Sustainable Finance

Oil and Gas

Global

Transition Assessment
Methodology: Oil and Gas
Sector

Table of Contents
Scope
Scope 1
This report describes Sustainable Fitch’s Transition Assessment methodology for companies Transition Assessment Stages 1
from the oil and gas sector. Background 1
Section 1: Sustainable Fitch’s Transition
The assessment builds on the inaugural work of the Sustainable Markets Initiative (SMI) and its Assessment 2
Energy Transition Task Force, and benchmarks, differentiates and positions each company’s Section 2: Key Sector Issues for
path towards net zero. The framework recognises the following two potential pathways: Performance Indicators, Adjustments and
Safeguards 8
• Decarbonising (emissions reduction by advancing in technology and efficiency gains, Appendix 1: Performance Indicators 12
complemented by emissions removal). Appendix 2: Scope of Company
Interaction and Methodology
• Greening (decarbonisation of existing activities as well as the replacement of emission- Maintenance 14
intensive technologies with greener alternatives). Appendix 3: Important Facts About the
Oil and Gas Sector 15
The analysis output is a colour-coded spectrum (ranging from Black to Brown, Light Brown,
Olive, Light Green and Green) which is more visual than a numerical or letter scale. Each colour
represents an intermediate stage of a company’s transition pathway. Black represents carbon-
intensive companies with no or limited decarbonising or greening plans for their activities. At
the other end of the scale, Green represents companies that have already transitioned and
achieved net-zero greenhouse gas (GHG) emissions status.

Transition Assessment Stages

Below are the three broad topics assessed for each company:
• Emissions Ambition (for 2050 and 2030; 30% weight of the assessment): Absolute
emission metrics refer to the volume of emissions generated in the time horizon, while
intensity shows the volume of emissions per unit of energy generated in the time horizon
under consideration (e.g. MJ, kWh, boe).
• Emissions Reduction (long term and short term; 40% weight of the assessment): Actual
metrics of a company’s emissions reduction targets achieved in recent and past years;
important as they show commitment and achievement.
• Financial Actions (investments and revenue; 30% weight of the assessment): Amount
apportioned towards transition and transition-enabling investments. Actual revenue
generated from transition and transition-enabling investments.

Background
There is scientific evidence that global warming must be halted. The 2015 Paris Agreement is Contacts
an international, legally binding treaty that seeks to limit global average surface temperature
rise to well below 2°C and, with best efforts being pursued, to limit it to 1.5oC above pre- criteria@sustainablefitch.com
industrial levels. To ensure maximal impact at the quickest pace, efforts need to be focused on
those economic activities that contribute the most to global atmospheric GHG concentrations.
GHG emissions from the production and use of oil and gas, mainly CO 2 and methane, are some
of the leading causes for global warming. The energy sector is responsible for around 70% of
GHG emissions globally, according to the International Energy Agency.

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Some companies have shifted business models towards environmentally friendly solutions,
such as renewable energy and electric vehicles infrastructure, but others still need to transition. Paths – Approaches to transition
The contribution of the latter is fundamental to decarbonising. The energy system is complex, Decarbonising Greening
and its transformation necessitates wider engagement on the concept of transition. In addition To achieve net zero To achieve net zero
through decarbonising
to explaining our methodology, we also highlight important factors for the oil and gas sector through decarbonising
and build out of green
activities or products
transition identified in developing our methodology. activities or products
Reduce
Section 1: Sustainable Fitch’s Transition Assessment Reduce
Building on the work of the SMI and its Energy Transition Task Force, Sustainable Fitch has activities or products
that give rise to
developed a methodology aimed at benchmarking, differentiating and positioning companies on emissions
activities or products
their path to net zero. The established framework provides more transparency and helps that give rise to
understand each company’s pathway towards meeting the Paris Agreement. Transition emissions Remove
approaches adopted by different companies are unique and specific, and the output of our
analysis generates information useful in understanding each company’s pathway, while allowing
for differentiation. emissions from
activities or products
The Pillars of the Framework Remove
Replace
Pathways
The two pathways towards targeting and achieving net zero are decarbonising and greening: emissions from activities or products
activities or products giving rise to emissions
• Decarbonising focuses on emissions reduction of a company’s activities and products with green alternatives
through improvements in technology and efficiency gains in its day-to-day operations,
complemented by the removal of emissions generated.
• Greening entails the decarbonisation of existing activities as well as the replacement of Net zero Net zero
high-emitting technologies with greener alternatives (low- or no-emissions generating).
This pathway leads to a growth in sustainable products and activities as a proportion of Source: SMI, Sustainable Fitch

the total, so that revenue with technologies are more aligned with the Paris Agreement.

Assessment Scale
The output of Sustainable Fitch’s Transition Assessment is represented in a colour-coded
format as shown below. Each colour represents a unique intermediate stage in a company’s
transition pathway, from Black to Green.
Each of the colour-coded bands can be further broken down by qualifiers to provide users with
a more granular assessment. As such, one of three signs will be added to each colour from Brown
to Light Green (inclusive) to indicate their position, “minus” (“-”), “flat” (“=”) and “plus” (“+”).

