With increasing pressure from governments and the public to be transparent about their operations and the associated climate risks, the oil and gas industry can utilize environmental, social, and governance (ESG) reporting to not only meet these external pressures but also to help prepare for the future.
While there are questions around the impact of ESG reporting in the short and long-term, when properly implemented, it is a valuable part of a well-designed sustainability program. ESG reporting offers benefits such as risk mitigation, cost reductions, employee engagement, and more, in addition to helping organizations meet regulation requirements and their sustainability commitments. Below we dive into the key ESG considerations for oil and gas professionals.
ESG Data and Benefits are Closer Than You Think
It’s true that carbon accounting or emissions disclosure is a big focus of the environmental component of ESG, but it isn’t the only factor. Water stewardship and waste management are just a couple of the other areas that fall under the ‘E’ of ESG. Monitoring and reporting on these other environmental issues can provide organizations with valuable insights into their operations, beyond what a balance sheet can portray.
Due to the oil and gas industry’s heavy regulations, oil and gas companies are adept at collecting data, and many of the key data points to manage environmental areas like wastewater management and land use are readily available. But collecting the data is only part of the journey; reporting and utilizing this data to inform strategy, planning, and decision-making are the next steps in a successful ESG program and driving organizational success.
A comprehensive ESG program also means ensuring that data is collected and reported for the full extent of the ‘S’ and ‘G’ components as well. Social considerations such as gender inclusivity, diversity, hiring practices, customer satisfaction, data protection, human rights, and labor standards; involve data which many organizations already have in HR systems and, when managed as a part of a comprehensive sustainability strategy, improve employee satisfaction and strengthen community relationships.
The Governance or ‘G’ component includes collecting and reporting data like board composition and membership selection, executive compensation, shareholder rights, accounting and auditing procedures, ethics, bribery, and corruption policies, and lobbying and political contributions. Again, many organizations already have this data at hand in internal documents and information management systems. When governance data is integrated as a part of an organization’s decision-making and reporting process it can protect brand reputation, improve trust in leadership, and reduce the risk of scandal.
Use ESG Metrics to Predict and Mitigate Transition, Liability, and Physical Risks
With increasing regulations around environmental protection, intensifying extreme weather events, and scrutiny from consumers, oil and gas companies face a long list of potential transition, liability, and physical risks on the horizon.
By identifying benchmarks and thresholds for ESG metrics, sustainability and operations teams can begin to pinpoint ESG-related risks across their organization and take action to reduce or eliminate the impacts. From identifying centers of excellence to targeting potential hotspots, organizations can create an ESG risk profile that can help them understand potential impacts on key areas of their business, from financial performance and reputation, to operations and physical assets.
ESG reporting can also reduce potential negative financial implications including lawsuits, fines, and sanctions. According to a Bank of America analysis, ESG-related controversies cost large US companies more than $500 billion in value over five years. ESG risk analysis and management helps organizations provide insight into which metrics may not meet compliance thresholds for local and federal regulations, or which may be out of alignment with investor or board requirements. By monitoring and creating action plans around ESG areas that are at-risk, organizations can minimize or avoid potential future costs.
Oil and gas companies can also use ESG programs to help manage transition risks by identifying business areas that could have significant exposure with any intended organizational or operational change and consolidating accurate and reliable data to conduct scenario analysis to assess potential business, strategic, and financial implications of climate-related risks and opportunities.
ESG Has Multiple Financial Upsides
As oil and gas companies navigate the changing landscape of fossil fuel consumption, adaptation and new models will have to be a part of the equation. A well-managed and strategically-integrated ESG program can help create new value throughout a business transition, including benefits like those identified in a recent McKinsey study:
- Facilitate top-line growth
A strong ESG proposition helps companies tap new markets and expand into existing ones. Organizations achieve better access to resources through stronger community and government relations.
- Reduce costs
Executing ESG effectively can help companies combat rising operating expenses, which can affect operating profits by as much as 60%.
- Optimize investment and capital expenditures
Enhance investment returns by better allocating capital for the long term (ex, more sustainable plant, and equipment). Avoid investments that may not pay off because of longer-term environmental issues.
First Steps on the ESG Journey for Oil and Gas
The benefits of ESG are many and the oil and gas industry can benefit from implementing ESG reporting now as part of their sustainability programs. Here are four easy-to-follow steps to get started:
- Understand what is material to your stakeholders, from customers to regulators.
- Break down any sustainability business silos and integrate ESG into your long-term strategic vision.
- Set meaningful, measurable targets for more than carbon; addressing the ‘S’ and ‘G’ as well.
- Collect your data and calculate results in a single, auditable system that allows you to automate reporting and easily share progress with both regulatory agencies and other stakeholders.
When companies put in place a well-designed sustainability program that ties in with their overall corporate strategy, they can not only meet regulatory requirements but also mitigate potential risks and improve stakeholder engagement.
If you’re looking to evolve your sustainability program and formalize your ESG reporting, FigBytes can start you off on the right foot. Learn more by visiting our platform page.