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Oil companies must adapt to the climate agenda to be an attractive investment

How do we achieve a CO2-neutral society by 2050 and realise the Paris Agreement’s ambition of limiting the rise in global temperatures to 1.5 degrees Celsius? The International Energy Agency (IEA) recently published a report presenting its pathway for how the world can achieve the international climate goals. We asked Kasper From Larsen, an energy and utility sector specialist and portfolio manager at Danske Bank Asset Management, for his view on the IEA’s climate plan. He talks about the challenges and opportunities associated with transforming oil companies into clean energy suppliers and Danske Bank Asset Management’s role in the green transition.

What are the most important aspects of the report?

It focuses on the energy and transport sectors, which should achieve net-zero CO2 emissions by 2050 if we are to keep global warming in check. The report warns that no new oil, coal or gas projects should be developed from this year onwards and that all energy production should have net-zero CO2 emissions by 2040. Moreover, all sales of petrol- and diesel-driven cars must be halted by 2035, and climate quotas, such as planting trees, should not be used to offset carbon emissions. We have earlier seen the UN climate panel’s (IPCC) proposal for creating a CO2-neutral society, which illustrates there is more than one roadmap to achieving the global climate ambitions.

“We agree with the report’s ambitions and direction, and have set a target of having carbon neutral investments by 2050, which obliges us to help push oil companies towards more climate-friendly energy production.”Kasper From Larsen, energy and utility sector specialist and portfolio manager

What might be hardest to achieve?

Predicting developments over the next 30 years is a difficult task. For example, the report’s climate plan depends on the development of new climate technology for shipping, the use of green hydrogen for heavy industry, higher carbon taxes, and a steep cut in energy consumption per person. Green energy meeting our energy needs by 2050 would require every person in the world to reduce their energy consumption by 4 per cent a year, on average, going forward to 2030 and by just under 2.5 per cent every year throughout the entire period up to 2050 – otherwise, the report’s roadmap does not work. I am concerned about whether private consumers could cut their energy consumption so significantly. The plan requires that we drastically change our habits and that cars, homes, food and other consumer goods become considerably more energy efficient than at present – otherwise, industry will have to be the one to cut back.

In addition, energy infrastructures throughout much of the world are designed for fossil energy and cannot yet handle power from renewables in such large quantities. Massive investments are required in the power grid, and the question then is how this would be financed.

According to the report, we have the necessary technology to achieve net-zero carbon emissions by 2050. Why does the oil industry not invest in climate technology only?

The report notes that solar and wind energy must be greatly expanded to accelerate the electrification of society. More or less all traditional oil companies – particularly in Europe – have ambitions to enter this market and also invest in green technology. However, there must be a balance between income and expenses if they are to run a sound business and be capable of making these investments. Simply put, oil companies need a source of earnings to drive the transformation – otherwise, they do not have the necessary funds to invest in renewables. As long as the world needs transport and energy, and the penetration of electric vehicles and renewable energy is not sufficient, we will still need oil for society to function. Nevertheless, a good many companies are reinvesting an increasing share of oil income in expanding their renewable energy production and reducing their oil business. However, this shift takes time and is a reflection society’s energy needs, and it can only happen at the pace oil companies have the funds to invest in climate technology.

Is the oil industry transforming fast enough?

Oil companies are like super tankers that will take time to turn towards CO2-friendly technologies, which requires massive investments. Several European companies, such as Shell, Total, Equinor and BP, are among the frontrunners in the industry and have raised their targets for clean energy investment while at the same time keeping oil production flat. They know the energy transition is a risk and that shifting from black to green energy is a necessity. Naturally, we can discuss whether their plans are ambitious enough, but they still need oil income to provide the capital to invest in green energy infrastructure. The oil industry in the US and other parts of the world has been more sluggish and is only now understanding that they need to shift away from fossil energy if they are to remain relevant and have a viable business in the future. Oil companies have generally become aware that a climate transition is their licence to operate. However, the pace of change varies greatly from company to company, as does whether they will be able to meet the increasing demand for green energy.

How can the green transition be financed if it is not only to be done by oil companies?

How society should finance the green transition is the big question. The report proposes stopping new oil, gas and coal projects, which will mean declining tax and duty income. New market reforms will have to compensate for this, so we have the money to make the massive investment in green infrastructure. One solution suggested is a global carbon tax, which should be higher than at present. By focusing on taxing CO2 emitting activities, such as petrol- and diesel-driven cars, consumers will ultimately pay for the transition, and that money will have to be reinvested in green energy. Indirect subsidies in the form of tax breaks for the oil industry also need to be phased out and instead used to push in a green direction.

“We have seen that engaging with oil company management and voting at annual general meetings can help push them away from fossil energy and thus contribute to society’s climate goals.”Kasper From Larsen, energy and utility sector specialist and portfolio manager

What is Danske Bank Asset Management’s approach to the green transition and the oil sector?

We agree with the report’s ambitions and direction, and have set a target of having carbon neutral investments by 2050, which obliges us to help push oil companies towards more climate-friendly energy production. For us, this is about investing in companies who understand the importance of participating in the energy transition. It is vital that oil companies embrace the green transition if they are to remain relevant investment cases for us in the longer term. Our view is that these are the companies that will be best equipped to create attractive, long-term returns for our customers.

Can Danske Bank Asset Management push oil companies in a green direction?

Undoubtedly, the world has to move in a green direction, and we discuss with oil companies how they can transition to financially sound, CO2-friendly, energy production as quickly as possible. They listen to us, because they are keen to be an attractive investment case, which affords us a good opportunity to influence them. This is about using our influence as an investor, taking responsibility and pushing the transformation, so oil companies increasingly invest their earnings in renewables. As our objective is to create attractive return for our customers, we have a very real incentive to persuade companies to become greener as quickly as possible. This shift will namely futureproof their business, so they can deliver solid returns going forward. We have seen that engaging with oil company management and voting at annual general meetings can help push them away from fossil energy and thus contribute to society’s climate goals. We have recently helped elect new members onto Exxon’s board who have a clear agenda of speeding up the company’s climate efforts, and we have voted for Chevron to set reduction targets for its scope 3 carbon emissions. These are examples of how we actively make climate demands on the oil industry and can make a difference.

You can read the full report from the International Energy Agency here.

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