As large oil and gas companies increasingly take on climate change commitments, a unique barrier to achieving actual emissions reductions has emerged, Andrew writes.

  • Some are selling off assets — often carbon or methane-intensive facilities — to companies that lack environmental targets and in many cases are privately owned, with fewer incentives to cut their emissions.

Why it matters: A result of such mergers and acquisitions is that high-emitting assets can simply change hands, rather than be retired.

The big picture: A new report out from the Environmental Defense Fund, an environmental group, and Ceres, a sustainable investment advocacy group, recommends that companies take climate goals into consideration during the negotiations process.

  • The report, published Thursday, calls for putting the onus on the companies selling assets to ensure their deals teams take climate and sustainability concerns into account when negotiating terms.

How it works: One proposal is ensuring that public reporting of emissions and other environmental impacts continues after a transaction closes, even if an asset goes to a private company with more limited disclosures.

  • The series of voluntary principles says buyers should also plan ahead for the decommissioning of transferred assets, such as natural gas wells, including the costs and liability issues.

Context: Research EDF published last year examined 3,000 deals between 2017 and 2021 and found that public-to-private transfers of fossil fuel assets have comprised a growing majority of deals.

  • In addition, deals have increasingly moved fossil fuel assets away from companies that have environmental targets, said Andrew Baxter, a report coauthor and director of climate transition at EDF, in an interview.
  • An example of this is BP’s 2019 sale of its Alaska assets to Hilcorp.
  • “Business as usual M&A is threatening to stall out global greenhouse gas emission reductions, potentially,” Baxter said.
  • “We’re not assuming nefarious intent behind any of these transactions,” he noted, saying the problem instead is a lack of environmental risk controls.

Yes, but: One potential stumbling block to incorporating climate risk into deals is the incentive structure for M&A teams.

  • “The deals teams within these companies are incentivized to do them quickly and to extract as much value as possible,” he said.

Our thought bubble: Including the climate ramifications of a transaction on a deal sheet may not be an easy sell, but it could pay off over the long term.