Make ESG "Count" - Placing value on intangibles
- Sep 2, 2020 5:03 pm GMT
In the energy industry success and failure are predominately determined by tangible factors: profit and loss, equipment malfunction, engineering oversights, production shortfall, cost overrun. Intangibles such as goodwill, social outreach, diversity and environmental stewardship have a universal acceptance in business but are so difficult to quantify.
In order to navigate the evolving Environmental-Social-Governance (ESG) landscape and related reporting requirements many companies are attempting to wade through the "alphabet soup" of ESG (SASB, OGCI, TFCD to name a few). Embracing Energy ESG will be difficult with tremendous resistance from companies reluctant to accept consulting firms' ideal path to becoming a stellar corporate citizen. Anyone who lived through the Enron collapse remembers vividly the credit agencies swinging and missing, why would a ESG rating system fare any better?
As well known business expert Peter Drucker stated 8 years ago : "What gets measured gets managed". This begs the question "Who gets to referee ESG?" Borrowing from my most meaningful example of successful industry standard implementation, the introduction of energy futures contracts, the industry should strive to wear the striped shirt again, demading clear and measurable rules for ESG.
Many of my peers have bristled at financial institutions taking the moral high ground on investing in oil & gas, placing social scores above profit and loss when deciding who gets funded. As a capitalist I see their point. But when your percentage of Wall Street has dropped below 5% sometimes you have to listen to the music played by the guys putting quarters into the juke box. You are bound to like some of the songs.
Similar to the effort that picked Henry Hub and 10,000 mmbtus for the natural gas contract, our industry should coalesce around mutually agreeable standards for sustainability, social impact and governance that highlight the benefits oil & gas have and will generate. If it will be difficult to deny the energy transition has started, then why not engage it to ensure we balance society benefits with costs.
I know firsthand most energy companies have historically strived to improve their communities and the environment, without being prompted by private equity or a large bank. Let's all first agree that these intangible assets are worth pursuing, establish a forum that determines the metrics and produce that greener and less risky barrel and cubic foot.
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