National oil companies (NOCs) constitute half of the world’s oil and gas production and two-thirds of global reserves. However, they have received less attention from investors regarding decarbonisation challenges. This report outlines the role of investors in directing and incentivising the energy transition, how NOCs can decarbonise activities, improving transparency, preventing offshoring of emissions and engagement with NOCs, among other factors.

Investors’ exposure to NOCs

International oil companies face increasing pressure to reduce greenhouse gas emissions and transition to clean energy, while investors, regulators, and others pay less attention to NOCs. NOCs face geopolitical and climate risks, which investors can influence and direct the energy transition by taking immediate steps to address disclosure requirements, develop and apply ESG frameworks to NOCs, and call on banks to stop financing new oil, and gas expansion projects by NOCs.

ESG risks and NOCs

The report assesses climate and governance risks in NOCs along with corruption, nepotism, and political malfeasance. Compared to IOCs, Sustainalytics assessed that most NOCs have severe risk scores, increasing concerns regarding NOC climate strategies and corporate governance. Similar concerns were echoed by NRGI’s Resource Governance Index, emphasising the need to strengthen integrity measures and adopt clear rules on commodity sales.

Potential avenues for investors’ influence on NOCs

Investors can influence NOCs on activities that align with climate goals. The report outlines the potential avenues for investor influence on NOCs by considering risks faced by investors, disclosing NOCs’ climate-related risks, ESG frameworks, and banks’ financing decisions. The report also highlights the avenue of support in the form of financing for NOC commitments to the energy transition for low carbon and associated projects.

Negotiating exposure and influence

Investors play a crucial role in directing and incentivising the energy transition to meet the Paris Agreement’s goals. The report suggests directing NOCs to adhere to climate disclosure requirements to improve transparency, developing and applying ESG frameworks to NOCs, and calling for banks to refrain from financing new NOC oil and gas expansion projects.

Recommendations for investors and financial actors

Although investors and financial actors are engaging on climate with IOCs, there is still a lack of progress regarding NOCs. The report suggests these recommendations for investors and financial actors to manage NOC exposure risks and engage with NOCs on climate-related issues. The recommendations include requiring NOCs to adhere to climate disclosure requirements, extending ESG frameworks to NOCs, and calling on banks to refrain from financing new NOC oil and gas expansion projects.