Attention to Environmental, Social, Governance (ESG) considerations can reduce project risks, build social support for projects and generate incremental value. (Kerogen Capital 2019)
The idea that investors who integrate corporate environmental, social and governance risks can improve returns is now rapidly spreading across capital markets on all continents. In Europe, for example, a critical mass of pension funds and insurers have started to award new business exclusively to asset managers with ESG capabilities.
The idea that investors who integrate corporate environmental, social and governance risks can improve returns is now rapidly spreading across capital markets on all continents.
Companies who have incorporated ESG matters into their strategy have gained several benefits, including increased market trust and value for shareholders.
Seeking Return on ESG. The Reporting Ecosystem
Companies capture and track ESG performance and practices through metrics such as ‘total water consumption’, ‘number of incidents of discrimination’ and ‘percentage of employees that have received training on anti-corruption’. Behind each metric is a methodology for measurement (World Economic Forum 2019).
A number of stakeholder groups exert significant influence on the types of ESG information reported by companies, the way it is communicated and the way it is used. Key groups include the following:
- Companies across public and private markets, ranging from large conglomerates to small and medium-sized enterprises (SMEs).
- Standard setters publish detailed guidelines that support companies in understanding what ESGrelated information they should disclose, by topic.
- Framework developers also influence the ESGrelated information a company publishes, but they have a greater focus on principle-based concepts for how a report is structured.
- Assurance providers offer professional advice to companies on how to publicly disclose data, and they offer assurance on publicly disclosed non-financial information. Examples include Deloitte, EY, PwC and KPMG.
- Data providers play an important role in the ESG information chain by aggregating the ESG information that is available on companies—often through public reports, private research and company requests— and making that information available to audiences.
- Investment banks assess market trends and company performance—including the assessment of ESG information—to make buy, hold and sell recommendations to investors.
- Regulators represent a multitude of bodies that can demand ESG-related disclosure from companies under their jurisdiction.
- Additional key players include a range of ESGfocused organizations that offer various operations and services to help companies understand how to better measure, benchmark, improve or report important aspects of their ESG performance.
The global investor community has developed a variety of methods for optimally integrating ESG information, such as outlined in (A Practical Guide To ESG Integration for Equity Investing). Among the many ESG factors that are viewed as having financial relevance are especially those related to climate change. The reason for this is that climate change is no longer a distant threat on the horizon, but one that is here and now, with multi-billion-dollar economic consequences. Many investor initiatives are now pushing for de-carbonization and the (Task Force on Climate-related Financial Disclosures (TCFD)) has given much impetus for improving risk preparedness and, by implication, de-carbonization actions.
Publicly listed oil & gas firms are now beginning to release ESG reports or at least include an ESG statement in their corporate presentations in a nod to the trend. The influence of ESG factors on investment is a significant commercial threat to those who do not comply.
The Transition Pathway Initiative (TPI) recently released an evaluation of companies operating in the energy sector. In its report, the TPI, which is backed by investors with more than £12 trillion of assets on their books, assessed 109 energy companies, noting that only 31 of these had implemented strategies that were aligned with commitments to the 2015 Paris Agreement to combat climate change (Financier Worldwide 2019).
To further discuss ESG, Finding Petroleum is organising a half-day conference on Responsible Investment in Oil & Gas. The conference is sheduled to take place on Friday, December 6, 2019 at the Geological Society in London.
If you are an investor, oil & gas company or service provider, policy maker, industry body, regulator, NGO, insurer, analyst or interested party seeking to shape the future of Responsible Investment in the natural resources sector, we hope to see you at the conference.
- Financier worldwide 2019. ESG importance on the rise as oil & gas makes the transitionESG importance on the rise as oil & gas makes the transition
- Kerogen Capital 2019. ESG Policy Statement.
- World Economic Forum 2019. Seeking Return on ESG. Advancing the Reporting Ecosystem to Unlock Impact for Business and Society.