How ESG is shaping emissions management in the energy industry
Introduction
Environmental, social, and governance (ESG) data helps stakeholders key in on companies with light ecological footprints, sustainable workforce management, and transparent governance. It is especially common in the broader business world: fundamentally, ESG sheds light on business practices that don’t reflect directly on balance sheets but nonetheless may create material advantage, avoid risk, or signal other beneficial outcomes in the longer term.
As the world moves to decarbonize its energy systems, ESG provides a way to compare businesses and their performance in key metrics against each other. Since there is no universally accepted standard for ESG in the energy sector, comparing companies can be difficult. And since self-reporting is the norm, businesses may report on metrics that tell a positive story while ignoring those that don’t.
Despite this, the focus on emissions reporting for ESG is appealing because it’s more measurable (and verifiable) than other metrics, and because it’s a cornerstone in addressing climate change.
This article will show how ESG is shaping the upstream oil and gas sector in at least three ways:
how the push for data is making measurement crucial;
how voluntary adoption of more stringent emissions standards is growing; and
how trade shake-ups across geopolitical borders may become more widespread as powerful political blocs weigh in.
The measurement imperative is growing
An increasing number of O&G players have taken it upon themselves to reduce emissions. Differentiated product markets, carbon credits, and social licenses to operate (SLOs) have all recently emerged as incentives that give businesses compelling reasons to act. At the end of the day, the prism through which businesses view the issue is risk and opportunity: as the risks of not acting and the opportunities to act both increase, greater adoption is expected.
In fact, adoption is growing so much that different classes of voluntary initiatives now exist:
Certifications involve binding standards and require verifiable completion in the present
Commitments ask for binding commitments to certain goals in the future
Guidelines set forth principles and practices firms may adhere to in the present or future
ESG ratings score participants based on self-reporting, but do not require specific achievements.
A recent report by Highwood Emissions Management found that, as of 2021:
At least 3 companies have become certified producers of responsibly sourced gas
At least 237 companies pledged commitments to emissions reduction
At least 66 companies follow standardized emissions reductions guidelines
Hundreds of companies in the energy sector receive ESG ratings
Challenges remain. Agreeing to certification, like the MiQ standard, is still relatively rare, although interest is growing. Independent measurement-based verification is lacking in most initiatives. And full public disclosure of unaggregated emissions data is rarely required, which presents an opportunity for improved transparency and accountability.
Nevertheless, it’s hard not to see a connection between ESG and the growth of voluntary reporting initiatives. The commitment to improving emissions management and sharing data, whether reducible to self-interest or not, can encourage new measures accountability and collaboration in O&G.
Regional trade is being shaken up
The EU commission’s proposed carbon border tax will likely have far-reaching consequences when it is unveiled as part of the so-called European Green Deal. At its heart, the proposal is designed to tax imports to the EU based on their carbon emissions footprint. In keeping with its goal to reduce GHG emissions by 40% over the next decade, the EU commission’s border tax is aimed at simple economics: make it cheaper to import products from low-emitting suppliers. This trade policy isn’t strictly ESG, but it shares the same spiritual predecessor: a desire to change the way businesses operate and are evaluated when it comes to the environment.
Of course, this isn’t the first trade policy enacted by the EU, nor is it the first energy-related policy. It does, however, pave the road for a world in which trade policy and energy policy can and should reinforce each other.
If the tax proposal is enacted, for example, European manufacturers might find the cost of importing Russian petroleum prohibitive, with its relatively high carbon emissions footprint. As a result, countries like Russia will face a fork in the road: either find alternative markets to sell in, or work to improve emissions standards for exportable products. Naturally, finding other trade partners and circumventing the intended effect of the policy might be the easiest option. But this is likely only the first parry in a series aimed at creating economic advantages for lower-emitting manufacturers.
A change as momentous as this will likely rewrite global competitiveness in the oil and gas sector. If EU petroleum imports shift significantly, new beneficiaries of the carbon tax like Saudi Arabia will have a keen interest to keep carbon emissions low in a suddenly-more-competitive environment. This may require additional testing and infrastructure.
Summary
The EU would benefit from new measurement-based standards that are fair to different jurisdictions without undermining the spirit of the proposed policy. This likely would take some political wrangling. Regardless, transparent and enforceable standards are crucial to ensure that goods are appropriately taxed and incentives properly established. ESG is here to stay, more explicitly framed by politics than ever before. For it to continue to be effective, the spirit of data, disclosure, and collaboration should inform its foundation in the energy industry.