Top investors hoping to do good by engaging with oil and gas giants are at risk of falling short of their own net zero commitments, a leading think tank has warned, as companies pump vast sums into new production.

Scores of global financial institutions, including some of the City’s top investment banks and fund groups, have signed up to climate pacts, such as the Glasgow Financial Alliance for Net Zero and the Net Zero Banking Alliance, and published targets to curb emissions.

On top of cutting funding for oil and gas giants and divesting certain holdings, these investors have attempted to use their scale and influence to pressure heavy polluters to rein in their activities and reinvest in renewables to support the transition to get climate warming down to 1.5 degrees by 2030 and net zero by 2050.

But a damning report from Carbon Tracker has revealed that rather than curbing production, most companies are ramping up their activities and have recently invested in projects that will exacerbate climate change.

From January 2021 to March 2022, oil majors, including Chevron, Exxon Mobil and Shell, gave the green light on $166bn of investment in new upstream oil and gas assets over the next decade — $103bn of which is incompatible with a 1.5-degree pathway, according to the report.

More than a third of the investment — $58bn — is outside even a 2.5-degree outcome, the think tank found. This includes controversial projects like TotalEnergies’ $10bn Lake Albert oilfield development in Uganda, which is set to supply the East African Crude Oil Pipeline.

These projects will take years to come to fruition and could lock in high carbon emissions for decades, Carbon Tracker said.

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Mike Coffin, head of oil, gas & mining at Carbon Tracker, told Financial News if oil majors do not change tack, investors may wind up falling short of their climate commitments.

“If investors are looking to be Paris-aligned, then it’s hard to reconcile continued investment – whether equity ownership or by financing – in those companies whose business activities are not aligned with Paris goals,” Coffin said.

“The report highlights that most companies have recently invested in projects that we do not see as compatible with Paris, and most are planning on developing new projects that are also incompatible with a Paris scenario.

“In a number of cases they are not aligned by a significant margin, with projects likely only to be viable if consumption of oil and gas is at a level that will raise global temperatures by more than 2.5 degrees; the science is increasingly clear of the devastating global impacts of such a temperature outcome.”

The International Energy Agency has warned there is no room for new long-lead oil and gas fields if the Paris climate target is to be met.

But pumped up commodity prices following the war in Ukraine have left the oil and gas sector sitting on record profits and incentivised new investments.

According to Carbon Tracker’s analysis, Chevron is currently on course for 16% production growth by 2026 from a 2019 baseline, while fellow US heavyweight Exxon Mobil should see 8% growth by 2027.

In Europe, TotalEnergies, Eni and Shell have published plans to cut oil production, but Carbon Tracker said this is not enough for a 1.5° pathway.

BP is the only company it examined that is planning to scale back on both oil and gas production, committing to a 40% reduction by 2030 from a 2019 baseline.

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While many oil and gas companies are positioning themselves as part of the “climate solution” by investing in renewables, this “doesn’t somehow offset the continued legacy businesses and make a ‘climate-aligned’ company,” Carbon Tracker said in the report.

For some investors, divestment may be an appropriate strategy, Coffin said, if the stakeholders they represent do not want to profit from activities that are contributing to global warming and previous engagement efforts have fallen flat.

“To potentially be considered aligned with global climate goals – whether 1.5 degrees, or well below 2 degrees – then companies need to be planning for oil and gas production volume to fall in the medium-to-long-term,” he said.

“For investors looking to engage with companies, then they must seek to understand company plans, and ensure that they’re not just planning on business as usual. Such activity is both contrary to society achieving the Paris goals, but also puts investors at ever-increasing financial risks as renewables substitute for fossil fuels, and policy action on climate grows.”

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To contact the author of this story with feedback or news, email Kristen McGachey

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