ESG is increasingly vying for airtime in oil and gas boardrooms as leaders grapple with how best tackle environmental, social and governance challenges. This follows a trend of ESG support throughout all sectors of the U.S. economy. A recent study revealed that ESG shareholder resolutions were up 22% to record levels for 2022. This article identifies (1) the key administrative reasons for the increased ESG discussion, (2) why leadership should take ESG seriously, (3) questions leaders should be asking themselves, and (4) a framework for addressing ESG challenges.
Key Administrative Reasons for Increased Focus on ESG
In 2021, the Biden Administration issued several executive orders directing federal agencies to implement ESG-related practices. Perhaps most important among these is President Biden’s January 27, 2021 Executive Order, “Tackling the Climate Crisis at Home and Abroad. The Executive Order:
- Requires agencies to consider the effects of federal permitting decisions on greenhouse gas emissions and climate change;
- Initiates an agency-wide push to incorporate programs, policies, and activities to promote environmental justice; and among other things; and
- Encourages the development of renewable energy production on land and in water.
The EPA is also developing ESG-related rules that impact, or will impact, the oil and gas industry. These rules seek to:
- Reduce methane emissions from abandoned oil and gas wells.
- Reduce/eliminate the use of natural gas-driven pneumatic controllers that are widely used in the industry.
- Increase performance standards for storage tanks, pneumatic pumps and compressors.
- Reduce emissions from existing oil and natural gas operations.
- Enhance compliance monitoring programs for new and existing well sites and compressor stations.
Reasons to take ESG Seriously
While some oil and gas companies have been slow to react, most leaders now recognize the importance of addressing ESG. While there are many reasons to take ESG seriously, here are some of the most compelling:
- Heightened focus of investors on ESG matters. Poor ESG performance will impact access to capital.
- The public has a heightened awareness of ESG issues. Companies must take steps to ensure they are not embroiled in any negative press.
- Opportunity to demonstrate leadership by investing in new technologies that can reduce environmental impact or improve efficiency. This can lead to cost savings as well as goodwill with the public.
- ESG can help companies become more sustainable and efficient in the long term, and it is becoming an increasingly important factor to consider when selecting investments and partners in oil and gas.
Questions Leaders Should be Asking
Leadership at oil and gas companies should be asking themselves following questions, which they must answer to stay competitive:
- Environment: What is our company doing – and what can we do – to reduce emissions and our carbon footprint?
- Social: Is our company’s workplace safe? How do we measure this?
- Governance: How are our processes and procedures being managed? Are employees receiving adequate support to fulfill their role?
Best Practices to Address ESG Challenges
Oil and gas leaders should consider the following:
- Conduct diligence on what peer companies are doing with regard to climate change initiatives and reporting. Trade groups can be especially helpful with this research.
- Identify and hire an ESG consultant to assist in drafting your ESG plan and reporting framework. There are multiple consultants who work specifically with the oil and gas sector.
- Update policies and procedures to ensure they address ESG.
- Develop clear metrics to evaluate how effectively the company has executed on its ESG policies.
- Reporting throughout the company is critical. Create a cross-discipline committee to evaluate ESG initiatives. Ensure that the committee has a compliance member and a member of leadership.
- The board should receive training on frameworks for your ESG plan and related disclosure obligations.
- Establish regular board review and oversight of the planning process, the plan itself, and progress against the plan. Work with the cross-discipline committee and keep the line of communication open.
- The tone at the top matters, so be sure to get sufficient buy-in from leadership.