Oil firms face investment hurdles in energy transition

Key performance indicator (KPI) metrics must be standardised as oil firms adapt their businesses to a lower-carbon future in order to attract and retain investors, according to an IP Week conference panel today.

The unprecedented speed and scale of the energy transition is creating uncertainty for energy firms' oil and gas businesses, as well as for investors, US bank Morgan Stanley's global oil strategist and head of European energy research Martijn Rats said.

Historically, company valuations have been anchored in shareholder distributions. But the future of dividend yields is looking uncertain as firms expand their businesses into new low-carbon ventures. Oil firms have compromised by providing more detail and transparency to help cautious investors understand how they can balance the energy transition while generating growth and acceptable returns, panellists said.

Panellists agreed that transparency is crucial to helping determine which companies are best positioned to transition to a lower-carbon future over the coming years.

"This decade is critical. We will be making key decisions about which companies to still be invested in," director of ethics and engagement for the Church of England Pensions Board Adam Matthews said. "We expect clarity on what companies have planned so that we can make judgements based on the credible plans."

But diverging strategies, differing metrics and the level of complex information provided is proving a challenge for investors to digest, panellists said.

"The question is which companies are detailing the plans [for the energy transition], and which ones are putting in place the most effective strategies for investors to understand that plan," Matthews said.

"There is an element of investors just disengaging with the sector because it has simply become too difficult," Morgan Stanley's Rats said. "The oil industry needs to simplify its story, come out with the KPIs that they think are really the ones to focus on, and then, over time, drive the creation of a new dialogue".

"One of the big challenges everyone has is consistency around standardising disclosure... the ratings agencies are going to start rating ESG risk, which will be critical for investors going forward," JP Morgan's investment banking managing director and global co-head of the energy group James Janoskey said. Investors need more clarity on milestones to build confidence amid diverging strategies, he added.

Climate Action 100 — an investor-led initiative making clear-cut demands from the sector for clarity on their plans — will publish a benchmark next month setting out investor expectations for company disclosures.

This "will be the most significant outline by investors of what they need to see to understand where companies are positioning themselves in the transition across a range of metrics," Matthews said. Boundaries will be established by investors working together, he added.

By Saleem Rizvi and Rowena Edwards