Deidra Garyk. Submitted

Editor’s note: Like or hate it, believe it’s a passing fad or the wave of the future. ESG came out of nowhere about four years ago and now is at the forefront of concern for almost every larger business in the energy sector, and beyond. But it turns out it’s even bigger than that. 

Deidra Garyk lives and breaths ESG in her daily work as manager of ESG and sustainability for a major oilfield services company. She’s also a leading voice for the energy sector in Western Canada. This deep dive into ESG comes in two parts – the first lays out what ESG is, and the second part is how it will specifically impact the energy sector. This is part 2.

 

THE IMPACT OF ESG ON THE ENERGY SECTOR

 

There is still scepticism among a few people in the oil and gas industry about the value of ESG disclosure. Some believe reporting their ESG performance is another cost with no real benefit, while others think it will not matter what the industry does because the anti-oil activists and politicians will still attack, and public disclosures may give them more ammunition.

As a result of increasing climate-related litigation, the fear of over-disclosing that some business leaders feel is justified. However, mandatory non-financial reporting requirements are moving at a rapid, overwhelming pace, and all industries will have to publicly disclose certain information to stay in business.

Climate change is the main focus of ESG reporting requirements right now, with a specific focus on emissions and decarbonization. This impacts the energy sector, particularly hydrocarbon industries. Nonetheless, there are opportunities that companies can use to their benefit.

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OPPORTUNITIES

ESG disclosure obligations force companies to evaluate non-financial aspects of their business and make improvements. They encourage companies to review their business practices, embrace innovative sustainability solutions, and pay attention to government policy and regulations that impact their operations to improve resiliency.

Good governance, improved safety, better employee and community relations, and strong environmental practices undoubtedly strengthen businesses.

A successful ESG strategy starts with breaking down the silos between operations and corporate reporting. A fully transparent ESG story that supports the company’s ESG strategy and goals not only builds a more tangible ESG story for shareholders, but also checks a lot of boxes for other stakeholders, including boosting employee pride and morale.

Therefore, it is important that everyone in the company understands what goes into these metrics and how they are contributing to the ESG strategy. Making it part of the corporate culture to demonstrate how a company is helping to transform the energy sector allows companies to regain a hold of the narrative to ensure what the public is being told is accurate and truthful.

ESG disclosure gives the public an opportunity to peer inside companies in different industries. The knowledge they gain can be used to patronage businesses that have matching values and invest in industries that have a business model that goes beyond the financial balance sheet.

Canadian oil and gas has an opportunity to showcase that it is being a good corporate citizen and is working to improve its operational practices. The industry is used to being monitored by regulators, with heavy penalties for breaking the rules, meaning it tracks and measures data and performance. This is why the number of Canadian oil and gas companies with some publicly available ESG-related information is higher than most other sectors.

International standards will provide a roadmap for sustainability disclosures, helping companies navigate their new, often uncertain, ESG journey.

Consistency from one set of standards allows for ease of comparability of data. Currently, with only voluntary standards in place, companies can choose which ones they use and which topics within the standards they report. This sometimes, rightly, leads to accusations of cherry picking and greenwashing.

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Having standardized rules creates a sense of certainty, something businesses require to continue investing in their operations. Consequently, comprehensive information helps inform and build trust in the information reported.

If every company and industry is judged equally and fairly, Canadian oil and gas can use ESG reporting as an opportunity to explain the complex industry and the benefits of the products to the public. Although, there is an overt bias in the international standard against fossil fuels, particularly with expectations that all companies decarbonize.

Disclosers will be required to explain how sustainability-related risks and opportunities are linked to information in the general-purpose financial statements. This will obligate disclosure of assumptions, estimations, and uncertainties in the data, presumably highlighting known, but not talked about, issues with wind and solar energy.

Perhaps pulling back the curtain and exposing the truths about all forms of energy will improve the public conversation around energy development, energy security, and energy use.

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RISKS AND COSTS

Mandatory reporting and increased regulations mean more requirements and more complexity, which leads to additional costs for companies.

Firms are investing in ESG disclosure and with that comes a shift in job responsibilities and the creation of new roles. These companies know ESG is evolving, so they are investing more money and focus into it.

