Environment — Social — Governance — Opportunities
From an Article by the National Law Review (Volume XI, Number 275), Journal of Petroleum Technology, October 1, 2021
While ESG is perceived by some to be — and can be — difficult to implement, and it may seem like a profit-killer, the irony is that, for most companies that implement ESG programs, including those within the oil and gas industry, it has the opposite effect.
The institution of environmental, social, and governance (ESG) values and metrics represents a true revolution in how corporations are managed, measured, and operated. This sea change will continue to drive companies away from the familiar framework of short-term profits toward success that is defined not only by profitability but also by a sustainable and measurable contribution to the betterment of society at large.
This new paradigm brakes a long-established mold. While ESG is perceived by some to be—and can be—difficult to implement, and it may seem like a profit-killer, the irony is that, for most companies that implement ESG programs, including those within the oil and gas industry, it has the opposite effect.
According to the International Energy Association’s (IEA) 2021 Global Energy Review, renewable energy grew 3% in 2020, inclusive of a 7% increase in electricity generation from renewable sources. Logic would imply that, all things being constant, fossil fuel demand would decline. But all things are not constant, and because of an estimated 4.6% increase in global energy demand this year, a year when the world continues to feel the effects of COVID-19, the demand for fossil fuels has not diminished and will not any time soon.
Coal, driven largely by Asia, is a significant part of that demand, but natural gas is a driver across nearly all geographies. Even as we seek to supply more of our growing energy needs from renewable sources, the demise of fossil fuels — for good or for bad — is greatly exaggerated. While the industry itself is not going away, the way in which it operates and its contribution to the economy and society most certainly will be transformed.
Why is that? Certainly the societal implications of a focus on ESG represents an ethical imperative. But the truth is that money talks. BlackRock is the world’s largest investment manager, with $10 trillion of assets under management. According to S&P Global, as of February 2021, oil and gas represented 2.55% of its total investments and coal and consumable fuels accounted for 0.36%. Despite these small percentages, the investments are material and represent close to $255 billion and $36 billion, respectively, in the energy sector.
As such, when BlackRock’s CEO Larry Fink speaks, people listen, including those in the energy sector. To that end, in a 2020 letter to investors, Larry Fink warned that “Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
While BlackRock has been and is instrumental in creating the ESG imperative, it is just one of the many stakeholders pushing companies in all sectors to embrace ESG and to develop metrics to measure progress toward identified goals.
Despite all the talk about the energy transition, net-zero economy goals, and the importance of ESG overall, energy companies should not lose site of the fact that (1) it is unlikely there will be a decline in global energy demand — populations are continuing to grow — and (2) broad index funds, as opposed to actively managed funds, simply cannot abandon the sector or create stranded assets. But, a lack of an ESG strategy will ultimately affect a company’s access to public, and increasingly private, capital. And that will happen to all companies, whether publicly funded or not.
A lack of an ESG strategy will ultimately affect a company’s access to public, and increasingly private, capital.
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