ESG driving change
ESG as a business driver has been a reality that has long been bubbling under the surface. What is important to understand is that demands for ESG are not only coming from investors, but importantly they are now expected by employees, customers and increasingly regulators. Activist shareholders are shifting to an ever more influential stance, forcing companies to change. This trend is likely to continue.
Decisions relating to ESG and sustainability are growing in importance at the board room table. Just look at the recent changes in strategy at BP, Shell, SNAM, Repsol and other large energy companies. Bernard Looney (CEO) announced BP is an Integrated Energy Company (IEC), no longer an International Oil Company (IOC). Changes are happening rapidly, and many of the same O&G industry leaders have set 2050 carbon neutral targets including Total of France.
Standardisation
The demands for the implementation of ESG programmes are evolving, and understanding what’s required can be a daunting task for small or medium enterprises (SMEs) – with pressure even more intense on companies in the O&G and hydrocarbon sectors. As ESG reporting becomes more common, standardisation is a concern, with an overwhelming number of institutions and organisations purporting to be the custodians of ESG ratings.
Investors and other stakeholders need confidence that ESG scores are consistent and comparable performance measures.
This lack of standardisation makes it doubly difficult for newcomers to understand how they can incorporate ESG criteria into their business operations – especially the smaller firms who do not have large corporate affairs budgets and staff to implement these operationally.
In my opinion, it is difficult to come to a single conclusion about which ratings agency to use, or which ranking index is the most relevant and accurate. For companies looking to measure their SDG impact, the confusion multiplies where companies can earn an ESG AAA rating whilst receiving a score of zero for SDG impact scores.
Larry Fink, CEO of Blackrock says, “The Sustainability Accounting Standards Board (SASB) provides a clear set of standards for reporting sustainability information across a wide range of issues, from labour practices to data privacy to business ethics.” He goes on to add that for “evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the Task Force on Climate-related Financial Disclosures (TCFD) provides a valuable framework.” These are helpful industry standards and frameworks but they are not the only option for companies.
The application of ESG within companies
So, what does this mean in practice?
There are three strands to examine when applying ESG good business practices:
1. Environment
Performance as a steward of the environment – its actions to reduce greenhouse gas emissions, its responsible management of waste and water, energy, and its pollution reductions.
An example from my experience with the Trans Adriatic Pipeline (TAP); committed to the highest environmental standards – we took extraordinary care to remove olive trees from the construction sites, storing and protect them in Xylela disease-free areas.
2. Social
Management of relationships with employees, suppliers, customers, and communities —investors and governments look for strong relationships between industry and indigenous communities for example. ESG might focus on advancing social issues such as diversity in the workforce and leadership, human rights or poverty reduction, strong corporate citizenship and sustainability, and a commitment to CSR.
An example from my work with BP Azerbaijan, where I established a large CSR programme and upstream co-venturers called The Regional Development Initiative. With a range of international development and finance institutions, we raised nearly $100 million for programmes supporting the enhancement of local content and related supplier finance as well as training.
3. Governance
Leadership structure, its culture and changes to corporate governance measures, such as anti-corruption, non-technical (or above-ground) risk management, capped executive compensation, managing diversity, executive pay, and shareholder rights and regular risk reviews on complex energy projects.
As a practical example, I’ve developed evidence-based risk scenarios and established a set of signposts to alert the company of the direction risk is headed. With developed cross-functional mitigation measures, the executive team can make informed decisions.
ESG Implementation – all or nothing, or step by step?
It’s worth understanding that for practical purposes, ESG can be adopted according to the specific strands and capabilities of each company. All of these measures can be adopted and reported on in varying degrees – the important point being, that whatever measures are taken, they must be transparent, measurable and show continuous development and committed improvement.
Smaller companies should not be too daunted by this; it does not mean adopting all ESG requirements from the start. Instead, a focused and phased approach is both practical and realistic and something I’ll explore in a later blog.
ESG is here to stay
ESG can no longer be considered a ‘fad’ that will disappear in time, or the latest jargonistic term. If anything, the likelihood of ESG being adopted as a business fundamental will increase significantly in the coming years.
In the next blog, I will investigate the impact of ESG on the access to, and the cost of capital for the O&G industry, and why the largest institutional investors, asset managers, sovereign wealth funds and impact investors are increasingly turning towards ESG criteria to select their investments.
About the author
Michael Hoffmann advises on geo-political risk to guide market-entry strategies, stakeholder engagement, mergers and acquisitions and sustainable impact investment. Michael formally held senior external affairs roles within BP and was a director of the Trans-Adriatic Pipeline (TAP).