Assessment Scale

Source: SMI, Sustainable Fitch

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The Transition Assessment Process • Metrics on emissions targets, delivery of targets

Performance & financial actions helping transition.
Sustainable Fitch’s Transition Assessment process encompasses performance indicators, Indicators • Resulting score of 1-100 with colour banding and
granular qualifier.
adjustments and safeguards. Our sector experts analyse publicly available information and
interact with company representatives to integrate additional information. This helps make the Emissions 30%
• 2050 Aim
• 2030 Aim
analysis and assessment process more robust. Reduction

Emissions • Long-Term
We analyse each company’s transition pathway through performance indicators from emissions Ambition
40%
• Short-Term
ambition, emissions reduction and financial efforts deployed. Appendix 1 has a full list of Financial • Transition Investments
30%
performance indicators with corresponding thresholds, while a description of each is provided Actions • Transition Revenue

below. The numerical output is evaluated and may go through a series of potential adjustments
(that could be positive or negative) and safeguards to ensure each rating band meets certain • Adjustments are changes for systemic change,
governance and execution.
Adjustments
conditions. • Adjustments capped at two. Applied on previous
outcome with new colour banding and qualifier.

Performance Indicators
• To refine transition, application of prerequisites
A company is first assessed across three main categories of performance indicators. The result to access transition stages in the colour banding.
Safeguards
is rebased and then combined with the respective weights to obtain an aggregated numerical • Following the adjustments the safeguards can
result in a different colour banding and qualifier.
output for the assessment section. Such numerical output is then distributed across the six
colour-coded bands, and one of the qualifiers (“-”, “=”, “+”) assigned. Source: Sustainable Fitch

Metric Weight Number Description

2050 Aim 2.5% 1.1 Reduction in absolute Scopes 1 and 2
emissions
2.5% 1.2 Reduction in absolute Scope 3 emissions
5% 1.3 Reduction in intensity life cycle
Emissions (Scopes 1, 2 and 3 emissions)
Ambition
2030 Aim 5% 1.4 Reduction in absolute Scopes 1 and 2
(30%)
emissions
5% 1.5 Reduction in absolute Scope 3 emissions
10% 1.6 Reduction in intensity life cycle
(Scopes 1, 2 and 3 emissions)

Long-Term 5% 2.1 Reduction in absolute Scopes 1 and 2

emissions
5% 2.2 Reduction in absolute Scope 3 emissions
10% 2.3 Reduction in intensity life cycle
Emissions (Scopes 1, 2 and 3 emissions)
Reduction
Short-Term 5% 2.4 Reduction in absolute Scopes 1 and 2
(40%)
emissions
5% 2.5 Reduction in absolute Scope 3 emissions
10% 2.6 Reduction in intensity life cyle
(Scopes 1, 2 and 3 emissions)

Transition None 3.1 Decarbonising

Investments percentage (of total annual investments)
(Tracked Data) None 3.2 Green
Percentage (of total annual investments)
Transition 15% 3.3 Total green and decarbonising
Financial Investments percentage (of total annual investments)
Actions
5% 3.4 Green-to-decarbonising investment ratio
(30%)
% (of total annual investments)
Transition 5% 3.5 Green and decarbonising annual revenue
Revenue growth (%)
5% 3.6 Green and decarbonising annual revenue
(% of total revenue)
Source: SMI, Sustainable Fitch

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Emissions Ambition
In the assessment process, we pay specific attention to both the medium- and long-term
emissions. Our long-term assessment timeline is aligned with the Paris Agreement objective of Assessment Scale and Parameters
net zero by 2050, while our medium-term assessment focuses on 2030 and aims to gain Colour Code From (incl.) To (excl.)
confidence that intermediate plans and actions lead to the 2050 pathway.
Black 0 5
Absolute and intensity metrics collectively provide a comprehensive understanding of a Brown 5 27.5
company’s reduction goals. The former refers to the volume of emissions generated in a time Light Brown 27.5 50
horizon. The latter shows the volume of emissions per unit of energy generated in the time
Olive 50 72.5
horizon under consideration (e.g. MJ, kWh, boe).
Light Green 72.5 95
Near-term targets carry a heavier weighting in the assessment and highly influence the final Green 95 100
output, as they provide greater insight into the company’s trajectory and increases
Source: Sustainable Fitch
management’s accountability. To assess the 2050 aims, we focus on the strength, quality and
ambition of the identified targets as well as their net-zero alignment.
As per the section Ambitious Emissions Reduction Targets are Key, below, we acknowledge that
not all long-term commitments are equal, as companies in the industry can refer to different
type of targets (e.g. carbon neutrality), adopt varying perimeters or include limited scopes of
emissions and/or GHG protocol categories (e.g. Scope 3 categories).
Discrepancies can also extend to the types of gases identified in a company’s emissions
reduction ambition. “Partial coverage’’ targets are those that have limited perimeters or omit
material GHG emissions. We account for partial coverage by scoring the line item a step-down
compared to what would have been achieved had the company adopted full coverage.
Emissions Reduction
In our assessment we give more importance to delivered emissions reduction than to a
company’s targets, given that the later emissions reductions are achieved, the less likely we are
to achieve the goals of the Paris Agreement.
The short-term emissions reduction assessment focuses on the cumulative reduction over the
previous three years (on a rolling basis), while the long-term assessment will consider emissions
reduction achieved against a 2015 baseline. While not all companies report as far back as 2015,
we use the oldest available data and assess the absolute reduction achieved in that given period,
without rebasing emissions reduction on the number of years covered. In doing so, we
acknowledge the importance of historical emissions disclosure in driving accountability and
increasing transparency.
Emissions ambition and emissions reduction use the same carbon performance metrics
(absolute and intensity) to enable comparability between the commitments and actions.
Equally, the notion of partial coverage would apply to both ambition and reduction categories.
Financial Actions
Performance Indicators which focus on financial actions taken by the entity in relation to:
• the amounts invested towards transition and transition-enabling investments
(separating decarbonising from green); and
• the revenue and revenue growth generated from transition and transition-enabling
investments.

