ESG Mandates Heating Up for the Oil and Gas Industry
October 5, 2021
Originally published on Hart Energy by Steve Soter.
As we enter the latter half of 2021, energy companies are embracing the growing importance of ESG disclosures and reporting. As many are adopting new technologies, increasing efficiencies, and incorporating renewable or alternative energy into their operations to meet new mandates and regulations across both U.S. and the European Union, as well as to ensure they are attracting investment.
The recent SEC scrutiny on existing climate disclosure requirements and expected rule proposal on additionally mandated disclosures creates a sense of urgency for companies to figure out how to remain compliant with disclosing the direct and indirect impact they have on climate change.
These potential new regulations will help bring consistency and standardization in climate-related reporting to the industry. Standardized methodologies and a common level of disclosure will support the industry’s effort to reduce its impact on climate change. This will also help investors compare climate-related disclosures between oil and gas companies, an effort supported by the recent announcement by the American Petroleum Institute setting a framework for the industry. And, without question, recent and high-profile attention to these issues within the industry have only accelerated the need for such standardization and comparable disclosure.
With impending regulation and pledges to reduce net carbon emissions, the pressure is higher than ever for the industry to remain accountable and ensure that ESG disclosures are as accurate as possible. As the energy sector further "operationalizes'' ESG, the data challenges will be significant. It's one thing to add extra carbon scrubbing technology to smokestacks, but it's quite another to take reporting data from that technology, aggregate it with a deluge of other data and tell an audit-ready and coherent story, backed by trusted and transparent information.
Assessing the present to determine the future
While climate change reporting standards are still evolving, companies should disclose the potential and actual impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning where such information is material. The recent SEC scrutiny has made this abundantly clear. Additionally, as strategic decisions are increasingly based on climate impact factors, industry participants simply cannot ignore ESG issues. It is critical that these companies assess their current position and set realistic goals for reducing their contribution to climate change.
To begin with, companies must set concrete and actionable emission reduction targets to display their commitment to combating climate change. To do so, they not only need to be aware of their current rate/volume of carbon emissions, but must also develop a data-informed plan, to reduce emissions from reliable and transparent data sources that encourage prioritizing sustainability in impactful ways to ensure that future business practices do not undermine their ambitions.
In addition to pivoting their corporate strategy, companies also need to set information governance standards to establish baselines in how they measure their Key Performance Indicators (KPIs). Doing so also provides companies with a consistent and transparent method to measure their progress over time and hold themselves accountable for the pledges they make towards emission reduction.
Weaving ESG into company strategy
Outside of compliance with current regulations, investors want to see that climate change is considered appropriately when a business makes strategic decisions. To demonstrate this, companies must start with reliable, accurate and auditable data.
Notably, industry giants such as Equinor, and more recently, BP have made major strides to improve monitoring and in 2020 announced that it aimed to install methane measurement at all of its major oil and gas processing sites by 2023 and reduce its methane intensity by 50 percent.
Collecting and reporting emissions data consistently and frequently ensures that the compiled data is accurate, as opposed to relying on estimates. This enables teams to stay abreast of internal developments and progress towards milestones and industry benchmarks while reducing the need to backtrack and manually search through data compilations when it is time to report sustainability metrics to stakeholders.
Finding ways to streamline ESG reporting
The increasing focus—from investors and industry bodies—on ESG data brings critical operational change. Oil and gas companies are challenged to manage and track an increasing magnitude of disparate data as disclosure becomes mandated.
To address this, businesses must adopt a defined approach supported by digital compliance tools that simplify the complexity of processes to provide usable, auditable and transparent data to stakeholders. This is even more important as new disclosure and emission standards come into play.
Trusted reporting systems will help teams communicate across silos, geography, and the entire enterprise. This allows for real-time collaboration, allowing enterprise teams to consistently report the most up-to-date information. Further, by automating these processes, companies can establish continuity across various platforms and data sets, ensuring that reporting is consistent and in a compatible format.
Moving toward a better environmental future
Oil and gas companies will continue to be under scrutiny to ensure they’re not only proactively taking steps to reduce their environmental impact, but are also being transparent with climate-related disclosures, particularly in light of increased regulatory scrutiny.
As ESG metrics move up the priority lists for investors and industry regulators—and with new regulations on the horizon - organizations will be forced to be transparent with their reporting; thereby enabling would-be investors to have a clear understanding of their practices and intentions.
This can only be achieved by using the right solution to collect and aggregate data from different areas of the business to create accurate and auditable reports to demonstrate progress. The time is now for oil and gas organizations to take the initiative to ensure they are aligned with the changing values of investors and society at large, cementing their role in a more positive future.