‘Net zero accounting tricks would land people in jail if tried’

Sustainalytics conference hears flaws in decarbonisation calculations are rife and carbon price shock poses a material threat to companies' returns

Companies publicly committing to net-zero carbon emissions are regularly doing so fraudulently, Carbon Tracker founder and executive chair Mark Campanale told a Sustainalytics conference this week.

Speaking at the Net Zero Business Model Conference, Campanale noted a number of issues with the way companies were calculating their route to net zero including oil and gas companies saying their carbon intensity will go down while planning to double production.

“The metrics we have seen people use and develop are things called intensity metrics, which says this year we have a little bit more gas in our mix and a little bit more renewables so we are selling less carbon intensive kilojoules of energy,” he said.

“What they don’t tell you is they are also planning to double sales… While intensity may reduce, if you are increasing overall production that doesn’t get you to net zero. You actually have to cancel projects. You actually have to stop investment in new production and what we are seeing from the oil and gas sector in particular are plans to increase production.”

See also: – Shareholders up pressure on Standard Chartered over fossil fuel funding

He said it was sad investors, apart from those who divest, were not calling companies out on the need to cut production. Campanale noted BP was the exception in the oil and gas sector with the chief executive saying the company will cut back projects by about 40%.

Decarbonisation illusions

He mentioned another issue was companies depending on carbon capture and storage (CCS) technologies to meet their net-zero targets.

“If you look at the models, they imagine CCS and negative emissions technologies arriving at the back end of the 2040s to miraculously get them to [net zero by] 2050. Of course, that’s an illusion. If they are not investing in CCS and carbon technologies today and they are not doing large-scale reforestation then you can’t get to net zero.”

Finally, Campanale said it is problematic the companies aiming to get to net zero do not count historical emissions. “Net zero… doesn’t mean offsetting what you are selling this year. It means going back 30-40 years and removing all the historical emission in the atmosphere from the sale of your products and then you can start again.

“But of course, doing that is going to take decades if not centuries and that’s why we don’t believe you can grow production and be net zero, or indeed you can offset your current productions.

“It’s an accounting trick, which if you had a court trial for accounting fraud a lot of these people would be going to jail right now.”

Campanale’s colleague, Carbon Tracker energy strategist Kingsmill Bond, also laid out some challenges the oil and gas industry is facing like the fact once hard to solve sectors like steel and shipping are managing to decarbonise, leaving little to justify the industry’s existence: “People often say there are all these hard to solve sectors that can’t be solved so you have got to have continuity for fossil fuel incumbency.

“The problem with this argument is it is making a basic error, which is global fossil fuel demand, at its peak in 2019, was about 14,000 million tons, and we have an enormous system designed and built to create that 14,000 million tons and these hard-to-solve sectors are about 20% of this and the really hard to solve sectors like plastics are 5-10% of this. You can’t build a business model on 5-10% of your sales.”

Green penalty

Betty Jiang, head of US ESG research at Credit Suisse, agreed with Campanale that a lot of the fossil fuel businesses are off the mark when it comes to setting net-zero targets and said this extends to fossil fuel intensive companies as well.

“Of the Climate Action 100+ companies, only half of them have net-zero emissions targets and only half of those companies have targets that are appropriately in scope – that includes Scope 3 emissions. But more importantly, how are they tying the capital allocation to transition investments?” she said.

“For many we ended up seeing net-zero targets but then a black box for how do you get there. And that is a key disconnect between where the pledges are and the actual execution.”

See also: – Roadmap to net zero

Jiang noted the difficulty companies have reconciling viable net-zero plans with financial performance: “We have done analysis comparing the climate actions of Climate Action 100+ companies versus the sector-relative stock performance of these companies and we found there is very little correlation between the quality of the firm’s climate action versus their share performance.

“If anything there is this version within subsectors where you see industrial companies, electrical utility companies tend to have a more positive correlation between how committed they are with climate and their stock performance. But that is the opposite for oil and gas and for consumer products.”

She said BP, which had been mentioned as an oil and gas company taking bold action to decarbonise has not been a great performer relative to its peers.

Jiang concluded this means investors want climate leadership and tangible transition plans but, “at the same time they are only willing to reward companies that can do so without sacrificing returns”.

If regulation and policy supported the net zero ambitions better, argued Jiang, companies might be able to demonstrate the ability to transition without harming returns in the long term.

Systemic risk

Tamara Close, managing director of CGC Consulting Group, told a panel later in the conference how far-reaching the impacts of decarbonisation would be felt. She said it poses a systemic threat to investments.

“When you have a systemic risk from an investor point of view, you cannot de-risk your portfolio like you used to be able to, through strategies such as diversification,” she said.

“The only way to actually de-risk the portfolio is by identifying those underlying investments or companies that are managing this risk for you. And climate change certainly is one of those systemic risks.”

Close said a global rise in the price of carbon is a transition risk we face which would impact every segment of every industry. She described a stress test CGC Consulting Group had carried out on a global sample of companies and their scope one and scope two emission with a price of $75 per ton of CO2.  

“What we found was that companies with more than $20trn of enterprise value had a significant and material decrease in their return on capital – and by material we mean a greater than 5% decrease in their return on capital.

“A 5% decline in the return on capital in a company meets the legal test for materiality under Delaware and securities law for a company. This means they need to report and disclose this as a material risk to their company,” she said.

Close pointed out carbon price is forecast to go much higher than $75 per ton.