The concern about increasing climate-related disclosure requirements is real. In addition to the time and people resources needed, a study conducted between February and March 2022 noted that corporate issuers on average spend $677,000 per year on climate-related disclosure activities, with the largest cost categories including GHG analysis and disclosure ($237,000 on average), climate scenario analysis ($154,000), and internal climate risk management controls ($148,000).

Institutional investors spend on average $1.372 million annually to collect, analyze, and report climate data. The major spend categories for investors include external ESG ratings, data providers and consultants ($487,000 on average), in-house, outside counsel, and proxy solicitor analysis ($405,000), and internal climate-related investment analysis ($357,000).

This is in line with the SEC’s own estimates of the costs to comply with its yet-to-be-released requirements. They predict first year costs of $640,000, and ongoing costs of $530,000 per year.

If businesses have to spend money to comply with new regulations, they will have no choice but to pass the costs on to consumers.

The likelihood of assurance or audit requirements adds an extra layer of burden, from financial cost to employee time, and even litigation risk. It is not certain when there will be a sufficient number of auditors with adequate expertise to conduct the work, particularly to verify the accuracy of GHG emissions, which is presently the main focus for ESG reporting.

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Scenario analyses, climate forecasting simulations and models, are a component of the IFRS’ Climate Disclosure Standard. These are costly exercises, upwards of six figures, that require companies to have a crystal ball to peer into the future to determine how their business will be impacted by climate change.

Models have inherent risks. Their inputs are easily politicized and manipulated to provide an equally politicized output that can be skewed towards a grossly alarmist narrative. We saw it with COVID-19 models that overpredicted cases and deaths, and we have seen it with global warming predictions, particularly those models run by the United Nations’ Intergovernmental Panel on Climate Change (IPCC). The summary reports written for policy makers and media too often do not reflect what is in the actual scientific papers, but they do make for good headlines.

It may be allowable for an organization like the IPCC, with unlimited resources and global influence to put out inaccurate information, models and scenarios that get it wrong, intentionally or otherwise, can create legal risks for companies that can be costly, both in resource use and reputational harm.

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CLIMATE LITIGATION, REGULATORY COMPLAINTS, AND SHAREHOLDER ACTIVISM

Climate litigation, regulatory complaints, and shareholder activism are on the rise, especially in the USA and Europe, but all around the world. Environmental groups are well-funded and they are in attack mode in an effort to stop or minimize hydrocarbon development in favour of wind and solar projects. They will use whatever tools are available, and they have found a new regulatory sledgehammer.

Greenpeace filed a complaint against Suncor with the Alberta Securities Commission in October 2023, alleging that Suncor has not fully disclosed its climate-related risks. By removing from their 2023 climate scenario analysis disclosure the mention of potential stranded oil sands assets in a low-carbon scenario, Suncor is alleged to have failed to provide adequate disclosure of climate-related transition risks to investors.

In the complaint, Greenpeace states Suncor “may have failed to provide full, true and plain disclosure of all material facts in its forward-looking disclosures.” The “fact” they think has not been disclosed is that a significant portion of its oil sands assets will be worthless (or stranded) in a low-carbon economy.

Greenpeace appears unhappy that Suncor shifted its business strategy under its new leader towards expanded oil sands investment and away from wind and solar. It appears that this complaint is a coercive attempt to influence the way a private company conducts business. It’s political.

Unfortunately, this complaint to a securities regulator will now become a “controversy” and will impact Suncor’s ESG scores. Lowered scores can impact interest rates on sustainability-linked loans or other green financing tools. This is in addition to the resource costs – time, money, and people – of defending against the accusation and the reputational harm suffered from a petty complaint.

Shell’s board of directors experienced the risk of ESG activism first-hand. In February 2023, self-proclaimed lawyers to the earth, ClientEarth filed a lawsuit against the multinational’s board “for failing to move away from fossil fuels fast enough” and for its unreasonable emissions reduction strategy, all culminating in what they call a “flawed climate plan.”

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France’s TotalEnergies also felt the wrath of well-funded environmental litigators, including none other than ClientEarth and a few of their closest friends. They took issue with TotalEnergies’ net zero 2050 claim that they are “a major player in the energy transition” because of the use of natural gas and biofuels, known lower carbon products compared to other fossil fuels, to help reduce the company’s emissions. A Paris court is allowing the suit to proceed.

