BlackRock, the world’s largest asset manager, warned that carbon reduction strategies from oil majors based on divestment may backfire.
“Divesting, whether done independently or mandated by a court, might move an individual company closer to net zero, but it does nothing to move the world closer to net zero,” BlackRock CEO Larry Fink said at a G20 meeting earlier this month.
Earlier this year Fink called for companies to disclose their plans to become net-zero or face the consequences, in his annual letter to CEOs.
Assets sold by big oil can be purchased by either smaller oil companies or state-owned giants with less obligation to disclose their operations, including emission rates.
Major global oil and gas companies have been under scrutiny from shareholders, regulators, and the public to cut their carbon dioxide footprint and become more serious about climate change issues. Thus, many choose to whet their activities on the most high-yielding assets and sell off whatever is particularly carbon-intensive and damaging to their reputation.
According to Wood Mackenzie, a global firesale of at least $140 billion in oil and gas assets continues to hit new highs. This trend is primarily driven by emissions concerns and a desire to pay off debt, raise cash for dividend payments and other shareholder benefits. In addition, mounting pressure fueled by economic uncertainties of a rapidly decarbonizing world fuels fears about long-term business resilience.
For example, in 2019, BP Plc, the fifth-largest multinational oil producer in the West, announced a plan to sell assets in Alaska as part of a carbon reduction push. And good for BP. Yet the next owner, logically, sought to boost production for returns.
Much needs to happen beyond divestment, including a successful development of renewables, the utilities sector to electrify transport, and the delivery of that transport itself. Otherwise, falling oil investment will only serve to push up oil prices.
In March 2021, the U.S. Securities and Exchange Commission (SEC) announced it was creating a climate and environmental, social and corporate governance (ESG) task force in its enforcement division, which will be tasked with developing initiatives to identify ESG-related risks. The original focus will identify any material gaps or misstatements in issuers’ disclosures of climate risks under existing SEC regulations. The SEC may unveil its proposals before the end of the year. That may help regulate assets and transparency in reporting regardless of ownership.
Pressure as a strategy is excellent for making balance sheets seem greener. But those assets don’t stop emitting — they simply change ownership. Furthermore, many economists are becoming concerned that this ‘reallocation’ of assets could complicate reduction of carbon input ever more difficult in the medium-run.