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Definitions of Performance Indicators

Absolute Scopes • We consider Scopes 1, 2 and 3 emissions in absolute terms as calculated and provided by the company. Ideally, emissions are
1, 2 and 3 reported on the whole perimeter of a company’s business activities and across all products. Optimal reporting entails targets
Emissions that include all types of gases, or at least the most relevant for the energy sector (i.e. CO2 and methane).
(Ambition and • For Scope 2, our preference is to assess emissions calculated according to market-based methods, reflecting indirect emissions
Reduction) from the electricity that a company has purposefully chosen. For Scope 3, reporting is predominantly in line with the GHG
Protocol, encompassing 15 categories. Only a small number of companies report across all categories and we evaluate the
extent of their use. We place more analytical emphasis on emission reduction targets and delivered emissions reductions for
Scope 3 emissions as per category 11 of the GHG Protocol, “Use of sold products”. The bulk of emissions from oil and gas
products occurs when fossil fuel is burnt by final consumers. We therefore deem value chain emissions from the use of sold
products to be most material to oil and gas producers.
Intensity Life • For this metric, we consider the whole life-cycle emissions of the activities undertaken by a company. The life-cycle assessment
Cycle Emissions requires clear disclosure across Scopes 1, 2 and 3 emissions. As per the previous section (the 2050 aim), we would consider
(Ambition and intensity as the volume of emissions per unit of energy generated in the time horizon under consideration (e.g. MJ, kWh, boe).
Reduction) • We expect the 2030 commitments for emissions reductions to be more practical and aimed at clear numerical goals when
compared to the 2050 long-term targets. In establishing the thresholds for the scoring of the 2030 emissions ambition on
Scopes 1, 2 and 3, we referred to work done by the International Energy Agency (IEA) on the expected absolute GHG emissions
reduction from the oil and gas industry by 2030 under a net-zero scenario (link). Similarly, when looking at the intensity life
cycle we used the Transition Pathway Initiative intensity metric target for the oil and gas sector by 2030 under the 1.5°C
scenario (link).
Investments • A clear distinction is made between green and decarbonising as part of a company’s investment strategy. We recognise the
value of capex versus the opex for long-term benefits towards a transition strategy, though we also consider some opex as
critical and conducive to the transition efforts (e.g. electrification of operations to reduce diesel consumption).
• When looking for decarbonising activities, we would refer to investments that would reduce carbon-intensive activities and
products, or remove emissions from activities and products. In the energy sector, examples include energy efficiency measures
and electrification of operations.
• When looking for greening activities we would refer to investments that would replace activities and products with green
alternatives. In the energy sector, a primary example would be represented by investments in renewables. To identify the
various type of investments, we would refer to the EU taxonomy, where possible, and the investments’ eligibility and
alignment. Where that is not possible, we would use internal analytical considerations.
Source: Sustainable Fitch

Adjustments
The second stage of the Transition Assessment considers a series of potential adjustments that
can flag specific situations that the model does not directly capture.
Adjustment Impact
1 Positive adjustment if there is no new exploration/drilling of oil and gas assets OR +1
commitment to reduce hydrocarbon production by at least 20% in a decade (or annual
reduction equivalent)
2 Negative adjustment if emissions reductions achieved involve offsets for more than -1
5% of the total delivery
3 Negative adjustment if (current) intensity emissions are materially higher than -1
industry average (+30%)
4 Positive adjustment if (current) emissions intensity are materially lower than industry +1
average (-30%)
5 Negative adjustment if chosen emissions accounting methodologies do not capture -1
material categories (related to GHG Protocol for Scope 3 emissions)
6 Positive adjustment if executive remuneration is linked to quantifiable emissions- +1
related targets (>=20% of total variable pay)
Source: Sustainable Fitch

As per the above table, the adjustments are related to systemic change factors (i.e. no new
explorations, intensity) or to relevance of the information provided either at target or achieved
level (i.e. offset reliance, accounting methodology) or to transition relevance for top
management (i.e. remuneration). When looking at the intensity industry average, we are
referring to the Oil and Gas Climate Initiative measure from 2021 (link), specifically in the
upstream oil and gas sector. When focusing on the categories for Scope 3 emissions, we will
refer to the GHG Protocol categories for Scope 3.

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The dimension and magnitude associated with each of the above adjustments is equal (+/- 1) and
can impact the final output positively or negatively. Once the “net impact” derived from all the
adjustments is calculated as the arithmetical sum, this number will be used to move a score up
or down the scale, with a maximum adjustment of two notches.
The result will be expressed as one of the six rating bands with one of the qualifiers (“-”, “=”, “+”).
For example, a company assessed as ‘Light Brown +’ in the Performance Indicators stage and
receiving a net adjustment score of +3, would be capped as a two-notch improvement and see
its colour band move to ‘Olive =’.
Safeguards
In this final section, we will ensure that when a company is assigned an assessment band (e.g.
‘Light Green’), certain conditions are met (see following table). This prevents the risk of
secondary factors overriding the primary prerequisites in the model designed to inform the
robustness and pertinence of a company’s transition strategy.
Should the below conditions not be met, the rating is then automatically adjusted to the colour
band that the company’s performance indicators comply with. The assigned qualifier will be the
highest for the newly lowered colour band (i.e. “+”). We consider the colour and the qualifier
resulting from this Safeguard stage to be the Transition Assessment final output.
Prerequisites (Safeguards) of Each Colour Band
References to
Colour code performance indicators
Brown
- 2050 Aim to reduce absolute Scopes 1 and 2 emissions 1.1
- 2030 Aim to reduce absolute Scopes 1 and 2 emissions 1.4
Light Brown
Achieve all pre-requisites for ‘Brown’ rating band -
- 2050 Aim for net zero Scopes 1 and 2 1.1
- Aim to reduce Scope 3 absolute emissions (by 2030 and 2050) 1.2 and 1.5
- Aim to reduce life-cycle intensity (by 2030 and 2050) 1.3 and 1.6
- Investments in green and decarbonising capex/opex 3.3
Olive
Achieve all pre-requisites for ‘Light Brown’ rating band -

