Most companies have plans in place to identify and manage the normal operational risks of enterprise asset management (EAM). But, it is equally important to consider the potential emergence of ESG risks that a company may face. While predicting events such as hurricanes, pandemics, and regulatory violations is difficult, preparing for or mitigating the impact can avoid potentially devastating effects on an asset-rich organization, as well as its employees and shareholders.
As a reminder, ESG investing looks at three elements: environmental (E), social (S), and governance (G) issues, with stakeholders looking not only at the financial parameters of a transaction but also the non-financial parameters.
For example, oil and gas companies should develop plans to restore power lines or pipelines after an earthquake or other natural disaster. These plans should describe procedures for how employees will access remote sites, which assets will be prioritized, what additional equipment will be needed, and how it will be obtained.
Importance of ESG for O&G
The best thing about ESG ratings for the oil and gas industry is that they provide a simplified means of comparison; without them, we would not be able to compare thousands of companies on the same metrics. Otherwise, we're left reading long reports on climate solutions from Exxon Mobil that might make you think they're in the business of carbon extraction.
ESG indicators measure real results in their industry or on a global scale:
- Sustainalytics rates Exxon as "High Risk" and ranks it in the 25th percentile in its industry group (oil and gas producers), but it falls to the 83rd percentile when compared to the global world, which excludes the industry.
- MSCI ranks Exxon as an "average" company in the integrated oil and gas industry, but argues that it is "highly out of sync with global climate goals" and says it is not an ESG leader "on any of the key issues" that are assessed for the industry.
The best approach to ESG ratings is to find the process that best aligns with investment values, or to look at all available ESG ratings and go with the consensus.
How market leaders of the O&G industry deal with ESG implementation
Among the elements that justify the timid rebound of the oil majors (ExxonMobil and Chevron had respectively dropped about 40% and 30% in 2020), John Plassard, investment director at Mirabaud, puts forward pressure of "ESG" investments -responding to criteria assessing the consideration of environmental, societal and good governance issues in the strategy of companies- as well as the reduction of dividends of energy companies during the health crisis, as well as doubts about the sustainability of a high oil price.
If the fashion did not take immediately on the other side of the Atlantic -ExxonMobil having repelled the assaults of environmental activists for nearly 20 years before giving in to a small activist fund to which it had to give up 3 seats on its board of directors- the American majors are now doubling down.
- Chevron, for example, announced that it has started producing biofuel at its El Segundo refinery in California and has installed its first compressed natural gas station in the state.
- Talos Energy, an oil and gas exploration and production company focused on safely and efficiently maximizing long-term value through its operations currently located in the United States and offshore Mexico. Talos Energy improved our ESG performance by reducing our Scope 1 emissions intensity, enhancing our outstanding safety record, and announcing key enhancements to our compensation and governance structures to better align our operations with the interests of our stakeholders.
- ExxonMobil, for its part, continues to focus on carbon capture and storage techniques, and in this context signed agreements in July to participate in a project in Scotland and to explore the development of infrastructure in Normandy.
What is ESG rating and how it is formed
The ESG Rating is compiled by independent research agencies - Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI, Refinitiv, and others. They assess companies' development by three criteria - E, S, and G - and assign scores on a hundred-point scale.
In the United States and Europe, the Energy Transition for Green Growth Act requires oil and gas companies to publish non-financial statements. At the same time, it is important to provide investors with a simple financial analysis grid to facilitate the emergence of socially responsible investments (SRI). It is in this context that ESG criteria come into play:
- Environmental criteria: waste management, reduction of greenhouse gas emissions and energy consumption, sustainable prevention of risks associated with industrial disasters (oil spills, soil contamination, etc.)
- Social criteria: respect for employee rights and social dialogue in management policies, parity and number of people with disabilities, prevention of industrial accidents, staff training
- Governance criteria: fight against corruption, respect for transparency of executive remuneration, and relations between shareholders, management, and the board of directors.
Taking into account ESG criteria makes it possible to incorporate social and environmental issues and responsibility from a governance perspective into its overall management. Thus, this measure can not only improve the company's performance but also enhance its image. A company that integrates ESG criteria into its CSR approach makes a real difference to potential investors. Indeed, these criteria are the basis for the labeling process of socially responsible investment (SRI) funds: between the search for efficiency and a responsible focus on savings.
ESG: moving from a compliance exercise to a catalyst for innovation
The EY US oil and gas reserves, production and ESG benchmarking study found that ESG matters remain high on the minds of management teams of the companies studied. Thirteen companies obtained third-party assurance of their reported ESG metrics, with only two of those companies obtaining reasonable assurance. Further, 43 of the companies reported at least one scope of greenhouse gas emissions, with 33% of those companies reporting at least one category of Scope 3 emissions in addition to their Scopes 1 and 2 emissions.
"More oil and gas companies will begin to embrace ESG and sustainability as a catalyst to innovation throughout their strategy and in operations, rather than view it merely as a compliance exercise," said Pat Jelinek, EY Americas Oil, and Gas Leader. "While the approach companies take will look different, the intersection of digital technology and sustainability provides a tangible path to drive strategy and support ongoing resilience."
PureWest is committed to a transparent approach to ESG. It is a privately held energy company focused on developing long-term natural gas reserves in the Pinedale and Jonah plays in the Green River Basin of Wyoming. PureWest has launched a digital tool that gives users a view of their operations from an ESG perspective.
In 2022, PureWest joined the Oil and Gas Methane Partnership (OGMP) 2.0 initiative, further demonstrating its commitment to the transparent reporting of methane emissions data.
The US is leading the way in ESG
There are also regional differences in the evolution of ESG investment and reporting, with Europe leading the way and the US seen by some as lagging behind.
"Europe has driven the initial demand, regardless of the cost or sustainability of the pace of such investments," Josh Sherman, Opportune's partner in charge of integrated financial reporting, told Hart Energy. "I think there is a limit to the demand for ESG, as some investors will always push for the end of fossil fuels, regardless of the consequences." He noted that other investors, however, believe that moving away from fossil fuels too quickly could be detrimental to society, especially in developing countries.
"The world needs to add energy, not subtract energy," Sherman said. "E&P operators understand and have taken responsibility for reducing their carbon footprint."
Rextag also understands the importance of maintaining ESG standards and supports the industry by providing up-to-date renewable infrastructure data for the O&G industry. Oil and gas companies can plan their projects based on information about the location of existing and prospective renewable energy projects, using information related to wind turbines, solar energy projects, biomass/disposal sites, renewable gas, etc. This new and expanded dataset will include thousands of new miles of electric transmission lines, hundreds of more substations, and close to two thousand more renewable energy power-generating facilities.
