Over the course of the past five years, the use of environmental, social and governance (ESG) metrics and targets has moved in from the periphery to the mainstream of many investment strategies. The prioritization of ESG concerns has also coincided with a marked intensification in the social and political pressure for climate change action since the 2015 Paris Agreement. Investors are looking more closely at operational indicators to better understand company performance in reducing emissions. In response, companies have had to put the management and disclosure of indicators relating to emissions - including consideration of scenarios consistent with the Paris Agreement goals, internal carbon price assumptions, and greenhouse gas (GHG) emissions and/or intensity metrics - at the center of their ESG strategies.

The primary reason for including performance indicators, such as emission intensity, in corporate reporting is to help stakeholders assess a company's general exposure to climate-related issues, to demonstrate progress in developing or adapting their strategies for those issues, and to inform comparative assessments of regulatory and reputation risks. Yet, emissions data is meaningful only when and if equivalent metrics are employed.

This equivalence is not evident across the energy industry today. IHS Markit tracks environmental data published by oil and gas producers. This work highlights a rapid proliferation of performance indicators since 2015. It also highlights that the quality and variability of emissions estimates is extensive.

In a recent research initiative involving the Energy and Climate Scenarios and Oil Markets, Midstream and Downstream teams, the upstream emissions intensities of a selection of the 10 largest oil and gas companies by output and market capitalization were analyzed. In this analysis, the 10 companies studied employ 9 different methodologies. The points of divergence include:

· System Boundaries. Companies used different boundaries to report upstream emission intensities, with evidence of direct and indirect emissions, Scope 1 and 2 respectively, evident in varying degrees. The definition of upstream activities was also rarely specified in the company reporting reviewed. This makes it impossible to assess which specific activities are included in emission estimation and/or reporting.

· Units of measurement. The computation of production volumes can also be based on different units of measurement; each equally valid on their own, but nevertheless complicating comparisons. Examples include, kgCO2e per barrel of oil, kg/CO2e per barrel of refined product, gCO2e/megajoule. Companies are also making different choices around Global Warming Potential values.

· Ownership. Oil and gas companies routinely report operated and/or equity-based information. In setting the relevant boundary for GHG emissions disclosure, companies consider the approach best suited to their business activities. Given the complex ownership structures of the oil and gas industry, the choice of the emission counting approach can have substantial consequences for a company's GHG intensity.

As a result of this variance, comparison of the GHG emissions intensity published by companies could result in incorrect conclusions. Different companies employ different methods and definitions in the development of their emissions metrics. The lack of standardization in emissions intensity accounting practices and/or reporting does not allow for meaningful peer comparison at present. This implies ESG investors looking at the oil and gas sector are unlikely to make reliable "apples to apples" comparisons. It follows that ratings or rankings of companies based on different methodologies are not "apples to apples" assessments.

These differences might appear subtle but choices in this area can affect the final assessment of a company's emissions footprint and they complicate making comparisons. IHS Markit is advancing an initiative in this area in an attempt to develop industry best practices.

Read more on finding the right measure in estimating the GHG emissions of crude oil.

Dr. Knell is a Director of Gas, Power, and Energy Futures at IHS Markit.

Posted 27 November 2019