Lisa Rushton * Womble Bond Dickinson
The institution of environmental, social and governance (ESG) values and metrics represents a true revolution in how corporations are managed, measured, and operated. This sea change will continue to drive companies away from the familiar framework of short-term profits toward success that is not only defined by profitability, but also by a “sustainable” and measurable contribution to the betterment of society at large. While ESG is perceived by some to be – and can be – difficult to implement; and 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 will almost certainly have the opposite effect.
Most of the large integrated energy companies are well on their way to establishing ESG policies and programs and have begun efforts to reduce and minimize their impact on the environment. Just a few examples include:
* In November 2020, Occidental Petroleum Corp. became the first large US petroleum producer to set a net zero emissions target associated with their own emissions by 2040, and a commitment to reduce GHG associated with their products by 2050.
* Shell Oil held a shareholder vote this past year to approve their sustainability strategy which was met with 89% approval. The premise of that strategy was their goal to reduce by 100% their carbon intensity by 2050.
* ExxonMobil has announced a four-prong sustainability framework that includes the investment of $3 billion in carbon capture and storage projects.
* British Petroleum invested and continues to invest significantly in wind, solar, and hydrogen and is one of the largest contributors to renewable organizations globally. In 2020 they divested operations that reduced the company’s overall emissions by 5.4 Mte making an initial step towards their stated goal of reducing emissions by 41 Mte by 2050.
* Kinder Morgan has formed a new unit to explore green energy opportunities, including the storage and handling of liquid renewable transportation fuels such as ethanol, biodiesel, renewable diesel, and hydrogen.
What’s clear from the headlines and to anyone working in the industry is that energy companies are paying attention and embracing the ESG revolution. They are leading the way on many fronts. Shareholder buy-in, media pressure, customer expectations and demands are the drivers of change for Big Oil as well as a clear understanding of the social and economic imperatives. Mid-sized and small players too are increasingly motivated by access to capital along with customer expectations and ethical concerns. How ESG programs are instituted at these companies, however, may look a little different with thinner operating margins and limited human capital.
The key for any company is to know where it stands now so that it can get where it wants to be. Every company must understand where they stand within the ESG framework and have policies tailored to that company with goals aligned with business strategies. It seems basic, but it is critical. Only then can progress be measured.
Establishment of reporting guidelines has begun, which of course will provide a guidepost for the development of programs and benchmarking against other companies. The Securities and Exchange Commission, the Sustainability Accounting Standard Board (SASB), the American Petroleum Institute (API), Carbon Disclosure Project (CDP), and the Task Force on Climate-related Financial Disclosures (TCFD), are each designing frameworks based on stakeholder input for disclosures and reporting. But regardless of these standards, companies need to create programs that are tailored to their operations.
While ESG goals may seem daunting, all that is expected of companies right now is that they embrace the concept and take action.
Below are a few steps that can help E&P companies start their ESG journey.
* Create a cross-functional team to develop a process to craft a plan. Ensure that this team includes members of the company’s disclosure committee.
* Consider retaining an outside consultant to help craft your plan and reporting framework—preferably someone with experience assisting companies in the same industry.
* Work with energy industry trade groups to learn what peers are doing with respect to climate plans and preparations for disclosures.
* Review policies and procedures to ensure that they address ESG goals, and then continue to evaluate how effectively the company has executed on these policies. The board should be satisfied that implementation of the policies and procedures effectively aligns with the board’s overarching strategy and is moving the company towards net-zero.
* Require reporting throughout the company so that managers know that corporate executives are focused on climate change as a business imperative.
* Continue board education on frameworks for the plan and related disclosure obligations. Education is not a one-time event, and effectively should trickle throughout the organization.
* Establish regular board review cadence and oversight of the planning process, the plan itself, and progress against the plan.
* Document steps, process and progress in a way that does not create an undue distraction for your company. Many small-cap companies will not be able to devote a large staff or resources to climate issues. The roadmap and the goals must be credible and authentic to what the company can realistically deliver.
Taking small steps today with additional steps planned for the future can put your company on the right path to stay aligned with various stakeholders.
There is no rule prohibiting creativity. In fact, looking at your business through a different lens may offer some opportunities for reframing your basic assumptions and unlocking value in hidden corners. In many cases, embracing ESG is a journey that produces long-term benefits for a company. Good sustainability practices can sometimes produce savings over time and satisfy some of your company’s most important constituencies. It also may create a value proposition and a marketing narrative to bring in new investors, along with new capital.
The author
Lisa Rushton serves as Co-Head of Womble Bond Dickinson’s Energy and Natural Resources Sector and Head of the firm’s Renewable Energy Subsector. In that role, she advises corporate clients on matters relating to federal, state, and local environmental, health and safety laws and regulations, and was identified by Chambers as one of the leading environmental practitioners for business transactions.
