Blog 4 ESG – An indispensable risk management tool

Environmental, Social, Governance (ESG) I am pleased to say, is fast becoming a much talked about trend. But, sometimes, the impression given is that ESG is something new or different.

In this blog, and the next, we explore ESG as an effective risk management tool that, under a different guise, has been giving certain companies in the energy sector the edge for some time.

As an industry adept at working in some of the most challenging environments, energy sector companies are experienced at employing various means of risk assessment, starting with the obvious technical and engineering issues, and increasingly from an environmental standpoint.

Many energy companies already follow ESG practices—though some may not consciously be aware they are. For example, it has long been a requirement in most operations to implement, monitor and measure Health, Safety and Environment (HSE) practices. These involve a variety of metrics on emissions, water quality, compliance breaches, and the general safety and well-being of employees and neighbouring communities. Employing effective HSE strategies has been important in minimising risk in a complex industry. As a result, company performances have improved through increased reliability, fewer accidents, better environmental performance and, more recently, greater sensitivity to stakeholder needs and an emphasis on maintaining their License to Operate (LTO).

So, with the rising emphasis of ESG, we are not talking about a revolution, but an evolution.

Defining major risks

Identifying and managing technical, engineering and environmental risks is part of any energy project’s DNA. Increasingly however, we see projects impacted, more and more, by non-technical risks (NTR) or above-ground risks.

These are risks that can have a significant impact in the construction and operation phases and can lead to lengthy delays, sometimes even the cancellation of projects or the loss of reputation. Typically, these risks relate to stakeholder and community issues, political uncertainty, regulatory changes, corruption and conflict. Mostly, they can be categorised in the ‘social’ class of the ESG risk framework. 

Reputational risk

A recent headline example of a failure in the ‘social’ and ‘governance’ pillars of ESG, demonstrates that not taking local community concerns seriously leads to a leadership collapse. The sacking of the Rio Tinto Chief Executive, Jean-Sébastien Jacques, and two other senior executives is a case in point. On their watch, the 46,000-year-old rock shelters at Juukan Gorge in Western Australia were blown up. The site was highly significant to Aboriginal communities. The root cause of this catastrophe was the incorrect early participatory assessment of the social risks at the site.

Political Risk

Readers may also be familiar with a recent set-back concerning the completion of the final few offshore kilometres of the Nord Stream 2 pipeline, linking Russia with Germany. Following several years of planning and construction the project has been subject to sanctions by the US Government since late 2019, and further sanctions are imminent. The US does not favour European dependence on Russian gas, and simultaneously sees the potential upside of marketing shale gas exported as LNG to Europe. A similar political risk profile ended the South Stream project, though it eventually morphed into TurkStream. This project too, has however become subject to US sanctions.

Existential risk

Managing Non-Technical-Risk (NTR) on the executive team of the Trans Adriatic Pipeline (TAP) for almost nine years, I experienced significant political, regulatory and local stakeholder hurdles which threatened the very existence of the project. Engineers found solutions to technical problems, but what kept me awake at night was the myriad of complex and subtly nuanced issues such as securing international political support, dealing with local community and politicians’ concerns, international NGOs, and lender requirements. Chief among the programmes I instituted to address risk was securing the necessary support from the European Commission and influential governments, including the US, Germany, UK, Italy, and Greece. Continued focus on the Social and Governance pillars of ESG paid off, and the project started commercial operations on 15 November 2020 after nearly 15 years in development.

The ESG toolkit

My experience has shown that comprehensive NTR assessment brings other important risks to light. For example, TAP dropped an Iranian gas contract so that the US government would engage, and under my management rolled out a layered advocacy and public affairs programme to boost visibility and brand to key stakeholders. The work focused on managing the strong local opposition to the pipeline in the form of a multi-stakeholder programme driven by experienced country teams delivering engagement and CSR activities at the country and local levels. At company headquarters, we continued regular monitoring, reviews and adjustments in the assessments of NTRs that made TAP agile and mitigation plans nimble.

If we remove technical risk from the equation for just a moment, I see a consistent theme across projects, where Governance and Environmental risks are resolved more easily than their Social equivalents. Engineers usually say building pipelines and energy facilities are easy; it is people that complicate things. The true scale of NTRs however, is frequently under-prepared for—especially the Social elements, and for publicly listed companies where the demand for transparency and accountability from investors, activist shareholders, NGOs is justifiably high, there’s never been a better time for a social awakening.

Embedding all three tiers of ESG awareness and practices into a company’s processes and planning, leads to more effective decision making and mitigation of the kinds of issues I’ve highlighted here. ESG is an effective insulator to the board and investors or shareholders. ESG practices, like the ones I developed at TAP, have to be more widely adopted. And it seems working with social risk cannot be underestimated. Political negotiators and community stakeholder engagement specialists offer a diplomatic expertise that has to be recognised as an essential, early and continued, element of risk management.

With comprehensive and forward-looking non-technical risk management, examining the totality of risks through an ESG lens, companies can be more adept at preventing potential damages to their bottom line and their reputation. The dedicated Telos NRG team have several decades of ESG-related experience and are ready to support your company with a range of services. 

Please do contact us on +44 207 859 4882 if we can assist your company with ESG and other related services. Given our deep understanding of the energy sector we are able to support and deliver practical solutions. Please see more of our website for further details.

In the next blog, I will continue the theme of risk management, challenging the existing energy industry mind-set and exploring some of the opportunities small and medium-sized enterprises have to adopt ESG practices.