What is Environmental, Social, & Corporate Governance (ESG)?
According to a Pew Survey taken in 2020, more than two-thirds of Americans believe action should be taken now to curtail climate change. Fortunately, between a burgeoning prosumer market driving green technologies and global decarbonization efforts, world powers are responding with strident actions to mitigate the effects of climate change. That includes the financial sector, which developed Environmental, Social, and Governance (ESG) guidelines to help shed a light on a company’s future outlook for investors, lenders, insurers, shareholders, regulators, employees, and consumers by measuring:
- Environment safeguards (natural materials, water conservation, CO2 reductions)
- Social issues (diversity, human rights, poverty reduction)
- Ethical corporate governance (anti-corruption, pay equity, fair trade)
Environmental, social, and governance (ESG) standards consider the impact a company has on its employees, customers, and the communities where it operates. While the metrics are still evolving, it appears ESG reporting is here to stay and will likely replace “green” and CSR metrics going forward.
Why Does it Matter to Utilities?
The public demands cleaner energy and more responsible corporate behavior across a broad range of issues. ESG is an important tool for the energy industry specifically as momentum continues to build in efforts 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. Reports show that ESG ratings have increased deal volume and value, and promise to increase critical revenue streams for utilities investing in green technologies.
Environmental Issues Driven by Climate Change
Few industries feel the pressure of climate change more directly than utilities, which are challenged by temperature extremes to provide continuous service during peak demand. As such, the utility industry is essential in decarbonization efforts and is highly exposed to climate-related risks, from forest fires due to record heat waves to historic flooding during hurricane season. Furthermore, as scientific evidence increasingly underscores the urgency to address climate change, and with governments and the financial markets responding accordingly, demands on oil and gas companies have escalated in scope and sophistication: more detailed ESG reporting, more transparency on environmental impact, improvements to enhance grid-resiliency, and tangible steps toward a carbon-neutral future.
Widespread Support For ESG Policies
Companies must adapt their business models quickly to satisfy global net-zero targets. Within days of his inauguration, President Biden signed Executive Order 14008 entitled Tackling the Climate Crisis at Home and Abroad, further establishing a government-wide approach to address global climate imperatives and increasing pressure on companies to properly manage ESG issues. Widespread support of ESG policies, matrices, and the overall energy transition remains highly relevant to oil and gas companies because of increasing pressure to protect the environment.
Intensifying Activism and Societal Demands
Activists have raised their voices on ESG issues by challenging spending on new fossil fuel production, asking for operational improvements, and factoring ESG into divestment decisions. While ESG is not limited to environmental issues, the current media and wider public attention on climate change and decarbonization have meant that the energy sector, which includes some of the largest emitters, has been at the forefront of many ESG developments. However, the energy sector is not only dealing with the difficulties of the energy transition, but it has also been increasingly faced with the need to integrate other ESG issues, such as human rights, community engagement, and anti-bribery.
Your Growth Depends On It
Investors and their capital providers are increasingly focused on ESG risk factors in today’s market economy, as many find these factors helpful in analyzing a company’s long-term value creation and growth strategy. As net-zero pledges and government mandates continue to make headlines along with the broader discussion of long-term energy sources, including renewable and alternative energy as well as the energy transition, sustainability, and environmental factors are playing a large role in capital allocation. According to the sixth-annual Institutional Investor Survey conducted by Morrow Sodali Global, LLC in 2021, 98% of investors surveyed are giving more focus to ESG topics when it comes to investment decisions.
Mastering Environmental, Social, and Governance (ESG) Strategies
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 impacts 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. Let’s look at a few opportunities for enterprising utility operations to strategically address ESG priorities:
Define Your Priorities – Review your policies and procedures to ensure they address ESG and climate risk and then continue to evaluate how effectively the company has executed these policies. The board should be satisfied that the implementation of the policies and procedures effectively aligns with the board’s overarching strategy and is moving the company towards net-zero.
Invest Now in Green Technology – The ESG evolution is fueled by leveraging innovative technology and the energy sector is no stranger to innovation. Many energy companies already use technologies such as artificial intelligence (AI), machine learning (ML), the cloud, advanced analytics, the internet of things (IoT), big data, digital twins, drones, and wearables. Common applications include tracking and managing emissions, choosing the right portfolio of assets, and uncovering renewable energies with the leading potential for longevity and sustainability to drive permanent change.
Use Distributed Energy Resources – There has been a tremendous push toward adopting renewable sources like wind and solar. For example, ExxonMobil has been expanding its investment in renewable diesel and the “big six” have invested billions into clean energy projects. While this is certainly a noble effort, it’s not entirely feasible in all situations or geographies, it’s not an immediate solution for total energy supply, and progress has been slow. However, companies can employ renewable sources where it makes sense, which also has a welcome side effect of helping to insulate from the volatility of oil and energy costs.
Emphasize Safety – The humanitarian aspect of ESG means creating safer, healthier work environments for people, both within primary facilities and across the supply chain. Just as reducing pollution protects our planet’s well-being, reducing the risk of accidents and injuries protects the well-being of our people. Slip, trip, and fall accidents and contact with objects and equipment are some of the most common nonfatal work injuries that result in time off work. Reducing this risk can be as simple as upgrading facility lighting and focusing on overall improved visibility. Adequate lighting has proven to reduce the risk and prevalence of accidents and injury, and even minimize fatigue which can aid productivity.
Focus on Metrics that Matter – Deploying measurable solutions allows companies to prove the impact of their ESG efforts with both quantitative and qualitative data. For example, start by focusing on metrics like energy consumption, water management, greenhouse gas emissions, and safety performance data, including data from across your supply chain. Next, address social impacts like community relations, workforce, leadership diversity, and employee health and wellbeing.
What is Environmental, Social, and Corporate Governance (ESG) Conclusion
To achieve business value and ESG goals, a company must manage both its social and fiscal responsibilities — and a growing number of companies are. These enterprises — often motivated by employees, customers and investors — have become ESG champions and pioneers in the energy transition. ESG metrics and reporting in the energy and utility sector have become a business imperative as the world strives to tackle climate change, income inequality, social activism, supply chain issues, and increasingly stringent regulations around reporting. The reality is that companies that hesitate to make ESG a priority risk losing their opportunity to establish themselves as leaders and jeopardize their ability to remain competitive, attract investors and employees and, ultimately, survive in the long term.