- 2050 Aim for net zero across all Scopes with a credible ambition covering 1.1, 1.2 and 1.3
relevant materiality boundaries
- Demonstrate progress on emissions reductions across all Scopes in short- 2.1, 2.2, 2.3, 2.4, 2.5 and
term and long-term 2.6
- Demonstrate progress of transition with (at least some) revenue from 3.5 or 3.6
transition activities or products
Light Green
Achieve all pre-requisites for ‘Olive’ rating band -

- Commit a material portion of annual transition investment to green activities, 3.3 and 3.4
services or products
- Demonstrate progress of transition with (at least some) revenue from green 3.6
activities or products
Source: Sustainable Fitch

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Transition Assessment - Process Flow

Company A

Performance Indicators
Step One:
Assess the performance indicators of the
company and score accordingly Emissions Ambition Emissions Reduction Financials
Weighting 30% Weighting 40% Weighting 30%

19/30 10.5/40 14/30

Output:
Company A received a score of 43.5/100 which Transition Spectrum
equates to a Light Brown colour band and a (+) Scale
43.5/100
qualifier.
Light Light
Black Brown Olive Green
Brown Green
Light
- = + Brown (+)

Adjustments
Step Two:
Assess the company against the pre-defined adjustments
that are pertinent to the transition Adj 1 Adj 2 Adj 3 Adj 4 Adj 5 Adj 6 Adj 7
-1 0 0 +1 0 +1 0

Output:
Company A received three adjustments, moving one Total Net Olive
notch up the transition spectrum scale Adjustment: + 1 (-)

Safeguards
Step Three:
Ensure the company has met all the safeguards for All prerequisites are met, output
the colour band achieved in Step Two from Step Two is confirmed

Final Output :
The company has received the final output of a Olive Olive
colour band and (-) qualifier (-)

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Section 2: Key Sector Issues for Performance Indicators, Map of Key Assessment
Adjustments and Safeguards Considerations
In developing its Transition Assessment methodology, Sustainable Fitch considered the Ambitious reduction targets
following factors to determine performance indicators, adjustments and safeguards. These Inclusion of Scopes 1, 2 and 3 emissions
considerations help us to fine tune our assessment on the degree to which each oil and gas
Covering material carbon exposure
company is able to contribute to a low-carbon economy. Achieving this is complex because of
the different combination of factors as defined below. Short-term targets are a stimulus
Absolute/Intensity emissions reduction
Ambitious Emissions Reduction Targets are Key needed
Over the past five years, oil and gas companies have responded to pressure from governments, Methane is a key challenge
investors and civil society stakeholders with multiple emissions reduction targets and net-zero Simultaneous transition to various
pledges. However, plans differ considerably with regards to covered emissions, level of models
ambition, stated timelines and milestones and actions taken to achieve. Context of shift to natural gas
A company’s understanding of climate-related risks is reflected in how ambitious its emissions Offsets should be marginal
reduction targets are and the degree to which its transition plan is robust and goes beyond a Continued oil exploration and
business-as-usual mode. Understanding and comparing companies’ transition plans and production
assessing progress over time is important for all stakeholders, who have only focused on some Rise in green investments needed
specific players in recent years. The major European oil and gas companies are more advanced
Transparency needed
than those from other regions and are setting the standard for emissions reductions. Smaller oil
and gas companies have not been the focus of attention; however, the mood is changing as ESG Source: Sustainable Fitch
(and especially climate change) issues become key and climate-related disclosure regulations
imposed.
National oil companies (owning the vast majority of global oil reserves and contributing almost
60% of global oil production) generally face more emissions reduction pressures.
All Scopes of Emissions Should be Covered
Emissions reduction targets must cover all material sources of emissions, from its own
operations (Scopes 1 and 2) to the entire value chain (Scope 3). A lack of Scope 3 reduction
targets could indicate that the company has not yet developed a business strategy and
appropriate capex plan to transition away from producing fossil fuels and remain profitable in a
low-carbon world over time.
On average, the extraction, processing and transport of oil represents around 20% of the
product’s full life-cycle emissions. For gas, it is around 25% (link). For oil and gas companies
focused on exploration and production, well over 80% of the company’s total emissions come
from the use of their sold products (GHG Protocol’s Scope 3 category 11).
Oil and gas companies can intervene at different stages of the value chain, which would
influence the perimeter of their overall emissions reduction strategy. Vertically integrated oil
and gas companies capture methane emissions as Scope 1, while downstream companies mostly
capture them under Scope 3. They can additionally resort to trading and the refining of third-
party products, significantly increasing the amount of Scope 3 emissions attributable to their
activities from a sales and revenue perspective. Capturing the variation in perimeter allows for
more visibility on targets, their level of ambition and future achievements.
All emissions resulting from the sale of petroleum products, from extraction to consumption at
the point of combustion, should be included within life-cycle intensity and absolute Scope 3
metrics.
Boundaries of Reported Targets to Cover Material Carbon Exposure
In line with GHG Protocol on GHG accounting guidelines, oil and gas companies can choose to
report their emissions targets either through the equity share or control.
Approach Definition
Equity Share Emissions reported in proportion to financial interest in an asset
Control All emissions reported on any asset or operation that the company has operational or
financial control over
Source: Sustainable Fitch

