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Attitudes toward ESG metrics have been shifting for some time. As ESG becomes more of a priority for the oil and gas industry, the way these metrics are reported has also evolved. Pressure from different kinds of stakeholders has played into how E&P companies report on ESG, and it also depends on the nature of the company in question. Generally speaking, though, it is the environmental aspect that has been the main focus by far.

“The ‘E’ takes most of the oxygen in the ESG conversation, partially because it is easier to agree on how to measure. The ‘S’ and ‘G’ tend to be more subjective,” Nick Volkmer, Enverus’ director of product, ESG, told Hart Energy.

This has translated into companies beginning to set various targets, including reaching net-zero greenhouse-gas (GHG) emissions over the long term in some cases, to report their ESG achievements. Progress has been mixed to date, and efforts to develop a more unified approach are now underway, with various standards emerging and gaining popularity in recent years.

Hart Energy July 2022 - Oil and Gas Investor ESG Reporting Evolution - Nick Volkmer Enverus headshot“Each year, we see more disclosure and better standardization, helping facilitate ESG comparisons.”—Nick Volkmer, Enverus

Standardization is set to be accelerated further still when the U.S. Securities and Exchange Commission (SEC) brings in new rules relating to disclosure of climate-related risks for publicly listed companies. The rules are still being finalized, with a public comment period on the SEC’s proposals closing on June 17. But even with changes being made to the initial proposals, the implications are expected to be far-reaching.

“We view this as the most seminal rulemaking to come down in probably decades, and the amount of disclosures that it compels for public companies is a real game changer,” Stephen Grant, a partner at Haynes and Boone, told Hart Energy.

There is still uncertainty over what the picture will look like once the SEC’s rules are adopted, but it is clear that the industry can expect reporting to become more widespread and requirements to become more stringent.

Seismic shift

The volume of ESG reporting currently illustrates that overall, the industry has embraced the need for it. Enverus estimates that over 85% of companies representing roughly 94% of the market capitalization of the XOP, a key oil and gas E&P index, now publish annual corporate sustainability reports.

“It is safe to say ESG reporting is now the standard across the industry,” said Volkmer. “Each year, we see more disclosure and better standardization, helping facilitate ESG comparisons.

Meanwhile, the spring 2022 edition of Haynes and Boone’s Oil & Gas ESG Tracker, on which the firm collaborates with EnerCom, found out of 30 U.S.-listed middle market onshore oil and gas producers, 97% have made ESG-related disclosures. This was up from 70% in the spring 2021 edition of the publication.

The report showed that to date, the majority of ESG disclosures among its sample of companies were to be found on company websites and in corporate sustainability reports rather than in SEC filings. This means “most ESG disclosures are not subject to the full range of liability and other investor protections that help elicit more complete and accurate disclosures,” according to the report. Also, what is published on companies’ own websites can vary considerably.

“U.S. firms generally issue sustainability reports and recognize the need for disclosure. The issue is comparability,” Morningstar’s director of equity research, energy and utilities, Dave Meats, told Hart Energy. “For example, the E&Ps we cover break down Scope 1 emissions by carbon dioxide and methane (some included nitrous oxide, which generally made up a negligibly small proportion of aggregate emissions),” he continued. “Reporting Scope 1 emissions via process is optional; many chose to give a distribution via source (i.e. flaring, venting, combustion, etc.). Some don’t, and the ones that do often use distinct categorization methods (i.e. the combination of venting/ flaring into one number, or the addition of an ‘other’ category). Neither Scope 2 nor Scope 3 emissions seem to be required.”

As well as differences in how operators reported such numbers, Meats pointed to differences in when they disclosed them.

“There also lacks clear disclosure for the timing of sustainability reports,” he said. “For example, some firms released 2021 reports detailing 2020 data in November of 2021. It would be better for investors if the timing of sustainability reports were closer aligned to the timing of annual reports, if possible.”

Hart Energy July 2022 - Oil and Gas Investor ESG Reporting Evolution - Stephen Grant Haynes and Boone headshot“We view this as the most seminal rulemaking to come down in probably decades, and the amount of disclosures that it compels for public companies is a real game changer.”—Stephen Grant, Haynes and Boone

Publicly listed operators are not alone in making more disclosures, with portfolio companies and other private operators increasingly concerned with what their sustainability reports look like on both the macro and micro levels, according to an Akin Gump corporate partner and climate change group co-leader Cynthia Mabry. The shift now underway is that operators are viewing ESG reporting as just part of doing business, rather than something that they would only do if required to, Mabry told Hart Energy.


