U.S. oil and gas companies, and their investors, are at risk of significant stranded assets because they are not adequately reflecting the impacts of the climate crisis and the clean energy transition in their financial reporting, as detailed in a new report from the sustainability nonprofit Ceres.
This report is the first analysis of how the U.S. oil and gas industry should address climate change in order to comply with established U.S. financial disclosure standards and meet investor expectations for transparency.
It comes as the oil and gas industry faces a turning point. Countries responsible for almost two-thirds of the world’s greenhouse gas emissions have committed to reach net zero emissions by 2050 or sooner, but many U.S. oil and gas companies have neither set targets nor fully acknowledged the financial implications of the energy transition. A global drop in demand for fossil fuels, accelerated by regulation and affordable renewables, will slash overall demand and impact companies’ positions, depending on how they approach the transition.
The report contains detailed investor expectations on reporting that are consistent with the goals of Climate Action 100+, the world’s largest investor initiative on climate change. It lays out clear steps investors want companies and their boards, audit committees, and auditors to take to ensure financial reporting is both aligned with the Paris Agreement goal to limit global temperature rise to no more than 1.5 degrees Celsius and is consistent with generally accepted accounting practices (U.S. GAAP) required by the Financial Accounting Standards Board.Â
The report outlines four investor expectations for financial reporting in the U.S. oil and gas sector:
Companies should explicitly and consistently discuss climate-related impacts in all financial statements. They should also disclose future asset retirement obligations, including plugging wells, decommissioning infrastructure and reclaiming land. They should disclose long term pricing assumptions, all carbon offset and carbon capture assumptions, and total greenhouse gas emissions including Scopes 1, 2 and3, as high emissions can pose a greater future financial risk due to regulations and demand changes.
The narrative portion of oil and gas companies’ financial reports should include robust discussion of a company’s climate strategy in line with the U.S. Securities and Exchange Commission guidance and should disclose limits on access to capital. Assumptions should be consistent with financial statements.
Corporate audit committees should reinforce rigorous consideration of climate-related impacts on financial statements and set expectations with external auditors.
External auditors should demonstrate that they have taken climate impacts and the energy transition into account.