Environmental, social, and governance (ESG) matters are increasingly becoming a significant area of focus for companies, investors, and their stakeholders across all industries, including the oil and gas sector, especially as the industry moves towards an energy transition. More than ever, ESG is shifting from a corporate responsibility to an integrated business strategy. This can be evidenced in recent quarterly earnings calls where terms like ESG and sustainability are becoming more and more a central discussion point among executives, investors, and stakeholders.
But, simply recognizing that ESG is an important driver for attracting capital can only go so far. Achieving long-term value, performance, and growth really starts by crafting an effective ESG strategy and message that resonates with investors, stakeholders, and the public and having accountability for executing that strategy and message.
So, how can companies effectively communicate corporate advancements and spread the message that a company has made a serious ESG commitment? How can companies tell their unique ESG “story”? Opportune LLP Managing Director Amy Stutzman and Director Reid Brooks offer their insights to these questions and more.
Stutzman: Well, the first step is strategy development and thinking about how sustainability drives long-term performance. We would look at how ESG is already integrated into the business and existing metrics. In oil and gas, we find that there are many sustainability initiatives already ingrained in the business strategy and culture—for example, environmental initiatives and employee safety. So, we start by evaluating those metrics and identifying gaps.
Brooks: I would frame this differently. I don’t think companies are looking to convince, but rather begin a dialogue about their current operations and how those operations perform in the context of ESG. Obvious stakeholders include the investors and the public, but we are seeing company management working alongside these stakeholders to provide meaningful information about the company’s progress towards its goals—whatever those goals are.
Stutzman: “Convince” may be an interesting word choice. I would just make clear that we see this as more than a check-the-box exercise with a goal of issuing a sustainability report, but really a change in strategy. As far as stakeholders, certainly, investors because this will influence the ability to attract capital, but also executives and employees, customers, analysts, industry groups, advocates, government, and regulators as well.
Stutzman: This is an area that we’re following closely, and we’re involved in discussions with our clients and the industry as we all try to work toward best practices in reporting and convergence of standards. There’s a lot of activity in the industry right now with leaders working together on this. As a couple of examples, the Energy Infrastructure Council has an ESG working group. So does the Energy Workforce and Technology Council. Both groups provide guidance and resources such as reporting templates to their members.
The SEC recently issued an alert with the intention of examining ESG investing and disclosures more closely. How important is a coalescence of ESG standards to this process going forward?
Brooks: I think about this from two perspectives. The first perspective is that even with a lack of a unified framework, there are many very well thought out frameworks (e.g., SASB, TCFD, GRI, etc.) and there’s no reason a company cannot use one or more of these current frameworks to create a report that provides meaningful information to its various stakeholders. The second perspective is that a unified framework will benefit comparability. But just like we see with any new accounting standards or SEC reporting requirements, there’s no one-size-fits-all set of ESG disclosures. Every company is different and will need to prioritize different items based on their business. So, we’re certainly excited by the work being done by the SEC to create a level playing field, but that shouldn’t prevent companies from starting now.
I would also encourage companies to get engaged in the rulemaking process. When the FASB was doing outreach on revenue recognition, there were, in some cases, a lack of representation by the energy industry and it created some sticky issues that had to ultimately be addressed directly with the SEC to ensure stakeholders ended up with better information, which didn’t line up directly with the revenue recognition standard. The SEC recently issued a list of questions and it’s obvious from these questions they too realize that a one-size-fits-all approach may not be the right approach and that the level of disclosure that should be required may vary by industry. The SEC recently added a page to its website to highlight climate and ESG risks and opportunities. The SEC has highlighted climate-related risks as a 2021 examination priority and created a climate and ESG task force.
Stutzman: No, I don’t think it’s enough to let the data do the talking, so simply publishing a report isn’t enough. Again, I think this is something that companies are really embracing from the top down and it’s becoming a part of the business strategy and culture. It’s a way for the industry to tell the story of the positive impact we have on so many aspects of our modern way of life. So, what we’re seeing is executives are really engaging with their stakeholders on these issues in various channels in everything from earnings and investor presentations to social media.
What data do investors latch on to? In other words, where should you put your priorities?
Brooks: My answer is intended to address upstream oil and gas priorities. While we see great value in the “S” and “G”, producers realize that the most meaningful impact they can have in the short term is working on the “E”, specifically emissions, air quality and management of freshwater, produced water and other hazardous materials from their operations. As I mentioned above, each company’s priorities will differ based on their assets and where they operate. In some regions, the flaring of associated gas is a major issue for stakeholders, whereas in other regions, minimizing freshwater usage is a higher priority.
Big picture, I think a company needs to evaluate its operations first using something like the Pareto Principle. No one expects perfection out of the gate. Find the lowest hanging fruit that can be addressed and make meaningful and consistent progress in those areas. If a company can address the “20%” that will begin moving the needle in the right direction and act as a catalyst and create synergies in other areas.
Stutzman: As far as coming up short, I think those companies that have dismissed ESG or haven’t yet started thinking about it are falling behind. I think you need to start to be thinking about these initiatives and how to report them now. From what I’m hearing in the market and from private equity, there’s not an expectation of perfection in year one but rather the expectation is that companies are engaging in the issues and showing progress over time. I think you start small and then scale up over time.
Brooks: This is an area where I don’t think the industry across all sectors gets much credit. Based on what I see and hear, the industry has invested a great deal of capital in improving its efficiency and minimizing the impact on the environment. Electrified frac fleets, multi-pad drilling, green completions, VRUs [vapor recovery units], wastewater recycling, and importantly, progress on the commercial viability of carbon capture.
I think the oil and gas industry has been a lightning rod for bad press for a lot of reasons, but I think there has been a “fly under the radar” approach by the industry in the past with not enough efforts to educate the public on how companies are responsibly developing their assets. The irony to me is how little the public understands the impact our industry has on everyone’s daily lives. For better or worse, fossil fuels play a vital role in nearly all the products people depend on. For the same reason you don’t hear a lot of good news daily, it isn’t juicy and attention-grabbing so it doesn’t get much airtime in the media. But there are a lot of smart, hardworking people out there making energy cleaner and safer even if those stories aren’t showing up in your newsfeed.
I also think social media and its algorithms can tend to create groupthink and feedback loops that amplify views of the industry, whether negative or positive. “The Social Dilemma” is a good documentary covering this topic for anyone that hasn’t seen it.
Stutzman: This is an area where I see a lot of value so we spend a lot of time discussing how we can really stay focused on what has a material impact. We also talk a lot about how to link performance in ESG initiatives to long-term business performance and risk. A simple example of this for E&P companies is water management where you would measure water usage and percentage recycled. We would look for ways operationally to be smarter and more efficient with water usage. These changes will ultimately impact financial performance and investor’s view of your company versus peers.
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