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The choice of approach can lead to completely different outcomes. The control approach is
more common, although some companies, especially major ones, tend to report both. The equity
share approach allows companies to identify and disclose climate-related risks in line with
financial exposure to these. While a company might not have control over a certain asset, it still
derives revenue from that asset and so is exposed to the asset’s climate-related financial risks.
It can be challenging for a company to influence emissions without operational or financial
dominance and the control approach ensures that companies set emissions reduction targets
within their direct area of control.
Short-Term Targets Hold Management Accountable
Short-term urgency to reduce emissions means that a company needs to have a credible
strategy with ambitious near-term targets in addition to medium-term milestones and long-
term net-zero goals covering all material emissions across its entire value chain. Short-term
targets indicate current the management’s commitment to implement necessary changes to the
business strategy and operations and financial implications.
Absolute Emissions Reductions and Intensity Reduction
Many companies have targets to reduce their carbon intensity, often measured in terms of
amount of CO2 released for an amount of energy produced. A company can decrease its carbon
intensity by improving operational efficiency, shifting to lower-carbon fossil fuel assets (e.g.
conventional oil, natural gas) or adding renewable energy to its portfolio. This is a useful
measure to track a company’s operational improvements and portfolio shift, though real-world,
absolute emissions reductions are needed to achieve the Paris Agreement goals.
Lower carbon intensity can still lead to higher absolute emissions if the company increases its
oil and gas production. A robust transition plan requires absolute emissions reduction targets
covering Scopes 1, 2 and 3 emissions.
Methane is a Key Challenge for Oil and Gas Sector
The IEA estimates that oil and gas operations are responsible for 80 million tonnes of methane
emissions per year (2.4GtCO2e). As a potent GHG that has around 30 times more global
warming potential than CO2 over 100 years, methane is responsible for more than 25% of the
global warming the world is already experiencing today (link).
There is considerable potential to reduce methane emissions in oil and gas production, when
derived from venting, flaring and leaks. Policymakers’ and investors’ focus on methane has risen
significantly in recent years as reducing methane emissions in oil and gas production require
capex to improve leak detection, upgrade equipment and install infrastructure to gather and
process gas instead of flaring it. Identifying and managing these costs should form part of
methane reduction targets. Industry initiatives such as the World Bank’s “Zero Routine Flaring
by 2030” drive action in oil and gas production. The Global Methane Pledge, launched at COP26
in 2021, highlights policymakers’ focus on methane.
Transition to Various Business Models Possible
Robust transition plans should outline how a company reduces emissions from its own
operations and in the use of its product, while showing how transition risks are mitigated and
opportunities for new revenue streams are seized. Operational emissions (Scopes 1 and 2) can
be achieved in such ways as including improved leak detection, equipment and asset
optimisation, switching to renewable energy for operations, or divesting emissions-intensive
operations. Scope 3 emissions reduction requires a more fundamental shift in business model.
Renewables: One pathway is the shift from fossil fuel energy to renewable energy sources.
Some European majors and some independent companies have increased capex in non-fossil-
fuel business models in recent years and are shifting towards renewables. Through M&A and
significant investments in new projects, companies are expanding their portfolios in wind and
solar energy production, and retail and distribution activities.
Alternative fuels: Companies can also consider shifting towards alternatives such as biofuels,
synthetic fuels and hydrogen. The IEA expects only around 15% of overall investment in fuel
supply to be directed towards low-carbon fuels in the next decade to avoid a global shortage in
energy. Simply divesting from high-carbon assets (e.g. oil sands) lowers a company’s reported
emissions and can lower emissions intensity, especially if the energy output is increased through

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a renewable energy source. This does not necessarily lead to absolute, real-world emissions
reduction, if assets are picked up and run by companies with lower operational standards.
Carbon management: Encompasses carbon capture and storage (CCS) using depleted wells.
CCS is still an immature and often economically unviable technology. Climate benefits are
currently still limited and companies are exposed to market volatilities especially when
captured carbon is used for enhanced oil recovery (link).
Shift to Natural Gas: A Transition Path or a Technology Lock–In?
Natural gas has played a role in the shift from coal electricity production over the years. Many
companies have announced strategic shifts from oil to natural gas to reduce the GHG intensity.
According to a study conducted by the UN Economic Commission for Europe, life-cycle coal
power emissions range from 751gCO2e/kWh to 1,095gCO2e/kWh, while a natural gas
combined cycle plant emits 403gCO2e/kWh to 513gCO2e/kWh from a life-cycle perspective1.
The European Commission recently defined some natural-gas-based activities to be transitional
in the EU taxonomy (through the Complementary Climate Delegated Act).
Natural gas faces a number of challenges:
• There are stringent regulatory requirements for generation facilities and they are
subject to a threshold of life-cycle GHG emissions of below 100gCO2e/kWh. For
facilities with a construction permit granted prior to end-2030, direct GHG emissions
need to be lower than 270gCO2e/kWh of the output energy, or the annual direct GHG
emissions cannot exceed, on average, 550kgCO2e/kWh of a facility’s capacity over 20
years.
• While natural gas has lower GHG emissions than coal, current and future investment in
new gas exploration, infrastructure and power plants could lead to carbon lock-in where
fossil-fuel-intensive systems perpetuate or delay the transition to low-carbon
alternatives.
• Technological improvement has led to increased grid-scale storage capacity from
renewable energy and grew more than six-fold between 2017 and 2021, according to
the IEA. This could weaken the narrative of natural gas as a solution to the intermittency
problem of renewables. As countries push towards meeting their climate pledges, fossil
fuel demand will decrease.
• The case in favour of natural gas investing becomes harder to support with the need for
an increase in sustainable and clean energy investments. IEA estimates annual spending
of USD2 trillion this decade to reach net-zero emissions by 2050.
Offsets Should Only Play Marginal Role in Achieving Ambitions
Oil and gas companies need to focus on emissions avoidance and reduction, rather than carbon
offsetting (mostly in the form of nature-based solutions such as reforestation or purchase of
carbon credits).
There are also questions on the integrity of voluntary carbon markets and whether claimed
carbon removals are real and additional, in addition to doubts on how feasible large-scale
offsetting efforts (such as tree planting) are. According to the Science Based Targets initiative
(SBTi) guidelines, offsets cannot be counted towards near-term emissions reduction targets and
may only be considered for neutralising residual emissions in long-term net-zero goals or to
finance additional climate change mitigation efforts outside a company’s targets. Following the
SBTi’s Net Zero Standard, carbon credits are expected to only offset about 10% of residual
emissions.
While the SBTi methodology does not cover the oil and gas sector, Sustainable Fitch considers
the restricted use of offsets as relevant across all sectors. Generally, offsetting should not be
used as a key lever to achieve emissions reduction targets. Instead, it should only be used to

