Investors warned of misleading carbon intensity metrics in oil and gas sector

The Transition Pathway Initiative (TPI) has warned the investment industry about the use of a carbon-intensity calculation within the oil and gas sector, known as fossil-fuel equivalence ratios (FFE), which could mislead investors when assessing a firm’s net zero progress.

TPI’s most recent paper – Fossil fuel equivalence ratios in the oil and gas sector – comes at a time when investors are increasingly leaning on carbon-intensity metrics to gauge progress made by fossil fuel firms in reducing their carbon footprint.

The Fossil Fuel Equivalence (FFE) ratio is a method used to convert renewable electricity into a hypothetical fossil-based primary energy equivalent, which, according to the TPI report, can inflate the perceived impact of renewables on a company’s carbon footprint, thereby creating a misleading picture of a firm’s decarbonisation progress.

The Institutional Investors Group on Climate Change (IIGCC) reviewed TPI’s report and said that the use of FFE can potentially muddy the waters for investors due to the underlying logic often relying on questionable constants, such as grid intensity or efficiency ratios, staying the same over time.

Crucially, FFE is not relevant for absolute emissions reduction targets, as it applies only to sold energy products, the report highlighted. Furthermore, it found that oil and gas majors can apply FFE methodologies differently, leading to confusing or opaque data.

In 2024, 15 out of 37 oil and gas companies engaged by Climate Action 100+ set targets that include Scope 3 emissions. Of the 12 companies with carbon-intensity targets, the report found that five use FFE in their calculations, with notable differences in FFE methodologies.

“Based on feedback TPI has received from companies, the primary rationale for using FFE appears to be to allow for better comparisons with fossil fuel output, which is reported on a primary energy basis. If companies evaluate the impact of individual projects on their carbon intensities, the use of FFE may strengthen the investment case for renewable energy internally,” the report explained.

“By grossing up renewable energy volumes, using FFE ratios leads to steeper reductions in carbon intensities by increasing the sold energy in the denominator. However, the conversion has no impact on companies’ absolute emissions or amount of renewable energy sold,” it added.

Recommendations

Given the growing influence of FFE ratios in emissions reporting and target setting, the TPI said investors should treat the issue as a high priority engagement issue.

As such, TPI is urging investors to demand greater transparency by pushing companies to disclose the assumptions behind FFE-based intensity figures, or to phase them out.

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