US should regulate oil companies carbon reporting

Major investors and environmental groups are calling for US regulators to compel oil companies to be more transparent about the impact of climate change on their industry.

In an open letter sent this week, investors claiming to control more than $700bn in assets including London based F&C Asset Management, claimed that the US Securities and Exchange Commission should compel oil and gas companies listed in US markets to include the cost of climate change when estimating the potential of future reserves.

"We are concerned that climate change, and policies adopted to combat greenhouse gas emissions could render certain assets, particularly those with high carbon intensity, uneconomic," the investors' letter states.

The investors claim that oil and gas companies are being forced to look further afield for reserves, and these are often sited in areas that are more difficult and energy intensive to access and extract from, and therefore more carbon intensive. If authorities in Canada and the US chose to impose carbon cap and trade schemes to mirror regulations in Europe, then oil and gas companies would be forced to pay for carbon intensive activities, which would impact their profitability, investors claim.

Early this year, the SEC proposed revisions to how oil and gas companies report their reserves to take account of the changes in oil production that have taken place in recent years. The original reporting requirements were originally drawn up 25 years ago and need to be updated to take account of new technologies and extraction methods, such as those involved with oil sands.

While investors welcomed the proposed updates, they claim that the SEC hasn't made any explicit reference to the impacts of climate change and how the cost of reducing carbon emissions would affect the potential earnings from future reserves, for example.

Elizabeth McGeveran, senior vice president in F&C’s governance and sustainable investment team said porting their reserves, oil and gas companies should be required to assess the carbon impact of future barrels, not just the number of that they might potentially have. “As investors in oil and gas companies it is important for us to be able to assess the risk profile of reported reserves to factor in the costs of carbon emissions, particularly as global policy frameworks begin to change."

Other signatories to the open letter, include Ceres, a network of US environmental groups and investors. Addressing the US Senate last year, Ceres President Mindy Lubber said that investors have been lobbying the SEC since 2003 to improve its approach to climate change reporting to take more account of climate change. "Although climate risk has become a top-tier investor and business issue, the information provided by voluntary disclosure does not come close to meeting investors’ needs," she said.

Investors claim that the SEC should address the fact that, for example, the energy needed to extract a barrel of oil from Canadian tar sands is very different to a drilling for a simple barrel of crude from the Gulf of Mexico.

“SEC regulations already require the disclosure of known trends that companies can reasonably expect will have a material impact on net sales, revenues or income from continuing operations,” added F&Cs McGeveran, “We believe that the disclosure of any estimated additional risks posed by the extraction and development of additional reserves will be important.”