In the absence of regulations requiring ESG disclosures, pressure from investors is seen as a major driver in bringing the industry’s reporting to where it is today.

“We believe institutional pressure was the main catalyst behind expanded ESG reporting seen over the last few years,” said Volkmer. “Operators understand regulations from the SEC and other government entities are likely around the corner and are preparing for that possibility, but the abundance of voluntary disclosure to date is mostly to satisfy investors.”

However, pressure to make ESG disclosures has also come from a variety of other stakeholders, and this mix continues to change.

“The reporting that our individual companies do has been continuously evolving,” Aaron Padilla, vice president of corporate policy at API, told Hart Energy. “It grows in its comprehensiveness, and it grows in the different types of audiences to which it’s oriented.”

Padilla noted that some of the more traditional audiences in the earlier years of reporting included employees and communities, as well as governments in countries that were hosting the oil and gas industry. On top of this, he cited the expectations of the marketplace.

Mabry also pointed to a variety of stakeholders whose involvement has helped shape ESG reporting.

“What has developed from these sustainability reports or ESG reports has been based on stakeholder engagement, and that includes investors, but it also includes NGOs [non-government organizations] and other sorts of activism, as well as shifting government regulation and peer benchmarking,” Mabry said. ESG reporting frameworks have evolved in part as a result of operators “looking to see what their industry and aspirational peers are doing and ensuring that what they are putting to the market is consistent or as good or as robust as their peers,” she added.

Hart Energy July 2022 - Oil and Gas Investor ESG Reporting Evolution - Morningstar Dave Meats headshot“U.S. firms generally issue sustainability reports and recognize the need for disclosure. The issue is comparability.”—Dave Meats, Morningstar

This push for greater consistency has resulted in the emergence of certain frameworks and approaches that have become popular. For example, the API has collaborated with two other industry groups, the International Petroleum Industry Environmental Conservation Association (IPIECA) and the International Association of Oil & Gas Producers (IOGP), to produce sustainability reporting guidance for the oil and gas industry.

“The latest version that we produced in 2020, like previous updates before that, reflected common and good practices and reporting and relevant issues across the industry,” said Padilla. “That guidance document is shaped by our member companies, which produce it, so it’s by nature a reflection of the reporting that they do, or the reporting that they aspire to. It has established a framework that a lot of other oil and gas companies across the sector that aren’t necessarily members of API, IPIECA or IOGP also follow.”

Padilla added that the API has also produced a complementary guide on GHG reporting.

“We’ve defined more tightly the boundaries and the definitions for a core set of indicators, such that it will work in conjunction with our other guidance document to promote more consistent and comparable reporting from one individual company to the next,” he said. “We as an industry recognize the need for financial sector organizations in particular to have consistent and comparable reporting from one company to the next. And we have really aspired to define a standard set of indicators that will drive that and voluntary reporting by companies.”

In order to meet financial sector expectations for this sort of reporting, Padilla said the API had engaged with some of the world’s largest institutional investors, commercial banks and credit rating agencies.

“We’re very attuned to that stakeholder group for this reporting,” he said.

Stepping up

Now, the SEC is trying to improve consistency further still. The commission’s proposals would require publicly listed companies to disclose information about their governance of climate-related risks and their processes for managing those risks. And for those companies that already have climate-related targets or goals in place, certain disclosures would be required.

The proposals would require companies to disclose their direct, or Scope 1, GHG emissions, as well as indirect emissions from purchased electricity or other forms of energy, or Scope 2. Scope 3 emissions, which include those generated by end use of the operators’ products by their customers, are also included in the proposals, though only if they are considered “material” or if a given company has set a target that includes Scope 3.

Haynes and Boone’s Grant said he saw the SEC’s Scope 3 proposals as attracting a lot of attention and potentially subject to modification in the final rules.

“If those aspects of the proposed rules are adopted in the final rules, I’m curious to see if companies continue to [set Scope 3 targets], or if they back off from making those forecasts because in doing so companies would also be required to disclose historical Scope 3 emissions data,” Grant said. “In addition, the SEC’s position is if you have set a target or goal, you need to disclose it. You need to disclose how you intend to achieve that goal, and on an annual basis, you have to provide updates on how you’re doing.”

