As the preeminent inter-governmental energy research body, the International Energy Agency (IEA) plays a critical role in shaping government policy as the world weans itself off fossil fuels. The IEA’s scenarios for future energy demand, supply and commodity prices are also vital reference points for companies and investors as they decide where to deploy capital. Where the IEA foresees high oil and gas prices for decades to come, for instance, this can be used to justify multi-billion dollar investments into new fossil fuel reserves.
The IEA’s influence brings with it important responsibilities. Today’s collective letter to Fatih Birol, head of the IEA, signed by Sarasin & Partners is testament to the wide range of stakeholders that are looking to the IEA for leadership. The call for action is clear: the IEA must provide a credible 1.5⁰C scenario that is consistent with getting the world to net zero carbon emissions by 2050. This scenario would provide a much-needed independent benchmark for companies, investors and governments to establish whether their plans are consistent with a 1.5⁰C pathway.
Companies have already begun to draw attention to the fact that they lack credible 1.5⁰C-aligned scenarios to guide capital deployment and their reporting to investors. Take Italian oil and gas major Eni. Buried in its 2019 Annual Report to shareholders, it highlights how, despite the rising evidence behind the need to keep temperature increases to 1.5⁰C, it cannot stress test its financial statements in line with a 1.5⁰C pathway because they lack a credible 1.5⁰C scenario.
This means that Eni’s reported performance and capital numbers in its financial statements assume the world will overshoot 1.5⁰C. This means that investors lack clarity of how the business will be impacted by efforts to keep temperature rises to 1.5⁰C. And Eni is not alone. Most listed European oil and gas majors are currently using IEA scenarios as a key input into their financial reporting and capital expenditure planning. What we need now more than ever is for the IEA to provide a 1.5⁰C scenario to enable these companies to provide full visibility of the scale of capital transformation needed to keep to a 1.5⁰C pathway.
Companies have already begun to draw attention to the fact that they lack the pricing and operating assumptions they need in order to update their models. In its 2019 annual report, Italian oil and gas company Eni state that they recognise the rising evidence from the Intergovernmental Panel on C:limate Change of th world exceeding the 1.5⁰C threshold . However, they cannot provide stress tested numbers for investors because they lack a credible 1.5⁰C scenario. If pricing and operating assumptions are not based on models that account for a transition to a low-carbon economy, companies will not accurately reflect the risk of a decarbonising world in their accounts. This means that shareholders are not being made aware of material risks. You can read more about why oil and gas companies’ statements must accurately reflect their positions in our paper.
By responding positively to this request, the IEA would play its part in making the Paris Agreement a reality.
You can read more about our review of the failure of oil and gas companies’ financial statements to align with the Paris Agreement here.