07 Apr The rise of ESG and its impact on the energy industry
Last year ended up being a success for oil and gas businesses. After several disruptive years, prices escalated, and oil majors like BP, Shell and Exxon capitalised on these rises and generated significant profits. This rise in revenue happened before prices surged even higher due to Russia invading Ukraine.
While the current scale of profitability is considerable, the industry continues to face a mounting challenge – its significant role in environmental and climate destruction. It’s believed the oil and gas industry makes up 9% of all human-derived greenhouse emissions, and the burning of fuels produced in the sector accounts for a further 33% of global emissions.
Rising concerns and campaigns concerning the future of our planet have forced many oil and gas businesses to adapt and rethink their business strategies. According to a recent report by Deloitte, many companies are focused on building their environmental, social and governance (ESG) goals. The Deloitte report explains that the sharp rise in oil prices over the last year, combined with the global demand, meant that the industry could invest in riskier and more costly green energy projects, including carbon capture and energy storage.
Bloomberg Intelligence has reported that oil businesses find it more challenging to raise finance amid the increasing ESG concerns, while banks are under added pressure from their investors to reduce or remove fossil fuel financing. According to Goldman Sachs, the cost of developing fossil fuels now exceeds renewable energy projects. This change is generating an unprecedented shift in capital allocation. This year represents the first time renewable energy will represent the highest part of energy investment.
The Issue of Greenwashing
Despite these dramatic changes, the demand for oil and gas continues to grow. According to the UN Environment Programme, nations worldwide still intend to generate double the amount of fossil fuels expected to meet the target of limiting average global warming to 1.5 degrees Celsius above pre-industrial levels.
According to Darren Woods, the CEO of Exxon, there is increasing recognition of the need for a range of approaches to ensure the oil and gas industry makes clear progress on emission reductions but, at the same time, doesn’t directly impact people’s lives. Woods believes their company is committed to investing in new technologies like carbon capture, biofuels and hydrogen.
BP has committed to investing more in low-carbon alternatives as it reported some of its highest profits in the last year. Bernard Looney, the CEO of BP, informed investors that by 2025, the business intended to allocate 40% of its spending towards projects supporting the energy transition, including wind farms and hydrogen and electric vehicle infrastructure. Looney highlights their focus on the UK and the opportunity available, particularly within the wind industry.
Charlie Kronick, an analyst at Greenpeace UK, believes that while BP has some of the most ambitious plans of any oil and gas major in terms of diversifying away from fossil fuels, there are still significant changes required within the entire industry. Kronick explains that we can’t create a solution by implementing changes at one oil business at a time. It should be the responsibility of the governments to commit to eliminating the growth of fossil fuels and raise the targets to reduce emissions.
Despite several well-documented projects in green energy, oil businesses globally are being accused of greenwashing, highlighting their efforts to reach ESG targets while increasing their investment in oil and gas exploration. A study by ShareAction indicated that 25 global banks that pledged to reduce emissions last year had allocated $33 billion in loans and other financing to businesses with significant oil and gas exploration plans.
Other studies have suggested that while leading oil majors often use terminology like low carbon, climate and transition in their reports, their actions on clean energy were typical targets but remained financially committed to fossil fuels. Until the level of action meets the scale of investment, the transition to a clean energy business model will not happen.
Earlier this year, the IPCC released a clear warning on the dangers of climate change, pointing directly at oil and gas businesses and the significant impact fossil fuels have on our environment. The IPCC explained that the existing global energy mix is broken and requires considerable progress and a shift away from fossil fuels. Our continued reliance on fossil fuels makes our economy and energy security far more vulnerable to geopolitical disruption.
Rather than slowing the pace of decarbonisation, now is a critical time to accelerate the transition to a clean energy future. According to many energy experts, a decisive shift to renewable energy is the best solution for energy security.
According to Daniel Romito, director of ESG Strategy and Integration at Pickering Energy Partners, ESG has transformed considerably. Investors expect more details on ESG-related issues, supported by clear and transparent data.
Investors are not only basing their capital decisions on ESG practices in businesses but actively exploring other ESG-related metrics to gain a clear understanding of which business could compete within the movement toward a clean energy future.
With oil prices rising and governments actively driving for more climate action, some analysts and ESG investors believe oil and gas would capitalise on this profitable period and invest more in low carbon tech. Industry analysts have suggested that high commodity prices are efficient for current production streams, so oil majors are strengthening their business by repaying debts accumulated from the pandemic, increasing dividends and buying back shares. As oil companies move revenue back to investors and improve their performance, effectively reducing their progress on green investment.
There are also concerns that if ESG causes the oil business to reduce traditional activities worldwide, it could effectively reduce people in developing nations from capitalising on the benefits the west has experienced for so many years.
Mr Barkindo, Secretary-General of OPEC, highlighted his concerns if oil and gas resources in Africa effectively become stranded assets due to the global movement towards decarbonisation. Barkindo believes the environmental side of ESG is possibly outweighing the necessity to focus on social and development issues. Barkindo describes the oil industry as being under siege by climate campaigners. He also believed that the developmental needs of Africans were unrecognised, a continent with less than 3% of global carbon emissions and with nearly 600 million people with no access to electricity.
The net-zero movement has moral, economic and geopolitical factors, such as the difficult challenge of eliminating economic poverty in Africa while attempting to prevent the region from capitalising on its plentiful energy resources. Will countries across Africa be unable to utilise the same carbon-intensive activities that spurred on development and generated affluence in the west? The oil and gas industry faces this challenge and the best approach toward a clean energy future.
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