Canadian companies have not escaped. Environmental activists’ favorite bank to hate, after being named the world’s largest financier of fossil fuel companies in 2022, Royal Bank of Canada has been targeted by the Competition Bureau after a greenwashing complaint was made by well-known environmental groups Ecojustice and Stand.earth. Those in the hydrocarbon industry should be watching the outcome, particularly because the Canadian government is planning to strengthen environmental disclosure requirements to limit greenwashing by corporations.

Lawsuits alleging greenwashing claims are frequently gaining the approval of courts who are allowing them to proceed. Activists are not only targeting fossil fuel producers; they are going after the consumers of the products. Another ClientEarth-backed lawsuit was recently launched against airline KLM for ads that the environmental litigators say are deceptive and mislead about the sustainability of KLM flights.

Even though the court dismissed the suit against Shell’s board, many cases have been allowed to proceed. Courts appear to be wringing their hands in delight at the prospects of adjudicating climate-related cases which will set precedents for years to come and will drive public policy decisions. Canadian justices are taking the position that climate change is an indisputable deadly risk; as a result, Canadian case law recognizes the effects of climate change are catastrophic and are an existential challenge.

These kinds of lawsuits and complaints frustrate companies’ ability to focus on core business activities while their executives and legal departments are forced to focus time and money defending against well-funded activist groups with a sinister agenda.

Regardless of the outcome of environmental litigation, generally the public hears about the lawsuit and not the final ruling, so these lawsuits impact companies’ reputations. That is likely one of the goals of the climate litigants. If these groups are seen to get public support for their actions, it could encourage even more activism, including from shareholders.

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PRIORITY: CLIMATE AND EMISSIONS

The oil and gas industry should be paying particular attention to the IFRS’ requirement to measure and report absolute gross (not net) Scope 1, 2, and 3 emissions, as well as the intensity of those emissions, calculated using the Greenhouse Gas Protocol.

 

SCOPE 1, 2, 3 EMISSIONS – WHAT ARE THEY?

Scope 1 emissions occur from sources (equipment or infrastructure) that is owned or controlled by the company.

Scope 2 emissions are indirect and are associated with the purchase of electricity, steam, heat, or cooling.

Scope 3 emissions are the most complex for companies to calculate, and have the highest likelihood of reporting errors. Scope 3 emissions require companies to report on the emissions from the end use of the product, meaning knowing the emissions from consumers use of oil and gas. One company’s Scope 3 emissions are another company’s Scope 1 emissions, and this leads to double or even triple counting.

 

Mandatory emissions reporting will be onerous and will increase liability if there are material gaps or misstatements in reported data or missed targets.

Upstream and downstream Scope 3 emissions are often a company’s largest source of emissions as they are indirect and outside their control. For those involved in oil and gas production, Scope 3 includes the combustion of the product by consumers.

For a company to be able to state compliance with the IFRS Sustainability Disclosure Standard, the company must comply in its entirety. Ignoring Scope 3 emissions will jeopardize compliance and may put the company offside of the securities regulators.

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Although, it is not apparent what the consequences will be for companies that do not meet their future emissions reduction targets, there may be legal implications. The rise in climate-related shareholder activism and ESG-related litigation could be exacerbated by the global sustainability standard.

Regulators are cracking down on greenwashing, misleading promotion to make a company appear more environmentally friendly. The Competition Act in Canada now has “deceptive marketing” fines. To avoid greenwashing accusations, companies’ data must be robust and reliable.

High quality, supportable data is critical to mitigate risks. Keeping up with data collection is challenging, though, regardless of company size. Large companies have as much difficulty as small enterprises. As a result, there are legal risks from unintentionally misrepresenting data such as emissions, which are difficult to measure and calculate accurately.

Investment in emissions-intensive industries could be deterred due to decarbonization requirements. For hydrocarbon producers to get access to capital, they may have to present an energy transition plan, such as renewable power purchase agreements. Meaning oil and gas companies have to focus on things outside of their core business.

Plus, difficulty accessing sufficient capital, in a capital-intensive industry, results in less development. Hydrocarbons are presently the only reliable and affordable energy sources that supply available, secure energy to support our modern lifestyles because they can be used for multiple purposes, not only electricity production.

