ESG has spawned a library’s worth of annual reports and sparked derision from some politicians as “woke capitalism”—but its real purpose, experts at a recent Hart Energy conference said, should be to generate more profits for E&Ps.
Paying lip service to ESG can mean missing a business opportunity.
“Sustainability can be a driver of financial growth if and only if it’s developed and created with value creation objectives in mind,” said Carolina Ortega, Milestone Environmental Services’ vice president of sustainability, during an Aug. 31 panel discussion at Hart Energy’s Carbon & ESG Strategies conference in Houston. Ortega said sustainability initiatives should either create value or protect it.
“If it’s not creating value, don’t do it, save yourself,” Ortega said. “Don’t get involved trying to check the box of a reporting framework if it’s not creating value. Reported frameworks like SASB [Sustainability Accounting Standards Board], all of those are really helpful but they go at the back of your sustainability report. To me, that’s the ESG of your sustainability report. Your sustainability report is your roadmap.”
Kinder Morgan’s Kristin Tatum, vice president of ESG and financial planning, said integrating the sustainability roadmap should be a repetitive part of the company’s conversation.
“We’re not going to do something that is not economic and is not beneficial to our shareholders, first and foremost,” Tatum said during the discussion. “It has to create value for the company in order for us to do it. We’re not going to just check a box to be checking a box because we’re looking at sustaining the company in the future for the long run.”
Energy companies continue to identify targets to manage risks and seize opportunities around sustainability while assessing financial impacts to help ensure longevity, and an ESG roadmap is an important component of that process.
Savage Brands CEO Bethany Andell said a decision about a company’s ESG directives “come down to three things.”
It’s an “acknowledgment of stakeholder interdependence. ‘Is it in alignment with my purpose, my business and my values?’ And the financial impact around cost management or cost containment, value creation and also risk mitigation for … longer-term sustainability and viability of the company,”
According to a study in recent years by Harvard Law School, there appears to be a link between ESG and financial performance.
“While one can argue that the relationship between ESG and financial performance is perhaps due to the fact that more profitable firms have the resources to invest in areas that positively influence ESG, it could also be that profitability rises as a result of a company better managing its material ESG risks, or it could be a little bit of both,” according to Harvard.
Putting in place an ESG roadmap should be done like anything else on a company’s balance sheet, said Keila Aires Diamond, managing director and head of ESG for Quantum Capital Group: what’s the impact on the company’s business?
“Put a plan in place. Understand what you need to do on a daily basis? Who needs to do it? And then map out what is the cost of doing that and what are the benefits we’re getting?” Diamond said.
Avoiding ESG Roadmap potholes
Beyond the importance of implementing an ESG roadmap, companies needed to avoid the associated hazards, the panelists said.
“One of the pitfalls that I would avoid is assuming that governance resides only with your board of directors, if you have a board of directors,” Tatum said. “Your sustainability program has to go down to the lowest levels of the organization. It has to be governed at all levels of your organization and to do that you have to do your homework first.”
At some point it is necessary to separate sustainability from ESG “because your sustainability journey is about sustaining your company,” Tatum said.
Quantum Capital’s Diamond said it was important for companies to focus on the most financial and material issues within the frameworks of the law.
“Don’t lose sight of your end goal,” Diamond said. “One of the pitfalls might be operating today without having … sight of where you’re going or the mid- and long-term goals.”
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