5 ESG Trends in Energy: From Transition to Transformation
Global efforts to cut carbon emissions have put the energy sector under the microscope, and the pressure is on energy producers to stand out—in a good way.
Investors, customers, employees, ratings agencies, and regulators are pushing energy companies to publicly set environmental, social, and governance goals. If you are an oil and gas company, utility, mining, or renewables firm, addressing key stakeholders’ interests in your environmental impacts, or the “E” in ESG, will likely be the crux of your ESG strategy. Meanwhile, financial firms and consumer brands will factor in energy companies’ ESG goals when it comes to calculating their own greenhouse gas emissions, net-zero commitments, and decarbonization and energy transition plans.
As you plan your ESG strategy, here are five energy-related trends to watch:
1. The great energy transition
Moving to a lower-carbon strategy does not happen overnight. However, fossil fuel-based companies and the transportation industry, which are among those facing the greatest transition risks, are identifying climate risks and opportunities now. Some have publicly set targets for net-zero emissions. Stakeholders have had mixed reactions, particularly if a long-term goal has been set without also setting near-term targets for getting there.
Your company may not have mapped the road to net zero yet, but there may be other ESG goals you are ready to share externally. Assess what is material to your stakeholders, perform best-, base-, and worst-case scenario analyses of climate impacts, evaluate the potential hazards or benefits of pursuing strategies like carbon offsets, and determine how you will report and communicate your work to stakeholders.
2. Supply chain resiliency
Collaboration is key to mapping supply chains, both for gathering information for ESG disclosures and identifying vulnerabilities.
3. Reinvention and renewables
This is a pivotal moment for the energy industry. Legacy oil, gas, and utility companies are reacting to volatility in commodities markets while proactively reinvigorating reputations with long-term strategies for a low-carbon future.
Sustainable finance decision-makers are evaluating capital allocation that takes a balanced approach to incorporating renewables and cleaner energy into business portfolios. But not all energy producers are pursuing the same strategy or ditching fossil fuels.
Using investor-trusted data to drive your strategy will be critical to back your ESG narrative and share it with stakeholders. Having access to real-time ESG data collected from across your organization will help you stay agile as risk-and-reward payoffs change over time.
4. The link between ESG and the cost of capital
Companies with higher ESG scores and ratings tend to have lower cost of capital, according to MSCI, the investment research firm. They tend to have a lower cost of debt and less exposure to systematic risks, which suggests a lower cost of equity, according to MSCI. This is especially important as lenders issue loans with variable rates based on whether ESG goals are met or charge higher interest to companies with lower ESG rankings or ratings.
Energy companies have been at the forefront of ESG in looking for ways to mitigate risk, conserve resources, and reduce greenhouse gas emissions to reduce environmental impacts and deliver better returns. If you’re among those leaders, it could make sense to start telling that story with data to back it up.
This is especially important because some ESG ratings agencies and rankers may score you based on publicly available information, even if you didn’t create it. Be sure to tell your own story, with audit-ready data to support it.
5. Readiness for ESG reporting regulations
Just as preseason games get your favorite athletes ready for game day, dress rehearsals for compliance with upcoming ESG mandates can help prepare you for when regulators adopt final rules.
Review proposed rules, identify the data you’re already collecting and what data you still need to collect for compliance, and map processes for reviewing, reporting, and assuring the data so you know where gaps exist. (Learn more in this webinar.)
Start evaluating technology or ESG reporting software that can mitigate a lack of resources to collect data or create reports, so you can get back to the business of analyzing progress and driving strategy.
The time for energy companies to prioritize ESG is now, while a well-articulated and measured strategy can still provide competitive differentiation. Ultimately, firms that lean into ESG will gain more credibility, as the risk of not measuring and reporting ESG as an energy company is arguably higher than any other sector.