If COP26 was all about creating the mechanisms to make the energy transition possible, COP27 promises to be the catalyst to start implementing decarbonization in earnest, Wood Mackenzie claims.
Established at COP26, the Glasgow Financial Alliance for Net-Zero (GFANZ) aims to use the next UN Climate Change Conference in Sharm el-Sheikh as a catalyst to standardize and implement its transition financing plans. As one of the highest emitting sectors, oil and gas can expect to feel the consequences.
Launched in April 2021 by Mark Carney, the UN Special Envoy for Climate Action and Finance, GFANZ brought together the world’s largest banks, asset managers, asset owners, and insurers into a single financial sector-wide alliance, uniting the sector behind a central mission to mobilize capital to lower greenhouse gas emissions.
To ensure credibility, GFANZ is grounded in the UN’s Race to Zero campaign, which prescribes ambitious criteria for participation – a 50 percent carbon reduction by 2030 and net zero by 2050.
The central mission of GFANZ is to mobilize the financial sector to accelerate the transition to a net-zero economy. That inevitably means a smaller role for oil and gas as part of the transition. However, recent geopolitical events have highlighted the fact that economies are fragile to price shocks, and supply and demand must move in sync.
Despite higher oil and gas prices, the oil and gas industry remains exposed to financial sector capital allocation. By bringing together financial subsectors, GFANZ has many levers – from bank lending to security selection by asset managers – through which it can materially impact oil and gas companies.
Financial institutions will redirect capital towards companies with robust and credible plans to reduce emissions. To stay investable, oil and gas companies will have to demonstrate that they are taking steps to align with the Race to Zero criteria and will be under increasing pressure to cover all scopes of emissions.
Between now and COP27 in November, GFANZ will deliver guidance and frameworks that provide sector-level granularity on what is expected of oil and gas companies. The recent strengthening of GFANZ climate criteria implies that the alliance will set the bar high.
WoodMac believes that this will mean a greater emphasis on visible and measurable emissions reduction. GFANZ members will expect oil and gas companies to have a strategy that sets out how they will reach net-zero, along with targets and metrics that enable external stakeholders to track their progress.
Though companies are investing to reduce emissions, decarbonize, and diversify into renewables, this must increase to levels that trigger a declining trend in absolute company emissions, including Scope 3. At present, there are only a handful of oil and gas companies that show a reduction in total emissions over time.
Finance will still be available from non-GFANZ sources, but over time the pool of lenders and investors without climate criteria will shrink, WoodMac stated. Those willing to ignore ESG risks will expect to be compensated, making funding more expensive. They are also likely to have shorter time horizons and be fewer stable shareholders.
Despite the looming threat, production growth remains the key focus for most resource holders. Some of the largest emitters have been able to use recent high prices to rapidly deleverage, reducing their exposure to the issue, while a select few companies are diversifying into renewables.
With greenhouse gas emissions at their highest level and energy security in sharp focus thanks to Russia’s invasion of Ukraine, momentum is building behind the energy transition. As pressure increases on financial sub-sectors such as private equity to align in the run-up to COP27, GFANZ membership is expected to grow further. Given the emerging situation, oil and gas companies need to be ready for a rapid shift in the funding landscape.
To contact the author, email [email protected]