1 For comparative purposes please note that hydropower has median GHG life-cycle emissions

intensity of 24 gCO₂e/kWh according to the Intergovernmental Panel on Climate Change.

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achieve net zero and eliminate remaining, hard-to-abate emissions once other efforts have been
exhausted. Reliance on offsetting through carbon credits is an indication that a company does
not have a clear pathway to achieving its emissions reduction targets.
Investment in Exploration and Production Growth Signal Misalignment with Paris
Plans for long-term oil and gas production growth and continued exploration activity are not
compatible with a Paris Agreement-aligned transition to a low-carbon future. No scenarios
showing pathways towards a net-zero or 1.5°C future project a growth in global oil and gas
demand in the medium to long term. The scenarios also assume that gas and oil demand has
either already peaked or will peak in the coming three to five years.
Oil and gas remain important – albeit shrinking – energy sources for the world in the coming
decades and continued investment to ensure reliable and decarbonised oil and gas production
will be necessary. Company transition plans need to strike a challenging balance between these
competing pressures, ensuring appropriate streams of investment in, and revenue from, legacy
fossil fuel businesses during the transition to a new, low-carbon business model.
Green Activity Investments Needs to Increase Significantly
Oil and gas companies continue to generate the vast majority of their revenue from producing
and selling fossil fuels, despite the recent increase in investments in alternative business
models. Investment in upstream production remains by far the largest capex item for oil and gas
companies in the foreseeable future. The shift towards low carbon investments to transition
into a new business model has been slow. According to recent oil and gas company
announcements of near- to medium-term investment plans, low-carbon capex is only 5%–25%
of total capex so that 75%–95% of their capex still goes to fossil fuel exploration and production.
Investment in decarbonising oil and gas companies’ operations is a key part of a robust
transition plan and production needs to be decarbonised at considerable speed and scale.
Investments in greening activities that replace existing polluting activities are also needed, as
well as investment in CCS, methane detection technologies, upgrading of the assets to reduce
methane leakage and improvements in operational efficiency such as electrification of
operations.
Transparency in revenue streams is the only way investors can assess the strength of a
transition plan and judge the progress being made towards a low-carbon business model. This
disclosure is not yet available so that stakeholders are unable to separate revenue from oil and
gas production and related businesses (such as trade, refining and petrol station sales) from low-
carbon activities. Many companies have started to report according to the EU taxonomy,
including on revenue. In some cases, reporting is extended further to include EU taxonomy-
aligned revenue (in addition to the EU taxonomy eligibility). In the future, we expect this type of
reporting to become standard market practice with increasing regulatory pressure, especially
in certain countries.
Dependence on fossil fuels should reduce in the medium term if companies have robust
transition plans and implement them consistently. Such achievement would be captured in our
Transition Assessment.
More Transparency Needed
With different magnitudes reported, distinguishing among different company’s climate
pathways is difficult. There is lack of transparency on where companies are in their pathway
from being carbon intensive to net zero. This hinders the efficient and effective deployment of
capital by the wider investment community, which is needed to accelerate progress towards
net-zero. Informing on the varying progress across actors within the industry enables resources
and efforts to be effectively deployed where impact could most easily be generated.
Sustainable Fitch’s Transition Assessment aims to to be a framework that could help investors
distinguish across company transition plans and achievements in their pathway.

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Appendix 1: Performance Indicators

