Integrating the climate principles into gas and oil dealmaking

A new report published by Environmental Defense Fund (EDF) and Ceres outlines the first-ever climate-related guidance for oil and gas companies entering merger and acquisition transactions. As shown in EDF’s Transferred Emissions report, oil and gas industry merger and acquisition transactions (M&A), while a routine part of business, are a significant source of climate risk. Whether intentional or not, the majority of oil and gas mergers and acquisition deals from 2017 to 2021 relieved the seller of climate responsibilities without requiring the buyer to uphold the same climate standards.“It’s clear that a successful energy transition demands new models of oil and gas dealmaking that take environmental impact into account,” said Andrew Baxter, director of energy strategy at EDF. “The principles we’ve developed outline critical steps for the industry to consider their climate responsibility when buying and selling assets.”

Whether intentional or not, the majority of oil and gas mergers and acquisition deals from 2017 to 2021 relieved the seller of climate responsibilities without requiring the buyer to uphold the same climate standards.

EDF and Ceres developed the Climate Principles for Oil and Gas Mergers and Acquisitions through a series of roundtables and consultations with asset managers, private equity firms, banks, oil and gas companies and nonprofit organizations. The process was oriented to develop a series of principles that would be ambitious, effective, and practical for use in real-world transactions.

At the core of the Climate Principles is the belief that buyers of assets should continue to uphold the maintenance of climate standards after a change in ownership. As more banks and financial institutions adopt financed greenhouse gas emissions reduction targets and make net zero pledges, the sale of high emitting assets to operators with fewer or less ambitious targets and less stringent disclosures will be more challenging to finance and advise.

The Climate Principles highlight the need for diligence performed prior to the initiation of deals, including an assessment of both the climate standards of potential acquirers and their financial capacity to maintain those standards.

At the core of the Climate Principles is the belief that buyers of assets should continue to uphold the maintenance of climate standards after a change in ownership.

“Integrating the climate principles into dealmaking is a critical opportunity for oil and gas companies and all parties involved to demonstrate leadership on climate, fulfill their climate commitments in a credible way, gain a competitive advantage in negotiations, and level the playing field across the industry,” said Laetitia Pirson, a Ceres oil and gas expert. “It is critical that the industry, financial institutions, and civil society embrace these solutions and continuously work to strengthen them.” All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.