Investors with more than $2 trillion under management have criticised oil and gas companies over failures to align their businesses with the Paris Agreement, with just three seen as "getting closer” to a goal of helping to limit the rise in global temperatures to well below 2 degrees Celsius by 2050.

Despite headline-grabbing climate announcements by a number of European oil and gas companies this year, none is fully aligned yet, according to new research by the Transition Pathway Initiative (TPI) — a partnership between academics at the London School of Economics and investors.

TPI receives financial support from 80 investor groups globally, with a July report from TPI claiming these groups have a combined $20.9 billion of assets under management and advice.

In a new report, the TPI measured companies on “carbon performance”, which factors in the carbon intensity of the products they produce and sell, as well as emissions reduction targets.

For this annual report, TPI also measured how these companies would perform under different scenarios, including one in which governments meet existing national emissions pledges, a scenario in which temperatures rise by 2C, and one where they rise by less than 2C.

Only three 'getting closer'

TPI assessed 59 coal mining and oil and gas companies and found that just seven (12%) have set emissions targets in line with the pledges made by national governments as part of the Paris Agreement, including Shell, Repsol, Total, Eni and Equinor and also mining giants Glencore and Anglo American.

However, TPI warned that the pledges of these companies are widely regarded as “insufficient to avert dangerous climate change”, leaving the world on track for 3.2C of warming, according to United Nations Environment Programme.

In addition, only three oil and gas companies — Shell, Total and Eni — are getting closer to the 2C scenario, although their emissions-reduction targets and low-carbon investment plans are still not quite enough to bring them into line with that benchmark, let alone lower, TPI said.

“Investors have witnessed a flurry of significant climate announcements by fossil fuel majors this year, so it is striking this independent research still shows those commitments do not yet align with limiting climate change to 2C,” TPI co-chair Adam Matthews said.

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“There has been some movement, with seven European companies now aligned with the Paris pledges... but US fossil fuel giants have yet to take meaningful action to reduce their emissions and the gap with their European peers is stark,” Matthews said.

US supermajors ExxonMobil and Chevron are doubling down on hydrocarbons rather than seeking to diversify into cleaner business such as their European counterparts.

Noticeably absent was supermajor BP despite its announcement in August of ambitious plans to cut oil and gas production by 40% over the next decade.

Valentin Jahn, a research associate for TPI, part of the specialist team at the Grantham Research Institute on Climate Change at the London School of Economics, said: “According to our analysis, BP is not aligned with any of our benchmarks despite its public commitments to reduce its greenhouse gases and the greenhouse gases associated with some of the products it sells.

“BP’s target does not cover traded products, which made up more than half of all externally sold energy of the company in 2019,” Jahn said.

The report analyses the 12-month period to September each year.

BP s no-show on report

The share price of BP, which intends to cut production at a faster rate than its own scenarios suggest is necessary to align with the Paris Agreement, has fallen by 53% in the past 12 months, according to analysts at Westwood Global Energy Group.

In a note this week, analysts warned that, under its new strategy, the supermajor will need to come up with billions of dollars in new revenues for its investors.

“BP’s production contributed about $12 per barrel of oil equivalent of net income in 2019 at average Brent prices of $64 per barrel. With the change in strategy, it will be producing 400 million fewer barrels in 2030 and so it will need to replenish $4.8 billion of annual net income from alternative sources to make up for the foregone production,” Westwood Global said.

“Asset sales should compensate in the short term, but it is still a lot of profit to find to sustain a business of BP’s current scale.”

BP plans to divest another $5 billion by the end of next year, the company said in February after it hit its previously set $10 billion divestment target by end of 2019.

However, its plans to divest production will not contribute to the Paris goals, as the barrels will still be produced by someone else.

Utilities better aligned

Meanwhile, TPI also assessed 66 electric utility companies, finding that 39 (59%) were aligned with the Paris pledges, while 22 (33%) were aligned with the most ambitious "below 2C" benchmark.

Report author Simon Dietz said the divergence between sectors is because the route to Paris alignment is much more of a challenge for the oil and gas sector.

“The electricity sector is heavily regulated with regards to its emissions in some regions such as the EU and this likely explains some of the results we see,” Dietz said.

“More broadly, the technologies needed for decarbonising electricity production are already there and often competitive on cost with fossil fuels, so the core business model is not under threat.

“For oil and gas companies, the route to Paris alignment is much more of a challenge to their basic reason for being. Some companies have started grappling with this challenge, but none have met it yet,” Dietz said.