Managing ESG Risks in the Oil and Gas Industry

Environmental, social, and governance (ESG) issues are increasingly important for businesses across every economic sector, including oil and gas. Investors and the public care deeply about ESG, and they now have the tools to monitor these issues closely at individual companies. What’s more, they are demanding access to ESG information wherever they perceive a lack of transparency. Investors may be concerned with environmental impacts or diversity and inclusion efforts, or simply the organization’s apparent commitment to good governance and transparency in its progress on ESG concerns as a whole.

Wherever an investor’s passion lies, the decision to invest in (or boycott) one business or a similarly positioned market competitor often comes down to which company can present a more appealing ESG scorecard.

ESG Metrics as a Measure of Financial Risk

It makes sense that investors prioritize ESG so highly. A serious misstep — pervasive gender or race disparities in hiring, compensation, or advancement policies, for example, or an avoidable incident that creates major environmental hazards — can dramatically affect revenue and profitability for years to come.

Inadequate attention to ESG creates real and significant risk; recognizing that risk before investing at any scale is both rational and prudent. The close scrutiny around ESG, and new emphasis on socially responsible investing, also mean that institutional investors and private equity firms are demanding proof that a company is addressing ESG vulnerabilities to minimize the associated risks before offering financial support.

No Blanket Approaches

Unfortunately for leaders, there is no single “good” ESG policy. Every oil and gas company is different, which means that the many concerns lumped under the bigger ESG umbrella present differing risks to each company’s financial metrics.

The Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and similar advisory groups provide standards-based ESG criteria for a wide range of concerns, with sector-specific lists of the issues most relevant to financial performance for industry players. SASB standards and related reporting frameworks are helpful for investors and business leaders, allowing them to compare relative risk and measure improvements over time.

Regulators, too, are taking their cue from investors and expanding requirements for reporting around climate risks and other ESG concerns.

The shifts in regulatory landscape and investor sentiment make it imperative that oil and gas companies adopt a proactive stance toward not just addressing ESG and sustainability issues, but also reporting them effectively. The biggest oil and gas firms may have begun this process years ago, but taking meaningful action — and learning how to present data that satisfies investors and activists alike — requires constant effort for a company of any size.

Key ESG Reporting Priorities

What can smaller companies do to improve their ESG performance and the public recognition of their growth in this direction?

• Recognize the highly niche-specific nature of ESG pressures. Certain sectors are simply regarded as more problematic than others, even though their ultimate impact may be similar. For example, natural gas is general considered a cleaner alternative than petroleum products, and investment in refineries is less stigmatized than investment in exploration and production companies. As history will attest, the market is not always rational.
• Align economic and environmentally sound business practices. Like most industries, oil and gas activities include some inherent risk to the environment. However, sound business practices can often minimize this risk while elevating financial performance. Using only recycled water for fracking, limiting wasteful methane emissions, eliminating flares, and replacing older equipment can all lower operating expenses, simultaneously creating quantifiable reductions in monetary and environmental costs.
• Engage transparently with communities and investors. Be as open as possible with your stakeholders. For example: How do the company’s activities affect surrounding areas? What is its freshwater use footprint? How are investment decisions made by leadership, and how are board members compensated? What’s the employee safety profile? How does the company give back to local communities? Full transparency and honest engagement with stakeholders at all levels can improve decision-making and encourage good corporate stewardship that supports sustainable growth, even for sectors that are highly scrutinized.
• Formulate a clear strategy. Instead of reacting to evolving standards, whether regulatory or socially driven, oil and gas leaders should focus on anticipating the need for change, identifying vulnerabilities, and addressing weak points. How does the company ensure diversity and inclusion? Does it aspire to net-zero emissions, and if so, what’s the plan to achieve that goal? How will it adapt to a changing energy playing field and more renewables? Keeping investors and regulators apprised of plans, goals, and progress will help satisfy an ESG-focused world.

Improving a company’s ESG profile requires commitment from leaders. Similarly, effective ESG reporting demands an investment of staff resources that can be hard to find at smaller organizations. However, the consequences of failing to focus on ESG concerns can prove far more costly. Ask your CRI advisor about strategies to help your company thrive while meeting ESG goals that support the promise of a better world for all.