The energy transition towards a low-carbon future is facing challenges due to geopolitical, financial, and technical factors, despite the increasing focus on climate regulations. Dr. Valentina Kretzschmar from Wood Mackenzie highlights the impact of last year’s pivotal climate disclosures, including new standards from the ISSB and the EU’s CSRD, on the oil and gas sector. While the mandatory climate regulations are putting pressure on companies to improve reporting and decarbonisation efforts, there is debate on whether these regulations will affect traditional business models.
Geopolitical volatility and concerns about energy supply security have given some breathing space to the oil and gas sector, reducing pressure to embrace clean energy diversification. However, the challenges of decarbonisation remain, with backlash against green policies and climate disclosures in Europe and the US leading to temporary relief for the oil and gas sector. Nonetheless, regulatory pressures are expected to increase, requiring companies to focus on climate risk mitigation and energy transition strategies.
The adoption of new mandatory climate standards, such as IFRS S1 and S2 and the EU’s CSRD, is expected to impact companies’ reporting practices starting in January 2024. Auditors will become more rigorous in assessing climate disclosures, as regulations evolve rapidly following the Paris Climate Agreement in 2015. However, the energy transition faces headwinds from geopolitical tensions, macroeconomic pressures, and technological challenges, making climate goals harder to achieve. Many developing countries have signed up to climate disclosures, but political and social polarisation, especially in the US, poses challenges to climate initiatives.
The urgency for action by governments and regulators is driven by the projected global warming reaching 1.5 °C by 2034 if current trends continue, emphasizing the need for an orderly energy transition. Policy support, similar to the US Inflation Reduction Act, will be crucial to accelerate the development of new energy systems and incentivise private investment in clean technologies. A dual-track approach is necessary, with old and new systems working together to achieve decarbonisation while maintaining energy security and economic growth.
Despite the puncturing of the ESG bubble in 2021, sustainability remains deeply embedded in many countries, with climate-related regulations continuing to push for a green transition. While geopolitical volatility and macroeconomic disruptions may slow down the energy transition, key stakeholders in the energy sector believe it is a megatrend that will pick up pace once global stability is restored. Oil and gas companies must prioritize climate risk mitigation, reduce emissions, and be transparent in disclosures to meet regulatory requirements and maintain their social license to operate.
As geopolitical volatility persists and elections in over 60 countries in 2024 continue to disrupt the energy transition, oil and gas companies will face increased pressure to prioritize climate risk mitigation. Diversification into clean technologies could be a lever for companies, but it must make commercial and strategic sense to gain support from shareholders. Ultimately, companies must balance sustainability goals with business strategies to navigate the evolving landscape of the energy transition.
