Environmental accountability has exploded in recent years. Climate change has been a dominant driver of this growth. There is broad agreement among nations that rising global carbon dioxide emissions must be addressed.
This growing awareness has resulted in tremendous pressure on the energy sector to adapt to a new reality. Clean energy, decarbonization, and distributed power have become drivers of investment in the energy industry.
A New Paradigm: ESG—Environmental, Social, and Governance
According to the US SIF Foundation’s 2020 Report on US Sustainable and Impact Investing Trends, as of year-end 2019, one out of every three dollars under professional management in the United States—$17.1 trillion—was managed in accordance with sustainability metrics.
Related: Oil Could Be Primed For Up To 50% Rally, Strategist Says
In response to this growing trend, most companies have developed policies on Environmental, Social, and Corporate Governance (ESG).
Businesses that fail to consider such metrics can experience a significant financial impact. MSCI Inc., a global provider of financial and portfolio analysis tools, conducted a four-year study on this issue. The study found that companies with high ESG scores experienced lower costs of capital, lower equity costs, and lower debt costs compared to companies with poor ESG scores.
Experts at McKinsey sound an even more clarion tone. They cite more than 2,000 academic studies that concluded better ESG scores translate to about a 10% lower cost of capital. This correlates to lower regulatory, environmental, and litigation risks associated with high ESG-scoring companies. ESG is far more than mere window dressing—it is a strategic imperative.
ESG policies discourage businesses from relying solely on financial metrics and encourage broader environmental metrics in their decision-making. ESG programs, particularly among the largest companies, are generally well-defined and measurable. A common theme is a “path to zero”, which defines how, and how quickly, a company will reach net zero carbon emissions. This means either that the company has taken steps to ensure that carbon emitted while doing business is eliminated or offset through projects that sequester carbon.
Sustainability accountability is growing rapidly. In 2020, the KPMG Survey of Sustainability Reporting found that there was a sustainability reporting rate of 96% for G250 companies — the world’s largest 250 companies. Within the oil and gas sector, the rate was 100% for G250 companies.
Whether viewed as an opportunity to be seized or a problem to be solved, the energy sector is squarely focused on achieving measurable ESG results. And most of those results will come from reductions in emissions, particularly carbon dioxide.
Conclusions
Companies are going to be forced to confront ESG as a requirement of doing business. Leading companies have already embraced it and are reaping the benefits. Numerous studies have shown that companies with high ESG scores experience lower debt and capital costs.
ADVERTISEMENT
ESG is a financial issue, and one that will particularly challenge the energy sector. In the next article, I will highlight how hydrogen can be used to improve ESG scores.
By Robert Rapier
More Top Reads From Oilprice.com:
- Fujairah Oil Terminal To Upgrade As Crude Trade Is Expected To Surge
- Major Crude Draw Sends Oil Higher On First Trading Day Of The Month
- Finding A Real Solution To Louisiana's Energy Crisis
