The Importance of ESG for Oil and Gas Companies
June 14, 2021
By Richard Stepler, Lisë Stewart and R. Charles Waring
Environmental, social and governance (“ESG”) is a method of analyzing and reporting on how a company serves all stakeholders, including workers, communities, customers, vendors, shareholders and the environment.
ESG is important for the oil and gas industry specifically as momentum continues to build to promote renewable energy, sustainability and the energy transition as investors, governments and individuals remain focused on issues such as climate change, labor standards, diversity and corporate governance.
Oil and gas companies have been implementing ESG strategies for years through reduced emissions, responsible water use and disposal, and research and development into renewable energy programs. The current push to track and report ESG programs should be seen as an opportunity for oil and gas companies to promote, validate and expand upon these efforts.
Effective ESG planning can support reputation management, attract new types of investors, promote long-term financial outcomes and mitigate increased regulatory requirements; it has proven to have positive impacts on performance.
A few examples of these positive impact include reducing operational costs by lowering energy and water consumption, attracting and retaining talent, building stronger community and investor relations, and increasing the chances of receiving government support and subsidies.
ESG will remain highly relevant to oil and gas companies because of increasing pressure to protect the environment. The industry is well positioned to be a leader in this movement with many larger oil and gas companies proactively developing ESG strategies to build value and increase operational efficiencies. It is also becoming an integral part of the way investors analyze how companies create long-term value and growth, and it will be an important addition to companies’ strategic planning going forward. Investors are expecting companies to have an established ESG strategy and reporting plan. This includes reporting against at least one of the many ESG-related standards and frameworks. For companies in the oil and gas industry, there is an even greater focus on how they are establishing meaningful environmental objectives.
Energy companies need to be prepared to develop meaningful initiatives, monitor progress against established goals, and report on results. For an oil and gas organization, ESG planning should ask these following questions and analyze the corresponding answers:
- Environmental – How does the company perform as a steward of nature, including carbon capture and carbon emissions reduction, energy portfolio diversification, operational energy efficiency, resource conservation, and waste disposal?
- Social – How does it manage relationships with employees, suppliers, customers and the communities in which it operates?
- Governance – How does it handle leadership diversity, executive pay, audits, internal controls and shareholder rights?
The best way to get started on an oil and gas ESG strategy is to (1) determine what your company is already doing; (2) begin documenting it; (3) identify areas for improvement; and (4) implement a strategy to meet those goals.