More oil and gas companies, including those headquartered in North Texas, are turning an eye to environmental and social governance as investors and regulators continue applying pressure.
Source: Dallas Business Journal
In direct response to investor demand, more companies are incorporating ESG metrics in their performance compensation for their executives, according to a report by Haynes and Boone. Investors want to see that executives are incentivized to implement ESG strategies.
“Historically, performance compensation is tied to the key operating metrics of the company,” Haynes and Boone partner Jennifer Wisinski said. “Now they’re incorporating how well the executives are implementing the company’s ESG priorities.”
Investors have also been pushing for more quantitative metrics in order to better compare companies. More than two-thirds of the oil and gas producers in the study are disclosing quantitative metrics, an increase from 53% to 73% since the prior year’s report.
Haynes and Boone partnered with management consulting firm EnerCom to release the second edition of their report on the impact of environmental, social and governance policies on the oil and gas industry.
The study analyzed ESG-related disclosures of 30 oil and gas middle market companies producing onshore in the United States and monitored the change over time.
“I think in the last year two of the hot button issues have been climate change and diversity,” Wisinski said. “But different investors will focus on different areas. If you ask investors, generally they will tell you that they put an equal footing on the E, the S and the G.”
The report found that the number of companies publicly disclosing ESG policies grew to 83%, up from 70% in the previous report. ESG disclosures were mainly displayed on a company’s website, proxy statements and/or CEO letters.
Wisinski said the primary pressure pushing companies to publish their ESG strategies and achievements is from investors and other stakeholders.
“Over the last few years, there has been a lot of money put into investment funds and other investor groups that are focused on ESG factors,” Wisinski said. “When they have a fund that focuses on ESGs and when they go out and invest in a company, they want to know what those companies are doing for ESGs.”
The ESG tracker shows that 20 of the sample producers disclosed a total of 67 quantitative environmental metrics,14 companies disclosed a total 37 quantitative social metrics, and 14 companies disclosed a total of 31 quantitative governance metrics.
Mostly commonly, environmental metrics focused on reduction in emissions, water management and reduction in flaring. Social metrics mainly centered on diversity in the workplace, worker safety and community involvement, and governance metrics mainly emphasized board diversity, board tenure and management diversity.
More companies are also forming ESG-related board committees. Ten more companies that were studied have created ESGs since the previous report. Overall, 20 sample producers reported having an ESG-dedicated committee, and four companies delegated ESG oversight to a standing committee.
There is still variety in how companies are disclosing their ESG metrics, but Wisinski believes that over time with continued pressure from investors, stakeholders and regulators, there could be more of a consistent approach in how disclosures are made.
“Everything is evolving and changing very rapidly right now in a lot of different fronts — from what investors want, to what the regulators want,” Wisinski said.
Wisinski can’t predict what exactly what disclosure policies the U.S Securities and Exchange Commission might implement, but SEC chairman Gary Gensler foreshadowed that the agency would consider mandatory quantitative disclosures on greenhouse gas emissions. It is unclear what metrics the SEC will mandate disclosures.
The study reported that companies still find monitoring and reducing greenhouse gas emissions to be one of the most important ESG topics. Since the last report, the number of sample producers publishing greenhouse gas emissions rose from 16 to 21.
Gensler also indicated that the SEC would focus on defining “Net Zero” and establishing what metrics might let investors know that companies have met that requirement. The study found that while the number of companies with the goal of being Net Zero increased by 150%, this number is still relatively low. Only five out of the 30 sample companies have a Net Zero goal.
“Net Zero has become a key buzzword, especially with the big companies coming out and saying, ‘we’re Net Zero now,’” Wisinski said. “We’re going to be Net Zero by X date. It’s important to try to ensure from a disclosure standpoint that there is a consistent way that [Net Zero] is defined. So when companies are making those statements, you compare them really as an apples-to-apples basis.”
“What we advise companies is that ESG is evolving,” Wisinski said. “It’s a journey. We expect to continue to see change and development in the disclosures of these companies over the next few years. It’s not something that is static. It is something that is really changing.”