Thresholds
Metric Weight 0 1 2 3 4 5
Emissions Ambition
2050 Aim
1.1 Reduction in absolute 2.5% No target/No data Aiming to Net-zero target Net-zero Net-zero -
Scopes 1 and 2 emissions reduce but not with only target with target with
net-zero target partial partial but full coverage
coverage significant
coverage
1.2 Reduction in absolute 2.5% No target/No data Aiming to Net-zero target Net-zero Net-zero -
Scope 3 emissions reduce but not with only target with target with
net-zero target partial partial but full coverage
coverage significant
coverage
1.3 Reduction in intensity 5% No target/No data Aiming to Net-zero target Net-zero Net-zero -
life cycle (Scopes 1, 2 reduce but not with only target with target with
and 3 emissions) net-zero target partial partial but full coverage
coverage significant
coverage
2030 Aim
1.4 Reduction in absolute 5% No target/No data/0%–5% 5%–15% 15%–25% 25%–40% 40%–55% 55%–net-
Scopes 1 and 2 emissions reduction reduction reduction reduction reduction zero
reduction
1.5 Reduction in absolute 5% No target/No data/0%–5% 5%–15% 15%–25% 25%–40% 40%–55% 55%–net-
Scope 3 emissions reduction reduction reduction reduction reduction zero
reduction
1.6 Reduction in intensity 10% No target/No data/0%–5% 5%–15% 15%–25% 25%–35% >= 35% -
life cycle (Scopes 1, 2 reduction reduction reduction reduction reduction
and 3 emissions)
Emissions Reduction
Long-Term
2.1 Reduction in absolute 5% No data/0%–5% reduction 5%–15% 15%– 25% 25%–40% 40%–55% 55%–net-
Scopes 1 and 2 emissions achieved/increase reduction reduction reduction reduction zero
achieved achieved achieved achieved reduction
achieved
2.2 Reduction in absolute 5% No data/0%–5% reduction 5%–15% 15%–25% 25%–40% 40%–55% 55%–net-
Scope 3 emissions achieved/increase reduction reduction reduction reduction zero
achieved achieved achieved achieved reduction
achieved
2.3 Reduction in intensity 10% No data/0%–5% reduction 5%–15% 15%–25% 25%–35% >= 35% -
life cycle (Scopes 1, 2 achieved/increase reduction reduction reduction reduction
and 3 emissions) achieved achieved achieved achieved
Short-Term
2.4 Reduction in absolute 5% No data/0%–2.5% reduction 2.5%–7.5% 7.5%–12.5% 12.5%–20% 20%–27.5% 27.5%–net-
Scopes 1 and 2 emissions achieved/increase reduction reduction reduction reduction zero
achieved achieved achieved achieved reduction
achieved
2.5 Reduction in absolute 5% No data/0%–2.5% reduction 2.5%–7.5% 7.5%–12.5% 12.5%–20% 20%– 27.5% 27.5%– net-
Scope 3 emissions achieved/increase reduction reduction reduction reduction zero
achieved achieved achieved achieved reduction
achieved
2.6 Reduction in intensity 10% No data/0%–2.5% reduction 2.5%–7.5% 7.5%–12.5% 12.5%– 17.5% 17.5%– net- -
life cycle (Scopes 1, 2 achieved/increase reduction reduction reduction zero
and 3 emissions) achieved achieved achieved reduction
achieved

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Financial Actions
Transition Investments – Tracked Data (No Weighting)
3.1 Decarbonising - - - - - - -
percentage (of total
annual investments)
3.2 Green percentage (of - - - - - - -
total annual
investments)
Transition Investments
3.3 Total green and 15% No investments Evidence of 1%–25% 25%–50% 50%–75% >= 75%
decarbonising green and
percentage (of total decarbonising
annual investments) but with
insufficient
detail, or less
than 1%
3.4 Green-to-decarbonising 5% No investments Evidence of 0– 0.5 0.5–1 1–5 >5
investment ratio green and
decarbonising
but with
insufficient
detail to
determine ratio
Transition Revenue
3.5 Green and decarbonising 5% No investments Evidence of 1%–25% 25%–50% 50%– 100% above 100%
annual revenue growth green and
(%) decarbonising
but with
insufficient
detail, or less
than 1%
3.6 Green and decarbonising 5% No investments Evidence of 1%–10% 10%–20% 20%–30% >= 30%
annual revenue green and
(percentage of total decarbonising
revenue) but with
insufficient
detail, or less
than 1%
Source: Sustainable Fitch

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Appendix 2: Scope of Company Interaction and Methodology

Maintenance
Engagement, Confidentiality and Monitoring
Sustainable Fitch’s analytical team will perform the Transition Assessment on a solicited basis
and with participation of the analysed company. It will also be a monitored analysis that will be
updated at least annually to track performance and progress toward the achievement of net
zero. The Transition Assessment will exclusively focus on companies that have transition
strategies in place or are in the process of transitioning.
Company participation is important as many of the Performance Indicators are either not
publicly available or not fully transparent in terms of methodology or calculation used. Similarly,
for the Adjustments, we require deeper understanding of the analysed company’s behaviour.
Should additional confidential information be obtained (i.e. not in the public domain) during the
engagement phase, this information will not be published or be made available but will be
considered in the scoring outcome.
Methodology and Updates
The current methodology applies as of the day of publishing and will remain valid until
superseded by a newer release. Sustainable Fitch will retain the capacity to periodically update
the Transition Assessment methodology in order to keep it relevant and accurate for the energy
sector. This methodology has currently been developed for the oil and gas sector, though we
aim to expand it to cover additional sectors where transition is needed and where our
assessment may facilitate institutional investors in allocating their capital.

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Appendix 3: Important Facts About the Oil and Gas Sector

According to the UN’s International Panel on Climate Change, the world needs to achieve net-
zero GHG emissions by 2050 to limit global warming to 1.5°C with limited or no overshoot. This
means emissions need to be reduced by then to as close to zero as possible, with the remaining,
hard-to-abate emissions being counterbalanced by carbon removal. Total cumulative emissions
achieved this decade will largely determine whether global warming can be limited to 1.5°C.
The world also needs to reduce GHG emissions by 45% from 2010 levels by 2030 to stay on
track to net-zero by 2050. However, countries’ pledges to reduce emissions under the UN
Framework Convention on Climate Change would currently lead to an increase in emissions of
around 11% compared to 2010 levels, only limiting global warming to around 2.4°C,
significantly falling short of goals.
Oil and Gas Sector Facing Significant Transition Risks
Various climate scenarios that align with the Paris Agreement project a significant decrease in
oil and gas demand in the long term. However, should governments fail to implement stringent
policies in response to climate change, demand for oil and natural gas would likely continue to
grow to 2040, according to the IEA.
Oil Demand Decreases under Various 1.5°C Scenarios
Primary Energy from Oil
NGFS Divergent Net Zero NGFS Net Zero 2050 IPR RPS IEA NZE
(EJ)
250

