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Big oil's challenges, climate disclosures and boardroom effectiveness reviews - HSBC Global Research
19 Plays4 years ago
In this edition, we look at the significance of the IEA's net-zero emissions roadmap and the latest challenges for big oil companies, plus an update on climate-related financial disclosure requirements and our guide to board effectiveness reviews. Disclaimer
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Transcript
Introduction to ESG Brief Podcast
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Hi everybody, welcome to the ESG Brief, our look at some of the top reports by the analysts and strategists here at HSBC Global Research on environmental, social, and governance issues.
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I'm your host, Jack Reed.
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In this edition, we're talking about the pathway to net zero emissions and by when.
IEA's Net Zero Emissions Pathway
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The International Energy Agency sees one way forward, but at the same time, CO2 emissions are again rising, and that includes from coal.
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We look at the challenges for the international oil companies at a time of increasing investor pressure with our head of oil and gas research, Gordon Gray, and energy analyst, Tarek Solomon.
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Our head of ESG research, Weishin Chan, also joins us to talk about corporate disclosures on climate.
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And corporate governance analyst, Irina Kobel, helps us understand board effectiveness reviews.
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This podcast was recorded for publication on the 27th of May.
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All our disclosures and disclaimers must be viewed on the link attached to the media player.
Challenges for Oil Companies
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The International Energy Agency has published a proposed roadmap to reach net zero emissions in the world by 2050.
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I'm joined now by Gordon Gray, our head of oil and gas equity research, to talk about recent developments and his latest oil and gas report.
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Gordon, thanks for joining us.
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Thank you.
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It seems like a pretty ambitious plan.
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How significant is it?
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I think it could be very significant.
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Look, there's a huge uncertainty out there about the energy transition and so many scenarios about how the world could develop consistent with the goals of the Paris accord.
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Many of those scenarios, in fact, the majority of them, point to a pathway to keep average temperatures well below two degrees centigrade, which implies a world that goes to net zero carbon emissions by about 2070.
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But increasingly, there's momentum behind the view that that's just not enough, that we need actions that limit the temperature increase to one and a half degrees centigrade.
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And those sorts of pathways typically have an ambition to get to net zero by 2050.
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That's very much what this scenario is.
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It's the first detailed scenario from the IEA that has a pathway like that.
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And it is important because of the IEA's place,
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in terms of energy forecasting.
Investor Pressure and Legal Implications
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I think it could be significant actually for informing policymakers, investors, companies, etc.
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Now we've seen just in the past few days more evidence of rising investor pressure over the energy transition.
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What does all this mean for the big oil companies?
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Well, the pressure has been steadily increasing on companies, not just in Europe, but beyond as well.
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We saw in the US in recent AGM resolutions of the big caps over there.
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From a perspective of the Europeans, the IOCs in Europe all now have some form of net zero targeting.
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It's not necessarily net zero 2050, but we are still seeing steady pressure on them, evident in the AGMs in the last few weeks.
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And in addition to that, we're starting to see some clear evidence on the legal front as well.
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Just in recent days, for example, the court ruling in the Netherlands to Royal Dutch Shell compelling it to reduce its global emissions by 45% by 2030.
Future Energy Supply Changes
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And what have you found about the differences between the impacts on the oil and gas markets?
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Well, the outlook for energy is in a massive transformation at the moment.
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And we'll see the mix of primary energy supply changing dramatically over time.
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But if we look at the extremes, for example, if we do start to look at 2050 scenarios of getting to net zero, by that stage,
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Most of those sort of scenarios point to an energy system which has to have something like 60% of primary energy coming from renewables.
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It has oil share of the mix falling from a third to less than 10%.
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That means, in theory, oil volumes increase.
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could fall by three quarters by 2050.
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And indeed the IEA's comment in their net zero 2050 report suggests that in that pathway, no new oil and gas developments would be needed beyond those that are already approved in 2021 to get to that outcome.
Role of Gas and Rising Coal Consumption
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On gas, the situation is slightly different.
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Gas certainly has a role as a transition fuel in the near to medium term
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both in enabling emissions reduction through coal to gas switching and in dealing with the intermittency issues in the grid around renewables.
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But longer term, to get to that net zero 2050 pathway, the share of gas and the demand for gas certainly has to fall too.
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Gordon, thank you very much.
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Thank you.
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Underscoring the challenges, the IEA only weeks ago issued another report showing energy demand in 2021 is set to exceed pre-COVID-19 levels, and global coal consumption will grow 4.5% this year.
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Joining us now is energy analyst Tarek Solomon.
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Tarek, how do we square the ambitions with some of these realities?
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Absolutely, Jack.
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And I think that's really epitomizing the disconnect between ambitions and reality on the ground.
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We had the Joe Biden administration just last month completely revamp its climate direction, set new ambitions and goals.
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And of course, that's the world's largest oil consumer and the world's second largest emitter.
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But reality on the ground, as you rightly point out, is telling quite a different story.
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Emissions are set to rise this year, powered by a resurgence of coal use in emerging markets.
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And that really tells us that, unfortunately, emissions are still heading in the wrong direction.
