To avoid these outcomes, investors have begun asking oil and gas companies to disclose emissions associated with their asset transfers. This disclosure will give investors insight into whether a company is actually reducing its emissions or simply shifting them to new, often private, owners. Research from the Environmental Defense Fund (EDF) shows that, in aggregate, upstream oil and gas assets are moving from operators with stronger climate commitments to operators with weaker climate targets and disclosures, an outcome that only increases total global emissions.
As You Sow represents investors asking Chevron and ExxonMobil to provide accurate greenhouse gas target reporting by recalculating their emissions baselines to exclude emissions associated with asset transfers. This will ensure that when companies report progress toward their targets, transfers are not mistaken for real-world reductions.
This request aligns with the long-standing guidance of leading standard setters. The Greenhouse Gas Protocol indicates that companies should recalculate base year emissions in the event of a “transfer of ownership or control of emissions-generating activities.” Oil and gas industry association IPIECA similarly recommends “adjustments to the base year emissions” to account for asset transfers, to avoid giving the appearance of “increases or decreases in emissions, when in fact...emissions would merely be transferred from one company to another.”
Once Chevron, ExxonMobil and their peers begin reporting corporate emissions reductions to reflect real-world impact, the conversation can turn to best practices for climate-safe asset transfers. In response to widespread concern about this issue, EDF and Ceres have developed “Climate Principles for Oil and Gas Mergers and Acquisitions.” To ensure that the negative emissions impact of asset transfer is minimized, oil and gas companies should begin adopting these principles in deals and stop selling high-emitting assets to operators who will worsen their climate impact.
Thomas Peterson
Say on Climate Coordinator, As You Sow