Environmental, social and governance (ESG) initiatives have been in the crosshairs lately, putting some shareholders at odds with other stakeholders in an arena that lacks standardization or even common definitions.
The proverbial elephant in the room is increasingly visible as the world transitions to a lower carbon economy while balancing the needs of affordable energy and energy security. Panelists at Hart Energy’s Carbon & ESG Strategies conference addressed the issue Aug. 30 and why some people find ESG a prickly topic nowadays.
“It becomes contentious when firms feel like they’re doing their best [and are] already doing a lot of these things and then they’re getting it sideways from the government, from environmental groups, you name it,” said Marcella Burke, a managing partner for Burke Law Group.
She recalled an instance when a company, which had been capturing carbon for 28 years for EOR, storage and other uses, received state permits in a timely manner but the federal government was slow to act. “That net zero to some people is a way to stop oil and gas; it didn’t stop us. We just innovated around it,” Burke said.
Companies are increasingly facing scrutiny over ESG disclosures and efforts. This comes as the U.S. Securities and Exchange Commission attempts to address the issue, having proposed rule changes that would mandate companies include climate-related disclosures—some of which could materially impact businesses—in registration statements and periodic reports to better inform investors.
It comes down to the way in which ESG is being implemented and the strategies companies are using, said Trina Engels, director of ESG for Talos Energy, a player in offshore oil production and carbon capture and sequestration.
“The transition is happening too quick, and so it’s polarizing from that standpoint,” Engels said, pointing out how European sentiment on ESG and fossil fuels changed when the war in Ukraine put energy security in the spotlight. “All of a sudden they went out and started burning more wood, more diesel, more coal, anything they could to make sure that they had the energy.”
Concerns have also arisen among the energy industry and state legislators, which see the environmental focus of ESG ignoring economic realities—and that fossils fuels are necessary in not just developing countries but also the developed world, Kirkland & Ellis Partner Jim Dolphin III added.
“On the other side, there are concerns about how it’s actually being implemented and about how much of a wild west it really still is,” Dolphin said. There is “a lack of standardization in ESG language and disclosures and approaches, and real concerns that the ESG initiatives and statements that companies are making can’t actually be backed up by data and actual verifiable progress, which is fundamentally the point underlying the ESG effort.”
Pressing for better results
It is critical for companies to understand how they are tracking their environmental efforts because bankers, bondholders and insurers are asking.
Banking and insurance companies are pressing U.S. companies for better ESG results, asking “’What are you doing? Do you have a net zero plan? What else can you do? Why aren’t you doing this?’” Engels said.
Having ESG initiatives is also no longer an option.
“It’s a necessity for them to have ESG initiatives and programs in place because of pressure from their limited partners and their investors and their funds, who are themselves getting pressure from their investors, whether it’s social pressure or other concerns about financial metrics and things like that,” Dolphin said.
ESG pressure has grown so much that companies have to be reminded that shareholders take precedent over stakeholders, Burke added. “In our system of government, you have shareholders that you’re legally responsible to and you have no obligation to a stakeholder, and in fact, your shareholders might come back at you.”
Carbon capture is, however, set to pay off in more ways than one. Aside from the environmental benefits, Burke—who also advises the Texas governor on oil and gas acquisitions on state land—said the state recently approved six carbon capture permits that will bring in over $300 million to K-12 education in Texas on signing day—and more than $300 billion over a 25-year period thanks to BP, Repsol and other firms.
Addressing fiduciary duties
One criticism of ESG is that it is seen by some as being anti-profit.
Breach of fiduciary duty came to mind for Burke, who said the firm is working on several antitrust cases today and with state attorneys general who are reminding banks of their duties to shareholders. Shareholder activists have filed suit demanding ESG, but shareholders are now saying “‘Let’s make sure y’all are making some money for me,’” she said.
ESG can be a direct financial consideration in some instances, Dolphin added. Climate change may pose a physical risk to company’s operations or assets. Likewise, a shift in attitude toward certain fuel sources could impact demand for certain products, he said. But the matter has not been fully litigated in the U.S.
Despite whether questions are being asked, companies should take control of their narratives and make sure information circulating is accurate, panelists said.
“If you don’t go back out there and actively make sure that that data is correct,” Engels said of ESG and sustainability data, misinformation stays out there. That is “just as bad as not even doing it at all or at least doing it and choosing not to answer certain questions.”
And if an ESG goal is aspirational, say so to avoid legal risk, Burke added. Don’t say I’m doing something you’re not doing.”
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