HOUSTON—By now the oil and gas industry has probably heard the term ESG quite a bit and learned about its significance.
Across several sectors, businesses are rushing to embrace ESG metrics to measure progress toward their goals. Companies are also looking at innovative low-carbon solutions to gain competitive advantage in a lower-carbon economy. Announcements from companies committing to net-zero carbon emissions are now a regular occurrence.
But does ESG really matter for oil and gas? The short answer is yes.
From investor calls to board meetings, ESG continues to revolutionize how oil and gas businesses are managed, measured and operated. And this isn’t slowing down any time soon. This megatrend has begun influencing capital markets and more specifically security prices, and will continue impacting access to capital for oil and gas companies, according to Andrew McConn, head of commercial intelligence at Enverus.
“Company-level ESG differentiation does matter; it’s not just a sector level trend to attract investors back to the oil and gas industry at large…ESG will trend in the direction of mattering more, moving forward,” McConn said speaking at Hart Energy’s recent Energy ESG Conference.
He went on to explain one of the ways to measure the significance of ESG is to analyze how often the term “ESG” is mentioned by the analyst community.
“Starting effectively with zero mentions of ESG just a few years ago, it has ramped up significantly in the recent years and now averages about twice per investor call every quarter for the top 50 oil and gas companies,” he said.
In addition, he noted that the financial community is largely driving the ESG push, adding that the start of ESG investing can be loosely tied to the United Nations Principles for Responsible investment (UNPRI) that has been around for a decade but has ramped up in the recent years.
Launched in April 2006 with support from the UN, the PRI had over 2,700 participating financial institutions as of August. These institutions participate by becoming signatories to the PRI’s six key principles and then filing regular reports on their progress.
The first principle is a pledge that states, “We will incorporate ESG issues into investment analysis and decision-making processes.”
“This [pledge] is an explicit way of saying ESG matters,” McConn said, adding that there are currently over 4000 different ESG-focused funds managing over $ 130 trillion.
Although there is no agreed-upon ESG standard yet, McConn noted that the key to accurate measurement of ESG goals is high-quality disclosures.
“There are always going to be other ways to measure ESG components…but disclosures directly from companies themselves will be most accurate and useful sources of ESG data,” he said.
Even though disclosures are not required yet, according to McConn there is a significant increase in voluntary disclosures from oil and gas companies that conform to identities like SASB and GRI.
ESG is a broad term but the best way to define it is putting ESG into quantifiable metrics for each of the three categories, McConn explained.
“The E category, for instance, includes proprietary GHG emissions including methane leakage, flaring rates, water consumption, spill rates and energy usage. These are the hardest to quantify in a comprehensive and standardized manner.”
“That puts [Enverus] in a unique position to help companies understand what’s going on because it’s these metrics are important but also very difficult to measure,” he added.
Enverus has created a first-of-its-kind objective scoring system that combines ESG analytics with operational and economic performance, providing a complete end-to-end solution for all market participants.
A winning strategy
McConn outlined three elements of a devising a winning ESG strategy—reducing flaring and methane emissions, more ESG disclosures and aligning incentives with shareholders.
Even though all three elements are extremely critical for oil producers to achieve their ESG goals and attract investments, the “E” in ESG in most important for oil and gas companies, McConn said, adding that U.S.-based companies have been significantly reducing emissions over the past five years.
“Since 2020, we estimate that the volume of flared gas in U.S. has reduced by 60%...Even as activity and production have ramped back up after COVID, producers have been more deliberate in reducing flaring,” McConn said.
He continued, “The market recognizes that [reducing methane emissions] is a low hanging fruit on which companies have significant control and is moving the needle on climate change.”
Secondly, he said it’s best for oil and gas companies to disclose their climate, environmental, social and sustainability activities.
“At this stage, without firmer and more standardized requirements from regulatory agencies, it is best to disclose as much as possible,” McConn said.
“Investors recognize that ESG is complicated and it’s hard to conform to all the different standards,” he continued, “but to conform to optional frameworks that already exist helps in building trust with stakeholders and investor community.”
Unfortunately, the oil and gas sector for long time did not have great reputation with aligning incentives with shareholders. “It was the whole production growth versus returns paradox,” noted McConn.
“It took a while to overcome this and we are still feeling the headwinds of that mentality, but we don’t want to repeat the same thing with ESG…if investors care about ESG, we need to make sure invectives are in place to make that a reality at the management level," he said.
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