By Aldo Santillan – Managing Director and Editor in Chief, Energy Capital
The ESG Flag
Many companies and organizations are currently hoisting the Environmental, Social, and Governance flag. While this acronym does not represent a legal mandate or binding commitment, the benefits of following and embracing it are many.
According to Fitch Ratings, in 2020; “asset buyers were increasingly selective, and the acronym, in particular, seemed to had a great influence on the financing decisions of banks, due to new social and regulatory pressures.”
JD SUPRA, a legal expertise media company, also reported that over 80 percent of institutional investors worldwide; currently consider environmental, social and governance components as part of their investment strategies.
Among the benefits that this implementation brings are the economic and financial ones. For example, as reported by Romain Boscher, CIO for equities at Fidelity International; “companies with the highest ESG ratings collectively outperformed during the pandemic market crash in March and beyond.”
In the US, as an example, about a quarter of the assets under management; or roughly $12 trillion, are currently ESG’s investments. Moreover, several studies now find a positive relationship between those scores and financial returns.
Although there are not global specific frameworks for this acronym, some efforts are currently underway. For instance, we can talk about the Taskforce on Climate-Related Financial Exposures (TCFD), the SASB standards; Also, the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), and the Global Reporting Initiative (GRI). Therefore, a global benchmark will not take so long to become real.
So, since it is here to stay… where is the energy sector positioned?
Indeed, the energy industry has significant advantages regarding this acronym. Accordingly, the sector has been a pioneer in developing principles. Besides, in implementing some of the best practices derived from them.
For instance, in the last twenty years, renewable energy companies have led the way in advances in sustainable technology. Moreover, in the Oil & Gas sector, exploration, production, and distribution companies; are currently leaders in conserving water, reducing greenhouse gas emissions, and minimizing land disturbance and traffic and noise impacts.
As a result, several energy companies have experience in engaging in activities that comply with these requirements. For instance, the CEO of ConocoPhillips made reference last year to the significance of its strategy to its $9.7 billion acquisition of driller Concho Resources.
Similarly, when Pioneer Natural Resources announced its agreement to acquire Parsley Energy in 2020; the press release highlighted sustainable development as one of the transaction’s critical strategic and financial benefits.
Measures look at carbon dioxide emissions, water management, workforce diversity, wage gaps, human rights, health and safety, community development, ethics, and compliance. Even though our industry is well-prepared in some of those fields, there’s still much to be done, so we shouldn’t take things for granted.
To conclude, companies should not forget to give proper treatment to the “E,” the “S,” and the “G,” respectively, since each component has proved to be essential. The opportunities are many, and beyond its popularity, the concept reflects a greater insight: it symbolizes what our culture, society, and planet are demanding from us, intensely, nowadays.