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So this is the great challenge of 2021, perhaps, is try to turn those ambitions into actions and policies that will actually lead to a changing trajectory in emissions on the ground.
Net Zero Transition and Societal Impact
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And setting aside international agencies, governments and corporates, what about people, Tarek?
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Are they ready for this?
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Well, it's a very valid point and one that we've noticed has been gaining great attraction in media, in policy talk as well.
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It's what's the impact of net zero for citizens?
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And what we've written most recently about is the notion of
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jobs and burgers.
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It's about employment opportunities that come from the transition to net zero and dietary habits that might have to change.
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And these are perhaps two politically sensitive topics, to put it bluntly.
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Jobs will have to be created out of this transition.
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And the narrative historically has been around job losses, but in places like the UK and in the US and as well as Europe,
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new green policies and spending plans have had a very clear employment angle to give people on the ground a bit more confidence in that transition to net zero will benefit them.
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And on the burgers front, this is the notion that what role does our personal dietary habits have in net zero?
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The UK's climate change committee talks about having to cut meat and dairy consumption levels by between 20 and 50% in the next 30 years.
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And so there is this discussion evolving about personal choices, be it to buy an electric vehicle, be it to take public transport more, be it to eat less red meat.
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These are all things that are gaining more traction in discussion at the moment, and certainly ones that will be part of future discussions.
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Tarek, thank you very much for joining us.
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Thanks for having
Climate-related Financial Disclosures
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me, Jack.
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Also on the net zero runway this week, the Bank of England announced that it will use its corporate bond purchase scheme to encourage net zero transition among corporate bond issuers.
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European and U.S. credit strategist Song Jin Lee said in a video accompanying the report that the action of the Bank of England could have several implications.
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So firstly, we think that their approach could well mark a new high-caliber standard for ESG investments across the sterling corporate bond universe.
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Secondly, from a spread perspective, we should expect greater spread dispersion ahead, as some of the CBPS premiums in the climate laggards start to unwind, facilitated in part by the new CBPS framework.
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Climate factors could well become a much more important driver of relative value, and investors do need to take that into account when looking at future relative value.
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We switch now from the transition targets to the TCFD, an acronym that our head of ESG research, Weishin Chan, expects we'll be hearing a lot more about very soon.
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This is the task force on climate-related financial disclosures.
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Here in London, the UK's Department for Business, Energy and Industrial Strategy has just closed a period of consultation
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on climate-related financial disclosures, especially those aligned to the TCFD.
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Weixin joins us from Hong Kong now to look at the climate disclosures in more detail.
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Weixin, what's the background here?
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Thank you, Jack.
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This goes back to 2015 and the climate negotiations that established the Paris Agreement, so COP21.
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Now, back then, I think the
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financial system was reeling from the effects of the global financial crisis of 2008 to 2009.
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And they were worried that climate change would wreak similar havoc on the overall financial stability or stability of financial markets globally.
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So the Financial Stability Board established a task force on climate-related financial disclosures known as TCFD.
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Now, the TCFD task force were charged with coming up with a set of recommendations where
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climate disclosures from companies could be made known into markets so that financial market participants could use that information in a comparable and consistent manner.
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And what's the impact on British companies?
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There's no outcome yet, Jack.
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It's going to be a while before the findings from the consultation are made public.
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But essentially, the UK was consulting on how to implement mandatory climate disclosures in line with TCFD.
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from essentially April of 2022.
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And they're going to make changes to some legislation, the Companies Act and the Limited Liability Partnerships Act.
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And that's a very, very fascinating development because the UK would then become the first market or economy to make climate disclosures mandatory in this manner.
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And the task force on climate disclosures, what specifically do they want companies to disclose to investors?
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It's difficult to find a specific focus area, but the TCFD has four general categories.
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And these are governance and strategy and risk management, as well as metrics and targets.
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So very, very broadly speaking, the governance side will look at the board oversight and the management role in assessing climate risks and opportunities.
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The strategy would be, does a company have the appropriate
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strategy and financial planning involved to actually be prepared for climate change.
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Risk management side is very, very important.
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How do they manage the climate risks and how is that integrated into overall risk management of the firm?
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And then what metrics and targets will we use?
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What emissions are disclosed and what targets are there for climate risks and opportunities and how are these integrated into the performance targets of management at these corporations?
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And what about in our own industry, financial services?
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What are they looking for there?
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There is separate guidance for different aspects of financial services, as you say, banks, insurance companies, asset owners, asset managers.
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For an asset manager, one example is that the UN-backed principles for responsible investment.
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They actually made climate disclosures in line with TCFD mandatory in 2020.
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And so we're seeing a growing number of asset managers disclose on almost the carbon footprint and the risks and opportunities involved with their own portfolios.
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And how else is the influence of the task force being felt elsewhere in the world?
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There will be a bigger pressure to disclose.
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More stock exchanges around the world and regulators are beginning to align their sustainability disclosures.
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with TCFD especially when it comes to the climate and the environmental angle.
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So we have the UK, the London Stock Exchange Group has done that.
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Here in Hong Kong, the new ESG reporting regime which starts from July of 2020 requires climate related disclosures in line with TCFD.
