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Net-zero commitments, financial vehicles evolving amid decarbonization trend

Corporate commitments to net-zero carbon emissions can be difficult to decipher and measure, which is a problem that energy companies must address as the market for linking the commitments to financing tools grows, investment and industry experts said.

"It's an absolute minefield," Moody's Vice President for Climate Solutions Andrew Grant said about the variations in the wording and scope of companies' commitments to reduce and offset their greenhouse gas emissions.

Many companies avoid both the use of binding language in net-zero pledges and the inclusion of Scope 3 end-use emissions, Grant said at a series of panels hosted by his credit rating agency Sept. 23.

Energy companies are taking steps to fix this problem or having fixes pushed at them. Oil and gas supermajors such as Royal Dutch Shell PLC and Eni SpA went further than other fossil fuel companies by setting compulsory "targets" instead of softer "goals," Grant said.

The Science Based Targets initiative is ramping up pressure on companies by amending their net-zero best practices criteria to increase required Scope 3 emissions reductions from 67% to 95%, according to Cynthia Cummis, a member of the SBTi Steering Committee and director at World Resources Institute. The SBTi is a partnership among global disclosure system operator CDP, the United Nations Global Compact, World Resources Institute, and the World Wide Fund for Nature.

Tackling those emissions is "becoming the biggest pain point for companies," Cummis said during the virtual event.

Hard targets

Grant noted that while some fossil fuel exporters are taking Scope 3 emissions into account, the system for labeling cargoes as carbon neutral remains problematic.

"One of the real stories from this year has been the commencing of sales of LNG and crude bundled with offsets to be carbon neutral, including Scope 3," Grant said. "Clearly there are lots of challenges with that ... just because you've bought enough offsets to offset your emissions doesn’t mean you're risk-free."

The distinction between different types of offsets is critical. "Only 4% of the carbon credits ever issued are removal credits," Canada Pension Plan Investment Board head of sustainable investing Richard Manley said. "[Ninety-six percent] of them are avoidance credits, so in terms of building the removal capacity ... at the end state of net-zero, we still have a long way to go."

Green bonds

Some energy companies are going beyond net-zero targets by tying the metrics to sustainability-linked bond frameworks. Utility NRG Energy Inc. in December 2020 issued $900 million in senior notes in what was North America's first use of the emerging financing instrument, and Canadian pipeline giant Enbridge Inc. announced a similar vehicle in June tied to environmental, social and governance performance indicators.

Jeanne-Mey Sun, NRG vice president of sustainability, said the bond issuance was over four times subscribed and that the utility had already "overshot the target" for reducing emissions as outlined in the framework before issuing a $1.1 billion sustainability-linked note in August.

"We want to be part of the solution," Sun said. "And our customers want us to do that."

According to a May 17 note from Moody's ESG Solutions Group, worldwide issuance of sustainability bonds totaled $8.5 billion during the first quarter, "already on par with the full-year total from 2020."

Investment firm Nuveen Investments Inc. saw the market for such alternative financial instruments growing substantially in North America. "If anything, we have a lot of untapped possible demand from the U.S. that hasn't even been fully explored," managing director for responsible investing Sarah Wilson said.