From sea-level rise to wildfires, escalating impacts of the climate crisis are presenting extensive risks to the oil and gas sector. Transition challenges, too, have grown in recent years: climate change litigation is on the up, with early analysis indicating that share prices fall when cases are filed or lost. Even in the face of these significant threats, oil and gas firms face competing shareholder interests, which can result in pressure to scale back existing net zero targets and resistance to environmentally-focused policies. While refusing to act now may result in better short-term returns, organizations will be poorly positioned to manage risks in the long term. These incompatible pressures add to the challenges financial institutions face in evaluating their oil and gas clients’ risk landscape and, subsequently, their own risks.
The United Nations Environment Programme (UNEP) recent report, ‘Climate Risks in the Oil and Gas Sector’ details the key threats firms will face and outlines recommendations to mitigate these risks for banks, investors and insurers with oil and gas sector clients. A risk-minded investor exercising their due diligence will check that oil and gas clients:
- Diversify their operations. By shifting to less carbon intensive methods, businesses can work to preserve future profitability that may otherwise be put at risk by decarbonization policies and restrictions.
- Prioritize reducing environmental impacts. The potential for and significance of reputational damage from environmental incidents will likely only grow; inaction is no longer a viable option. Key activities include stemming methane leaks, which can be aided by methane leak reduction technologies.
- Bolster their assets’ resilience to climate change. Firms should assess whether existing infrastructure is fit to withstand forecasted risks, and create strategies to shore up protection wherever needed. Looking forward, business leaders must also incorporate future tail risk events in their planning.
- Make additional, climate-conscious investment. This should be focused on high-quality projects that enhance climate resiliency and offer co-benefits.
As the world moves towards mandatory climate disclosures, the UNEP also suggests financial institutions conduct site-specific asset-level analysis on their oil and gas clients’ holdings. Climate resiliency plans, as well as transition plans, should be thoroughly vetted for viability. Yet, financial organizations can only go so far in helping their oil and gas clients move towards net zero. Firms also need to adopt their own net zero transition plan as it relates to financed emissions, protecting themselves from the uncertain timing and nature of transition risks.
