U.S. Climate Bill to Encourage Even Greater ESG Investment in Oil and Gas

Guyana. By atdr

In recent years, the global push to make energy operations cleaner was accelerated during the pandemic when the international community saw the possibilities of a world curbing its oil and gas consumption. In response, energy firms have been quick to invest in, and promote, their ESG initiatives to show consumers what they’re doing to improve their practices. President Biden’s climate bill could encourage even greater investment in advancing ESG across the sector.

The recently passed $430 billion Inflation Reduction bill is expected to boost interest in developing better environmental, social, and governance (ESG) criteria across several industries, including energy. The CEO of deVere Group, Nigel Green, believes the bill to be “game-changing”, as it sets targets to reduce carbon emissions, and support green energy operations across the country, suggesting that renewable energy will be highly profitable in the future. Green suggests “The legislation… will shift the world’s largest economy forever towards a greener future.” Green added, “A seismic shift has occurred in corporate behavior. How companies approach ESG factors and the value they place on them compared to other considerations has already changed forever… Investors and the wider public need unambiguous information about how firms are contributing to greenhouse gas emissions, and how they are managing – or not – environmental challenges internally.”

Global ESG assets are expected to exceed $53 trillion by 2025, according to Bloomberg Intelligence. But ESG is not new to the oil and gas sector, with several oil majors improving their environmental practices dramatically as governments have pushed for a green transition in recent years. So, what exactly is ESG? Essentially, it is a set of standards for a company’s behavior for investors to determine its efforts to improve practices across these areas.

Environmental criteria include safeguarding the environment and responding to climate change. For example, oil and gas firms can introduce carbon capture and storage (CCS) technologies into their operations to reduce their carbon output. Social criteria focus on companies’ relations with their employees, suppliers, customers, and communities in operations. Lastly, governance looks at a company’s leadership, executive pay, and shareholder rights, among other issues. As governments push for stronger ESG practices, several investors have responded by shifting funding towards companies with clear ESG policies, to safeguard the future of their investment.

A 2022 Ernst & Young analysis found that ESG matters were viewed as important to management teams in the oil and gas firms surveyed, with an increase of six percentage points since 2020. In addition, 82 percent of the companies included had published a sustainability or ESG report. Herb Listen, EY Americas’ Energy and Resources Assurance Leader, explained, “The resilience of the oil and gas sector is being tested – from economic and geopolitical uncertainty to access to capital and climate change.”

EY Americas Oil and Gas Leader, Patrick Jelinek, stated that “more oil and gas companies will begin to embrace ESG and sustainability as a catalyst to innovation throughout their strategy and in operations, rather than view it merely as a compliance exercise”. He added, “While the approach companies take will look different, the intersection of digital technology and sustainability provides a tangible path to drive strategy and support ongoing resilience.” 

But it’s not been all clear sailing for energy companies trying to change their practices to ensure they remain attractive to investors. For example, last year Shell was taken to court in the Netherlands and ordered to cut its carbon emissions by 45 percent by 2030. Meanwhile, ExxonMobil and Chevron have faced heavy pressure from investors to improve their climate practices. 

And as oil and gas firms introduce more ESG policies, they must be careful to establish transparent practices and accountability mechanisms to avoid being accused of greenwashing. While it’s all well and good to promote your renewable energy projects if your biggest operations remain in fossil fuels the public will be interested in how you’re shifting operations to reduce carbon emissions and improve environmental practices in those operations. 

A study published in a peer-reviewed scientific journal earlier this year, examining ExxonMobil, Chevron, Shell, and BP records, discovered that the companies had been greenwashing their climate claims. The report assesses 12 years of data, up to 2020, and proves that the companies’ claims do not align with their actions, including increasing instead of decreasing exploration. Despite a shift in the language used by the oil majors, including mentions of “climate”, “low-carbon” and “transition” in annual reports, these ideas have not been reflected strongly enough in their practices. The report claims that “Financial analysis reveals a continuing business model dependence on fossil fuels along with insignificant and opaque spending on clean energy.”

There has been a significant effort across several industries, including oil and gas, to introduce clear and measurable ESG practices in recent years. Much of their investment now depends on it. However, energy firms must tread carefully and establish transparent ESG policies and effective accountability mechanisms if they are to win public favor rather than be accused of greenwashing in their climate promises.

Author Felicity Bradstock

Felicity Bradstock is a freelance writer specializing in Energy and Industry. She has a Master’s in International Development from the University of Birmingham, UK, and is now based in Mexico City.

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