Italian oil major Eni’s inclusion of indirect Scope 3 CO2 emissions in its new sustainability-linked financing framework will set a benchmark for other high-emitting companies seeking to raise ESG-linked debt, and is likely to put the company ahead of tightening standards.
Eni has created its own methodology to measure Scope 3 emissions, which although indirect typically account for the majority of a company’s CO2 emissions.
“Our methodology is comprehensive – it doesn’t exclude certain areas of the world or partnerships nor is it limited to operating activity or operating volumes,” said Francesco Gattei, Eni’s CFO. “It’s not limited to a subset of performance or activity – instead we’re including all our activity, which is a first.”
Scope 3 emissions are difficult to measure because they are outside each company’s direct control and relate to how customers use a company's products. Eni's methodology allows it to calculate and include Scope 3 emissions on the volume of products that it is selling and trading.
Eni says this is the first time an oil and gas major has published Scope 3 emissions as part of a sustainability-linked framework.
The framework is designed to support Eni's long-term plan to reach net-zero CO2 emissions by 2050 as it readies its first sustainability-linked bond issue.
“Our emissions calculated with our methodology cover the entire set of our processes – our upstream and downstream activities and also the quantities that we are buying from third parties and reselling to the market,” Gattei said.
In February, French oil major Total also pledged to address Scope 3 emissions and net carbon intensity objectives when it announced that it will only issue SLBs from now on as opposed to conventional bonds. But it is yet to publish a framework or issue an SLB.
Missing the point
Nearly all companies that have issued SLBs have focused on Scope 1 and 2 emissions, which cover their own operations. That misses the bulk of emissions and pressure is increasing on companies to properly consider Scope 3 ahead of the UN's COP 26 climate change conference in Glasgow in November.
"To do SLBs you need metrics and you need ambitious targets. Scope 3 is not yet well established but it is probably coming before COP 26," said Jean-Marc Mercier, vice-chair of capital markets at HSBC.
Indeed, both buyside and sellside in the financial markets are increasingly clear that high-emitting companies need to come clean about Scope 3 emissions as they try to raise more sustainable debt to transition to a low-carbon future – not least if they want to overcome the stigma of so-called greenwashing.
“It is important for high emitters to be upfront about what they are doing,” said Jarek Olszowka, head of sustainable finance at Nomura.
Scope 3 emissions are also particularly relevant for the financial sector. Emissions linked to financial institutions’ investing, lending and underwriting activities are on average more than 700 times higher than their direct emissions, according to research by environmental group CDP.
“Scope 3 is an issue for heavy polluters and the financial industry – in our case what we finance and invest in,” Olszowka said.
Competitive advantage?
It has taken around three years to complete the work required to produce its framework, but Eni said that it could offer a competitive advantage as regulatory standards tighten and because other oil majors are less prepared.
“We are in a privileged position compared to our peers. They have all declared long-term targets in different ways, but they don’t have internal targets or a set of methodologies that are complete,” Gattei said.
Eni’s framework includes clear interim targets, which have proved to be an issue for Royal Dutch Shell, for example. The Anglo-Dutch oil giant has been ordered by a Dutch court to hasten cuts in its absolute carbon emissions by 45% by 2030 compared to 2019 levels, instead of by 2035, after announcing 2050 net-zero plans.
“Most of our peers do not have interim targets. The net-zero target in 2050 is just a long-term reference to design a trajectory that has to be measured time and time again,” Gattei said.
Eni said that its comprehensive approach is putting it at the forefront of the transition of the oil and gas industry and could improve its financial performance, even if tighter standards are introduced.
The International Energy Agency said last week that investors should not fund new oil, gas and coal projects if the world wants to reach net-zero emissions by mid-century.
“As there is no standard, we will design our emission impact assuming all processes are our responsibility – I have to consider the broader view. I think the best message is to be proactive in pursuing a reduction of emissions,” Gattei said.
Eni is aiming to issue its first SLB when market conditions are favourable and is planning to replace a substantial percentage – possibly a majority – of its conventional bonds with SLBs, depending on market reception.
“The logic is to reduce the use of traditional bonds and to issue sustainability-linked bonds,” Gattei said.