Impact of ESG on Oil and Gas Sector
The creation of environmental, social, and governance (ESG) values and metrics herald a new era in how corporations are managed, measured, and operated. This seismic change will continue to drive companies away from the earlier greed of short-term profits toward success that is defined not only by profitability but also by a sustainable and measurable contribution to the betterment of society at large. This new paradigm brakes a long-established mold. While ESG is perceived by some to be difficult to implement, and it may seem like a profit-killer, the irony is that, for most companies that implement ESG programs, including those within the oil and gas industry, it has the opposite effect.
Issues at Hand
According to the International Energy Association’s (IEA) Global Energy Review, renewable energy would grow by 3% in 2022, inclusive of a 7% increase in electricity generation from renewable sources. Logically , this would imply that fossil fuel demand would decline. But all things are not constant, and because of an estimated 4.6% increase in global energy demand this year, a year when the world learns to cope with the after-effects of COVID-19, the demand for fossil fuels has not diminished and will not any time soon. Coal, driven largely by Asia (specifically China), is a significant part of that demand, and steel fabrication is leveraged to extract coal. However, natural gas is a driver across nearly all geographies. Even as we seek to supply more of our growing energy needs from renewable sources (like the EU plan to replace Russian fuel with clean energy), the demise of fossil fuels—for good or for bad—is greatly exaggerated. While the industry itself is not going away, the way in which it operates and its contribution to the economy and society most certainly will be transformed.
Profitability vs Ethics
Certainly the societal implications of a focus on ESG represents an ethical imperative. But the truth is that the financial aspect is equally critical. BlackRock is the world’s largest investment manager, with $10 trillion of assets under management. According to S&P Global, oil and gas represented 2.55% of its total investments and coal and consumable fuels accounted for 0.36%. Despite these small percentages, the investments are material and represent close to $255 billion and $36 billion, respectively, in the energy sector. Although the industry is gradually reforming itself to improve environmental sustainability, it still lags to some extent on social and governance fronts. Oil majors and other multinationals have adopted best practices in ensuring employee health and safety , including the way they utilize mining plant and equipment. However, the same is not true in case of the national oil companies. Many of these companies lag on the social and corporate governance front. Adopting a holistic approach can help company leaders to ensure all aspects of sustainability are covered in their ESG strategy. In the coming years, the pressure will mount on companies to be more transparent about their ESG credentials. Some of the leading oil and gas players in the sustainability theme are Equinor, Shell, ExxonMobil, Total, Chevron and OMV.
Conclusion
Despite all the talk about decarbonizing the oil and gas industry, net-zero economy goals, and the importance of ESG overall, energy companies should not lose site of the fact that (1) it is unlikely there will be a decline in global energy demand—populations are continuing to grow—and (2) broad index funds, as opposed to actively managed funds, simply cannot abandon the sector or create stranded assets. But, a lack of an ESG strategy will ultimately affect a company’s access to public, and increasingly private, capital. And that will happen to all companies, whether publicly funded or not. Adopting a holistic approach can help company leaders to ensure all aspects of sustainability are covered in their ESG strategy. In the coming years, the pressure will mount on companies to be more transparent about their ESG credentials.