The war in Ukraine has reshaped the world’s fuel markets, with the global industry seeing historic gains from the fallout. Aramco has become the latest in a long list announcing record profits in 2023. But how long will this last?
The answer will depend solely on how oil and gas companies can demonstrate decarbonisation to investors.
Speaking at International Energy Week, Chris Skidmore, chair of the UK’s Net Zero Review, said that failure to successfully decarbonise will see investment capital “simply go elsewhere”.
This is the direction that capital is moving in. ESG assets could hit $52 trillion by 2025, one third of all assets under management globally. Like it or not, the differentiator and value generator for energy companies in the next decade will be their attractiveness, and deployment, of these enormous capital flows.
© Supplied by Daniel KlierIn the past, ESG has been criticised for excluding oil and gas in favour of industries responsible for fewer greenhouse gas emissions. But ESG is moving on, recognising that we can’t build a sustainable world economy without decarbonising the world’s biggest emitters.
Far from being an enemy to oil and gas, as some politicians want the world to believe, ESG can help unleash long term, sustainable growth for the industry. Funding research, development, and the creation of green energy. But the sector can only tap into the vast and growing ESG investment market if it’s willing to meet in the middle, showing genuine efforts to decarbonise.
In such a carbon-intensive sector, nobody expects this to happen overnight. The maturing ESG industry is now accepting that we are in a marathon, where what matters are visible and measurable transitions. Data demonstrating improvements in emissions intensity, investment into renewable solutions and scientifically backed pathways, therefore, are what the market needs.
However, we must recognise the significant hurdles standing in the way of establishing clear feedback channels on transitions. And if energy companies need to meet the requirements of the ESG market halfway, the market too must make improvements if the two are to converge.
The ability to assess decarbonisation progress is hampered by poor data, which mainly reveals total emissions – because of ESG industry and regulatory pressure – rather than emissions per unit of revenue, or how quickly a company is decarbonising. There is also a widespread lack of understanding on what to measure thanks to an alphabet soup of competing and overlapping data disclosure frameworks.
And the ESG data industry is only making a bad problem worse, with company ratings determined by black box methodologies, often riddled with subjectivity, that give very little regard to company transitions. The data that informs these scores, which can include emissions, are often hidden away or in no state to produce insights on a company’s transition.
All these issues make it hard for oil and gas companies to accurately measure and genuinely manage their own transitions, which makes attracting ESG capital more difficult, and makes comparing their progress to other companies borderline impossible. For investors, companies, and the climate, the situation is a lose-lose-lose.
So how should energy and oil companies respond? Doing nothing is not an option. Data is improving, with technology making it abundant, accessible and comparable. Disclosure standards are harmonising thanks to initiatives like the Climate Disclosure Standards Board. And regulation is catching up, with the EU’s Sustainable Finance Disclosure Regulation (SFDR) forcing rigorous environmental labelling of funds.
The EU’s Corporate Sustainability Reporting Directive (CSRD) will mandate companies to report on their own sustainability and ESG data in 2025. But this doesn’t give oil and gas companies the luxury of time, as while asset managers are disclosing before companies are, firms failing to disclose relevant climate information will find themselves at the back of the queue while investors are reassessing their portfolios.
If oil and gas companies must do one thing, it’s to be transparent. ESG capital can’t and won’t come until this happens. The technology now exists to empower oil and gas companies to take full ownership of their data disclosure. It’s now possible for them to upload all the data that’s needed on a platform that’s framework-neutral and direct to investors. And the same technology enables companies to easily compare themselves to industry peers.
Above all else, oil and gas companies must be front-footed and willing to engage. ESG does not demand perfection, it only asks that we make imperfect strides towards meeting the world’s climate targets. If a company can’t even go that far, opting for zero transparency, then markets will see that as a far greater deterrent than emissions – no matter how high.
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