200

150

100

50

0
2020 2025 2030 2035 2040 2045 2050
Source: Sustainable Fitch, IEA, NGFS, IPR

Scenarios aligned with keeping global warming to 1.5°C or reaching net-zero emissions by mid-
century demonstrate a decrease in global demand for oil as a primary energy source in the
coming decades. The IEA’s Net-Zero Emissions by 2050 (IEA NZE), the Network for Greening
the Financial System’s (NGFS) Divergent Net Zero and Net Zero 2050 scenarios and the UN
Principles for Responsible Investment (PRI) Inevitable Policy Response Required Policies
Scenario (IPR RPS) all project peak oil demand to occur in or before 2025.
Similarly, the same scenarios project that global natural gas demand has already peaked and
that demand will decrease significantly between now and 2050. The changes to oil and gas
demand are expected to be driven mainly by changes in consumer behaviour, such as the shift
from internal combustion engines (ICEs) to electric vehicles (EVs) and the switch from oil and
gas to renewable energy and heat pumps for electricity and heat generation.
Gas Demand Decreases under Various 1.5°C Scenarios
Primary Energy from Gas
NGFS Divergent Net Zero NGFS Net Zero 2050 IPR RPS IEA NZE
(EJ)
160
140
120
100
80
60
40
20
0
2020 2025 2030 2035 2040 2045 2050
Source: Sustainable Fitch, IEA, NGFS, IPR

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The IPR RPS projects the global switch from ICEs to EVs to accelerate significantly this decade
and global stock of EVs to overtake ICEs in the first half of the 2030s. While less than 5% of
vehicles in 2023 are EVs, by 2040 over 80% of vehicles globally will be EVs.
Global Switch from ICE to EV Vehicles to Accelerate
ICE EV
(Vehicles)
2,500,000

2,000,000

1,500,000

1,000,000

500,000

0
2035
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034

2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
Source: Sustainable Fitch, IPR RPS

While currently oil and gas together make up around 60% of the source of heating buildings
globally, their role is projected to shrink considerably in the 2030s, almost vanishing by 2050
under the IPR RPS scenario. Renewable energy sources for heating buildings (i.e. heat pumps
and biomass) will heat more than half the buildings globally from the second half of the 2030s.

Heating Energy Source for Buildings Moving Away from Natural Gas
Coal Oil Natural gas Biomass Resistive District heat Hydrogen Heat pump
100%

80%

60%

40%

20%

0%
2047
2048
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046

2049
2050

Source: Sustainable Fitch, IPR RPS

Natural gas plays an important role in global electricity generation, with around 20% of global
electricity generated using natural gas. With renewable energy sources (mainly solar and wind)
expected to produce half the world’s electricity by 2030 according to the IPR RPS, natural gas’s
role in electricity generation is projected to decrease significantly by 2035.

Energy Source of Gloabl Electricity Generation Increasingly Renewable

Coal Oil Natural gas Biomass Nuclear Hydrogen Hydro Solar Wind
100%

80%

60%

40%

20%

0%
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050

Source: Sustainable Fitch, IPR RPS

Pressure on Oil and Gas Industry to Move Away from Traditional Growth Models
Strong statements from scientific and expert bodies, such as the IEA and the Intergovernmental
Panel on Climate Change, highlight that there should be no further investment in oil and gas
exploration or infrastructure for there to be a chance to meet the Paris Agreement goals. In

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response, some companies have started to test alternative sources of revenue, areas for growth
and business models, such as investing in renewable energy, entering the retail power market,
or acquiring or building EV charging infrastructure. We expect the growing influence of
alternative sources of revenue to shift the outputs of the transition assessment over time, with
companies moving up the colour band scale.
There is no one-size-fits-all strategy for oil and gas companies to successfully shift from a high-
to a low-carbon business model and remain profitable, and the sector is expected to witness
disruptive changes. Companies need to develop robust transition plans to adapt to these
fundamental challenges for their long-term business models. Plans need to go beyond GHG
emissions reduction targets and include changes to business strategy, capex allocation and
governance processes.
Growing Regulatory and Investor Demand for Disclosure of Transition Plans
Regulators and policymakers recognise that transition plans are necessary to minimise
stranded asset risk, ensure continued profitability and provide evidence that a company’s
overall business model is aligned with the Paris Agreement. Financial institutions are
experiencing pressure to align their investing and lending activities with the transition to a low-
carbon future. Regulators require banks and investors to disclose their plans to decarbonise
their portfolios which in turn incentivises them to demand disclosure of transition plans from
portfolio companies.
From 2025, EU companies will be required to publish detailed information on sustainability
matters under the Corporate Sustainability Reporting Directive (CSRD). The draft European
Sustainability Reporting Standards includes the need to disclose climate transition plans.
The UK has set out plans to require listed companies, asset managers and asset owners to
disclose their transition plans, building on existing Task Force on Climate-related Financial
Disclosures-aligned rules. HM Treasury launched the Transition Plan Taskforce in April 2022 to
develop the ‘‘gold standard for private sector climate transition plans’’. The final disclosure
framework and implementation guidance is expected to be published during 2023.
The proposed rules to enhance and standardise climate-related disclosures by the US SEC
would require companies to disclose their transition activities and strategies to manage
transition risks. The rules are expected to be finalised in 2023. In 2022, the China Banking and
Insurance Regulatory Commission introduced a set of new guidelines requiring regulated
entities to develop plans to support the transition to a sustainable future, including a plan to
reduce the carbon intensity of their portfolios. Those trends underline the pressure that oil
and gas, alongside other high-emitting sectors, face to transition their business model and
adapt to a net-zero society. Sustainable Fitch’s Transition Assessment aims at benchmarking
and differentiating oil and gas transition strategy to inform investors on the robustness and
ambitiousness of those strategies.

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