ESG importance on the rise as oil & gas makes the transition

November 2019  |  EXPERT BRIEFING  |  FINANCE & INVESTMENT

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Investors are increasingly scrutinising oil & gas companies through the lens of environmental, social and corporate governance (ESG) factors, as momentum builds behind efforts to promote clean energy, sustainability and the energy transition.

Pressure has increased particularly quickly over the past year. In March 2019, Norway’s Government Pension Fund Global (GPFG) announced that it would sell off around £5.7bn worth of stocks held in oil & gas exploration & production companies that have so far failed to invest in renewable energy. In the days following, the combined market capitalisation of Tullow Oil, Premier Oil, Soco International, Ophir Energy and Nostrum Oil & Gas fell by around £130m or 3 percent. While the drop alone is perhaps unremarkable, the Norwegian fund’s move is the rather large tip of a much bigger iceberg.

PenSam, a £13bn Danish pension fund, has removed 100 oil and coal companies from its portfolio over the past three years, with the latest round of cuts in July targeting oil companies, including US-based Hess and Marathon Oil and Austria’s OMV. Both GPFG and PenSam retained stocks in BP and Royal Dutch Shell, which invest in renewable energy technologies, as if to show the companies whose stakes have been divested that the secret to continued investment is embracing cleaner energy solutions.

In early September, BP and Shell were included in the Danish Magistre & Psykologer (MP) Pension fund’s plans to sell off shares worth around £75m in oil firms. Stocks in Chevron, Equinor, ExxonMobil, PetroChina, Petrobras, Rosneft, Sinopec and Total are also to be divested. Meanwhile, the Danish government and pension funds PensionDenmark, PKA, PFA and PenSam have promised to invest a further £41bn in renewable energy infrastructure.

It is perhaps unsurprising that Scandinavia should lead from the front on ethical and environmentally savvy investments, given the region’s comparatively high uptake of renewables and a broader socialist democratic agenda. The rising importance of ESG is not confined to northwestern Europe though, and conferences have been popping up around the world, offering ‘insight’ into ‘a new age’ of oil & gas development. By and large, these are offering more questions than answers and apart from those with pockets deep enough to finance R&D divisions for renewables and major projects to pair with their extractive developments, companies are looking for pointers on how to make the transition.

Looking for sustainability

With shareholders increasingly looking for products that are ESG compliant, funds want to see more responsible and sustainable operations from companies to justify their investment. There are, however, justifiable concerns that such a wide range of stocks are immediately ruled out from ESG investments, while issues in reliably scoring the factors persist.

In September, Bloomberg announced the launch of US equity benchmark capabilities that will serve as the basis for the Bloomberg SASB ESG Index family. This includes “ESG-weighted versions of the value, growth and dividend indices”. Aware of the shortcomings of previous ESG fund efforts, Bloomberg said that the new product was part of a focus of realising “materiality-based ESG” investing.

Meanwhile, the Transition Pathway Initiative (TPI) recently released an evaluation of companies operating in the energy sector. In its report, the TPI, which is backed by investors with more than £12 trillion of assets on their books, assessed 109 energy companies, noting that only 31 of these had implemented strategies that were aligned with commitments to the 2015 Paris Agreement to combat climate change.

Shell and Spanish firm Repsol were the only two oil & gas companies that had achieved this, but none were operating in line with the aim of keeping global warming to 2°C. In addition, the TPI found that 31 oil & gas companies would not release data on the indirect emissions from the products they sold, and 23 did not have fixed quantitative targets for curbing pollution.

For all the hyperbole then, little concrete action has been taken. However, publicly listed oil & gas firms are now beginning to release ESG reports or at least include an ESG statement in their corporate presentations in a nod to the trend.

The problem for most small and mid-sized exploration companies, though, is turning these noble intentions into quantifiable action without being deemed to be merely green washing. With neither the experience nor the cash to develop and run a wind or solar farm, these companies are left with efforts to ‘green up’ existing operations, which will just not cut it for ESG funds. The situation for oilfield services firms is equally stark, though some companies in this space have skills transferable to offshore renewables projects and business development efforts should be focused in this direction.

Faced with the potential for more funds implementing ESG prerequisites for investments, the industry has a new buzzword in ‘energy transition’ upon which to focus for the foreseeable future. However, as with ‘digital transformation’ before it, this runs the risk of being talked a lot about with very few of the participants knowing how to effect the significant change required. The energy transition is gaining greater traction than previous buzzwords because, unlike some of the operational improvements generated by these earlier campaigns, the influence of ESG factors on investment is a significant commercial threat to those who fail to comply.

The Global Sustainable Investment Alliance (GSIA) estimates that ESG investments represent in excess of $30 trillion globally. With GSIA and Deutsche Bank suggesting that this will double in the next three years, there is a clear and present danger for publicly listed oil & gas firms, which should provide sufficient impetus for them to embrace the Energy Transition.

Jon Fitzpatrick is managing director at Gneiss Energy. He can be contacted on +44 (0)131 225 3783 or by email: jon.fitzpatrick@gneissenergy.com.

BY

Jon Fitzpatrick

Gneiss Energy