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Malaysia has been supporting TCFD recommendations.
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Japan has been doing the same.
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So it's going to be a lot more common for companies to disclose
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in line with TCFD in the future.
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And what about the biggest emitting nations, China and the US?
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TCFD is not yet mandatory in the US, but given the change in administration that we had this year, the Biden-Harris administration has appointed Gary Gensler as the chairman of the board for the Securities and Exchange Commission in the US.
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And they have actively said that they're going to be looking
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at climate disclosures.
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So I do believe in the near future, before the end of this year, the US will issue a proposal on aligning their climate disclosures, very, very likely with TCFD as well.
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China is probably a few steps away.
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The People's Bank of China, the central bank in China, has been aligning its financial oversight to China's key climate targets.
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So they would like to reduce emissions intensity.
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They'd like to peak their emissions.
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And that's very, very important.
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The PBOC has asked a certain number of financial institutions, almost in a pilot, to measure their emissions and disclose the associated climate risk.
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So they're essentially moving towards climate stress testing for financial institutions.
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So that is a step in the right direction.
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And I think it may be a little while before they move to make TCFD disclosures mandatory in that market.
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Weishen, thanks for the update.
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Thank you very much, Jack.
Board Effectiveness Reviews
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We head now into the corporate boardroom to discuss the increasing ESG focus on the boardroom's own performance.
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Our corporate governance analyst Irina Kobel has just published a new report, A Guide to the Boardroom Effectiveness Review Process, and she spoke with our managing editor Chris Brown-Humes.
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Irina, welcome.
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Perhaps I can start by asking you, what are board effectiveness reviews?
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Thank you, Chris.
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Board Effectiveness Review is a feedback mechanism for boards and directors, helping them to maximise their strengths, as well as helping them to identify areas for development and focus.
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The main purpose of Board Effectiveness Review is to ensure that board improves its own effectiveness, as well as the performance of the company.
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So when you say effectiveness, can you just be a bit more specific about what exactly they're looking at?
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So we are looking at qualitative as well as quantitative aspects of portifactiveness.
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So quantitative aspects, those are something that we heard a lot about, especially from companies' annual reports and other disclosures.
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So that's about board size, skills, experience, directors' age, gender, so these types of characteristics.
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As well as board effectiveness, it's about some other qualitative aspects, boardroom dynamics, relationships between board individual directors and company management,
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and personal director attitudes and contributions.
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That's all actually constitutes board effectiveness.
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So what different types of review are there?
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There are two main types of board effectiveness reviews, internal and external reviews, with differ in formality and methods.
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Internal board effectiveness reviews, which are conducted by a company on itself, may feature a greater depth of company knowledge and a more personal reflection on board's functioning, as well as it can mitigate the risk over commercial confidentiality.
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At the same time, these reviews, they have shortcomings, which include less objectivity.
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On the other hand, external board effectiveness reviews, which are facilitated by a third party, offers a fresh, independent and objective perspective, new ways of thinking and insight into best practice.
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However, in addition to concerns about commercial confidentiality and a sufficient understanding of the company, an external board effectiveness review brings extra costs.
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And some of the internal or external reviews, they are compulsory in some markets, while other markets they provide for these reviews on a voluntary basis.
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And how does practice differ then around the world?
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Around the world, and especially 20 markets we looked at, the most common practice is to undertake an internal review on an annual basis.
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External review, which are recommended to be undertaken every three years, most typically, they are recommended in many countries, including France, Saudi Arabia, Singapore, the United Kingdom and the United States.
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And do investors care about these reviews?
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Oh yes, actually that's an interesting question because survey data suggests that investors are interested in companies for effectiveness reviews.
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However, most of the companies, according to the same survey, say that investors have never shown an interest in their processes or outcomes.
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And I think that actually raises an interesting question because when something is not on investor
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engagement agenda.
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There is no visibility of port effectiveness reviews.
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Many companies perceive it as something less important, you know, some sort of basic compliance exercise, so something just to tick the box.
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And we think that in this case, the reviews, they don't really bring the value that they actually can add to the company.
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So that leads naturally on to my final question, which is just how should investors use your report?
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Yeah, in this report, we provide an explanation of the key stages of outcomes and outcomes of word effectiveness reviews with an indication of how investors may contribute at each of these stages.
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We also provide a case study to illustrate what may be expected in terms of company disclosures and present a list of
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list of questions to assist investors in their engagement.
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Investors can also find an analysis of international regulatory frameworks for board effectiveness reviews in the 20 markets.
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That's a very helpful summary, Irina.
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Thank you very much for your time today.
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Thank you, Chris.
00:20:28
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Chris Brown-Humes, our managing editor, talking with corporate governance analyst Irina Kobel about her new report, Understanding Board Effectiveness Reviews.
Conclusion and Resources
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So that is all the time we have for this week.
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Special thanks to Gordon Gray and Tarek Solomon, Wei Shen Chan, and Irina Kobo.
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All the reports we've talked about today are available on the research website at research.hsbc.com.
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Thanks for listening.
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We'll be back soon.