Assessing the Preparedness of Major Oil and Gas Companies for a Low-Carbon Energy Transition

34 Pages Posted: 20 Mar 2019

See all articles by Francis Shaw

Francis Shaw

Imperial College London

Charles Donovan

Centre for Climate Finance & Investment, Imperial College Business School

Date Written: February 22, 2019

Abstract

Given the volume of capital already embedded in the energy sector, the transition of the oil and gas majors towards low-carbon energy will be crucial in meeting global climate objectives. Various commercial indices currently attempt to track climate change risks embedded in these firms. The methodologies employed are largely based on the carbon footprint of a company’s assets, operations and supply chains. These approaches rely on objective information about a company’s greenhouse gas emissions, thereby avoiding inherently subjective evaluations of corporate governance, strategic planning, and risk management policies. The indices generally do not consider the steps being taken by companies to engage in new lines of business and re-shape business models in response to changes in the global energy system. In short, they act as a poor proxy for the investment risks facing oil and gas sector investors.

In this paper, we introduce a methodology for identifying strategic differentiation among major international oil and gas companies with regards to a low-carbon energy transition. Our technique scores companies based on the degree of portfolio exposure, R&D, diversification, and observable business development in low-carbon activities. We track stated targets, board-level commitment, and monitoring by senior management. Our multi-dimensional analysis produces a within-sector, relative scoring of the degree of preparedness for the energy transition by the largest publicly-traded oil and gas companies.

Our approach offers a path towards meaningful interpretation of qualitative information that is becoming available as a result of recommendations by the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (TCFD) and national regulatory initiatives. The framework has potential application in other sectors by simplifying the assessment of potential strategic responses in energy-intensive industries. We conclude that existing information disclosures made by the oil and gas majors facilitate a robust evaluation of strategic positioning ahead of a potential shift to a lowcarbon economy.

Keywords: climate change; energy transition; international strategy; corporate finance

Suggested Citation

Shaw, Francis and Donovan, Charles, Assessing the Preparedness of Major Oil and Gas Companies for a Low-Carbon Energy Transition (February 22, 2019). Available at SSRN: https://ssrn.com/abstract=3339853 or http://dx.doi.org/10.2139/ssrn.3339853

Francis Shaw (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Charles Donovan

Centre for Climate Finance & Investment, Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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