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After misleading shareholders, politicians and the public regarding the risks of global warming from the usage of fossil fuel products like oil, natural gas and coal, major energy companies are under pressure to find ways to reduce it.

Concerns about climate change and extreme weather events such as hurricanes, wildfires and droughts are on the rise. According to scientists, these calamities are a result of global warming. These factors are compelling oil companies to add low-carbon products and services to their businesses.

Moreover, cities including New York City and San Francisco are suing oil majors like Chevron Corporation (CVX - Free Report) , ConocoPhillips (COP - Free Report) , ExxonMobil Corporation (XOM - Free Report) , Royal Dutch Shell plc (RDS.A - Free Report) and BP plc (BP - Free Report) to recover the expenses incurred while countering the impact of climate change. These include rising sea levels, which are the outcome of decades of greenhouse gases emitted from manufacturing and burning petroleum fuels.

ExxonMobil and other oil companies are defending themselves in lawsuits slapped by local and state governments. However, the effects of these lawsuits on the companies are uncertain.

Remedial Actions by Oil Companies

Companies such as Statoil ASA (STO - Free Report) and Total, SA (TOT - Free Report) are known for shifting long-term focus away from oil toward natural gas and renewable energy, which is in line with the global transition to a low-carbon economy. In fact, Total is likely to be the first oil and gas company, with some assets in alternative energies.

Statoil sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Meanwhile, by 2030, Statoil plans to shift about 20% of its capital investments into renewables and low-carbon products. In the last several years, the company has made an investment of about $2.6 billion, which has been majorly allocatedto offshore wind farms.

Among others, Royal Dutch Shell intends to reduce its carbon footprint by 50% through 2050 by growing into renewable energy and reducing exposure in oil and gas.

There are other companies which are willing to cut emissions from their operations by boosting efficiency, plugging leaks and cutting back on gas flaring. However, these are temporary methods with short-term impacts. These companies will divest from renewables as soon as market conditions change. They did not mention any plans to boost investment in renewable energy or take other actions to cut down oil operations.

Action Taken by World Bank

In December 2017, the World Bank – one of the globe’s premier financial institution – announced that it will not provide funds for any upstream oil and gas projects after 2019. Meanwhile, the bank intends to focus on providing funds for projects that initiate energy efficiency, solar power and resilienceto help countries meet their climate goals under the Paris Agreement.

The bank already stopped lending to coal projects in 2010. It is on track to have 28% of its lending going to climate action by 2020. The bank will make exceptions for natural gas developments in the poorest countries that need the fuel to provide access to energy for its citizens. Currently, about 1-2% of the bank’s $280 billion portfolio is allocated for oil and gas projects. This is expected to change soon as threats to climate changes are rapid.

What’s Expected From Fossil Fuel Companies

Per some environment protection groups, stringent regulations and their effective implementations will help reduce carbon emissions in the future and facilitate effective transition to cleaner and renewable energy sources. They believe that corporate governance and environmental management should work together to solve the problem.

The companies should regularly and accurately disclose non-financial metrics, which includes carbon and methane emissions. These companies should strive focus on environment rather than profits to gain competitive advantage and brand loyalty.

The global society demands fossil fuel companies to carry out operations that do not harm the environment. The companies should support prudent climate policies that guide toward reducing global warming emissions. Complete disclosure of the financial and physical risks of climate change to their business operations is vital. Such companies are required to pay for their share of the expenses of climate-related damages and climate change adaptation.

Lastly, the oil majors are required to align their business models with a carbon-constrained world and keep global warming lower than a 2°C increase above pre-industrial levels, as agreed by world leaders. This indicates that absolute carbon emissions from all global energy utilization need to fall 63%, while absolute emissions from oil and gas products must fall 35-60%.

Bottom Line

Though oil is a necessary component for the growth of any nation, climate change and related advances in other energy sources make it less important. Moreover, the emphasis to shift to renewable energy is likely to dent prospects of the companies, which are unwilling to transform operations. These changes may appear restrained, since they imply a distinct shift in an industry that for years has struggled with government climate regulation and in many cases, sought to dim the need for action on global warming. However, investor’s concerns are high, which is likely to force oil companies to focus on other renewable sources of energy.

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