Hart Energy July 2022 - Oil and Gas Investor ESG Reporting Evolution - Aaron Padilla API headshot“We as an industry recognize the need for financial sector organisations in particular to have consistent and comparable reporting from one company to the next.”—Aaron Padilla, API

Few operators have Scope 3 targets and disclosures to date, and while this number had been expected to rise, it cannot be ruled out that additional SEC regulations could have an impact on the uptake of such targets. This comes as companies are already grappling with the questions of how best to quantify and minimize Scope 3 emissions, which represent a far greater challenge than Scopes 1 and 2.

“Only a quarter of the ~100 energy companies we track disclose Scope 3 emissions,” said Volkmer. “It is a tricky number to triangulate on and, with oil and gas companies, the majority of Scope 3 emissions are from the consumer using the product. This will make any Scope 3 net-zero commitment difficult, but not impossible, to achieve for any energy company. The majority of net-zero targets are centred around Scope 1 and 2 emissions, or those directly sourced from the company.”

As the energy transition accelerates, though, additional pressure to include Scope 3 in targets and disclosures can be expected.

Akin Gump’s Mabry noted that investors in a particular company could demand that it go further on Scope 3 than whatever is ultimately required by the SEC. This can be seen in the rise of shareholder proposals demanding tougher targets on decarbonization, which in some cases have included Scope 3 emissions. While such proposals may be defeated, as was the case with a recent effort to make ConocoPhillips Co. adopt Scope 3 targets as part of a more ambitious decarbonization plan, the pressure will not come from the SEC alone.

“Companies should consider that at some point they will likely be disclosing Scope 3 emissions,” said Mabry. “Disclosures may not be in 2022, but companies should have a path toward disclosing those emissions in the future whether or not technically required under the SEC rules.”

There are other changes that are also expected to come about once the SEC rules are finalized, including the use of third parties to audit emissions disclosures.

“One of the major differences between the proposed SEC requirements and current sustainability report information is that emissions under the SEC will need to be audited by a third party,” said Volkmer. “Emissions are inherently hard to track and measure and third-party auditing will pose a new challenge. The question will be how different the SEC emissions guidelines will be compared to the current EPA [Environmental Protection Agency] system, which producers have years of experience with.”

Next steps

The SEC announced in early May that it was extending the public comment period on the proposed rules until June 17.

“We suspect that’s because they’re receiving a significant amount of commentary from stakeholders as well as industry participants,” said Grant.

Hart Energy July 2022 - Oil and Gas Investor ESG Reporting Evolution - Cynthia Mabry Akin Gump headshot“Companies should consider that at some point they will likely be disclosing Scope 3 emissions.”—Cynthia Mabry, Akin Gump

Indeed, Padilla said the API was preparing comments to submit by the SEC’s deadline.

“We will be specific in our letter to delineate aspects of what the SEC has proposed that we as an industry view as highly problematic and that we think should be rescinded and taken out of the comprehensiveness of disclosures that the SEC has proposed that each company should have to report,” he said. “And we’ll also delineate in our comment letter a better alternative, a narrower set of much more relevant and effective requirements for dimensions of climate reporting that we think would be more appropriate.”

Padilla added that, whatever shape the SEC’s rule will ultimately take, it will have an effect.

“And what we want is for it to have a positive effect,” he said.

Ultimately, efforts to standardize ESG reporting will continue, via the SEC and elsewhere. Morningstar’s Meats cautioned, however, that standardization alone is not enough but needs to be pursued in a certain way in order to be useful.

“The usefulness of standardized reporting is itself predicated on both the regulation and veracity of how exactly emissions data is gathered and measured, or perhaps in the case of Scope 3 emissions, estimated,” he said. “Investors could also benefit from emissions data from an asset-by-asset or project-by-project basis, if attainable. Investors should also have more clarity with regards to the purchase or utilization of carbon offsets in order to achieve emissions reductions or a net-zero target.”

Haynes and Boone and EnerCom’s Oil & Gas ESG Tracker found that institutional investors tend to favor companies that disclose their ESG targets. As time passes, and even more companies step up ESG disclosures, it seems likely that additional pressure will also emerge on companies to achieve those targets as well.

“Investors really like disclosure just by itself; they want to know what’s going on,” said Grant. “But they also want to see progress, and they want to see goals being met.