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BP's emissions pledge could light fire under US majors dragging feet on climate

BP PLC's pledge to cut its emissions to net-zero by 2050 could prompt a response from U.S. majors Exxon Mobil Corp. and Chevron Corp. which have been reluctant to amend their business models to better align with the goals of the Paris Agreement on climate change.

Investors have been pushing for large energy companies around the world to reduce emissions and take more serious action on climate change. Many companies, particularly in Europe, have responded as they work to diversify and decarbonize their portfolios by turning to natural gas, electricity and renewables to meet self-imposed emissions reductions ambitions.

BP joins Royal Dutch Shell PLC, Equinor ASA, Total SA and Repsol SA, which have all set goals to tackle the Scope 3 emissions that occur in the products a company sells to end users. With its recent pledge, BP also becomes the largest integrated oil and gas company to set a net-zero target, which could set the bar for other companies.

"[Environmental, social and governance] investor pressure on the oil and gas industry to decarbonize is not a brand-new phenomenon, but BP's announcement is game-changing in terms of scale," Raymond James senior associate Muhammed Ghulam said in a Feb. 13 email.

Unlike in Europe, investor resolutions in the U.S. are nonbinding, so while companies generally pay attention to those that win majority shareholder support, ESG-related investor pressure has evoked the most change in Europe and Canada.

"While American companies have been growing their investments in renewables and low-carbon technologies, the relatively lower emphasis on ESG in the U.S. helps explain why we haven't seen many similar announcements from companies like Exxon and Chevron," Ghulam said.

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The United States' largest integrated energy companies are most exposed to being left with stranded assets as they continue to invest heavily in oil and natural gas projects in the absence of climate change legislation, according to a recent report that climate think tank Carbon Tracker released Jan. 30.

If these U.S. companies continue to drag their feet on climate change, more investors could be driven to divestment, analysts have said. In 2019, Legal & General Investment Management, one of Europe's largest asset managers, dumped Exxon from some of its funds, hoping to ratchet up pressure on the company to take stronger steps to decarbonize its business.

According to a Feb. 14 research report from Moody's Investors Service, BP's recently announced climate ambitions are credit positive and "...should improve BP's trust with all stakeholders, including its debt and equity investors."

"Oil and gas companies that do not respond adequately to the rising investor pressure to become a part of the solution of the energy transition could over time lose some of their investors and eventually face rising costs of capital," Moody's said.

Dutch activist investor group Follow This recently took aim at Exxon and Chevron by filing shareholder resolutions in December 2019 asking the companies, for the first time ever, to cut Scope 1, 2 and 3 emissions and align their strategies with the goals of the Paris Agreement.

According to Follow This, Exxon and Chevron have sent no-action letters to the U.S. SEC asking the agency to block the resolutions from coming up for votes at the companies' respective annual general meetings this spring.

That tactic worked in March 2019 when the SEC, at the request of Exxon, blocked a resolution that asked the major to set and publish short-, medium- and long-term emissions reductions targets.

An Exxon spokesperson told S&P Global Market Intelligence previously that the company is on track to meet 2018 announced goals of reducing greenhouse gas emissions-intensity from its oil sands operations by 10% from 2016 through 2023 as well as decreasing methane emissions by 15% and reducing flaring by 25% this year.

Already somewhat bowing to investor pressure, in October 2019, Chevron announced that by 2023, it plans to lower emissions intensity from its oil operations by 5% to 10% and by 2% to 5% from its natural gas projects from 2016 levels. The reductions will occur from Chevron's operated and nonoperated upstream assets. Chevron previously established reduction targets for methane and flaring emissions.

Inquires to Exxon and Chevron asking if the companies are planning to retool and/or expand on their emissions reductions goals this year were not returned. Both companies could present updated climate change strategies at their respective investor days in early March.

"Now that BP, the last significant European holdout, has committed to setting scope 3 targets, there is no reason that Exxon and Chevron can't follow suit," Andrew Logan, senior director of oil and gas at shareholder advocacy group Ceres, said in a Feb. 13 statement.