Access to capital can be impacted by a company’s ESG score. These scores by ESG rating agencies vary and the process of awarding them is not transparent. ESG rating agencies want money – $50,000 or more per year – to help companies understand and improve their ESG score. It is a pay-for-play space, but many are willing to pay because they want their company included in ESG funds, often run by an arm of the same rating agency, or because lower rated companies could have more challenges accessing financing. There are myriad reasons why companies would pay to improve their score, and the rating agencies know this.

Credit rating agencies, such as Fitch Ratings Inc., are threatening downgrades if companies do not get onside with stringent emissions regulations, which will cause financiers to back away by placing more restrictions on oil and gas funding.

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TIME TO GO PRIVATE?

 

Companies may think that they can go from public to private to avoid the challenges of accurately reporting their ESG metrics. Monitoring ESG data is not only a requirement for publicly traded companies, private companies also need to track their ESG progress.

In the 2023 Fall Economic Statement, the Canadian government announced that mandatory climate disclosure will be expanded to include private companies.

Private equity firms are also asking the companies they fund to disclose more non-financial information to gain access to much-needed capital.

There is no escaping because private companies will have to report information to their purchasers as there is an increased focus on supply chains. Some larger oil and gas companies are forcing their suppliers and vendors to show complementary ESG values to continue to do business with them. Suppliers may see more customers implement a Supplier Code of Conduct.

If small businesses cannot comply and either cannot supply to larger, public corporations or cannot meet the disclosure regulations and get fined or forced out of business, there is less choice for consumers. This is not a positive outcome.

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THE FUTURE OF ESG REPORTING

 

Climate and emissions continue to be a major focus of ESG reporting standards, but that is shifting.

The IFRS’ International Sustainability Standards Board (ISSB) is already looking forward to its next two-year work plan, which may become reporting requirements, and they have only just released the first set of ESG reporting requirements.

Their proposed priorities include:

  • Biodiversity, ecosystems and ecosystem services, including water and land use
  • Human capital
  • Human rights
  • Researching integration in reporting between general purpose financial reports and sustainability-related financial disclosures and how they’re connected

As ESG becomes more mainstream and attracts the public’s attention, reporting will go one of two ways. It will shift from environment to social justice and the morality of money now that mandatory climate reporting requirements are being adopted. This will make reporting more subjective and open to interpretation by those who control access to the resources and tools necessary to keep a business operational. It will make it easier for this group to select winners in chosen sectors, even if their offerings do not benefit customers and society at large.

Alternatively, the focus could shift from ESG to sustainability – financial sustainability, durability, and viability of businesses as material risks are being identified and managed with an increased focus on fundamental business philosophy.

Regardless, ESG reporting requirements are not going away and decarbonization regulations and efforts continue.

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    0061 SIMSA 2024 For Sask Buy Sask
  • 0060 Arizona Lithium Lease building
    0060 Arizona Lithium Lease building
  • 0059 Southeast College Heavy Equipment Operator
    0059 Southeast College Heavy Equipment Operator
  • 0058 Royal Helium Steveville opens anonymous rocket
    0058 Royal Helium Steveville opens anonymous rocket
  • 9002 Pipeline Online 30 sec EBEX
    9002 Pipeline Online 30 sec EBEX
  • 0055 Smart Power Be Smart with your Power office
    0055 Smart Power Be Smart with your Power office
  • 0015 Latus Viro
    0015 Latus Viro
  • 0052 Predator Inspections
    0052 Predator Inspections
  • 0051 JML Hiring Pumpjack assembly
    0051 JML Hiring Pumpjack assembly
  • 0049 Scotsburn Dental soft guitar
    0049 Scotsburn Dental soft guitar
  • 0046 City of Estevan This is Estevan
    0046 City of Estevan This is Estevan
  • 0041 DEEP Since 2018 now we are going to build
    0041 DEEP Since 2018 now we are going to build
  • 0032 IWS Summer hiring rock trailer music
  • 0022 Grimes winter hiring
  • 0021 OSY Rentals S8 Promo
  • 0018 IWS Hiring Royal Summer
  • 0013 Panther Drilling PO ad 03 top drive rigs
  • 0011
  • 0006 JK Junior
  • 9001
  • 0002

 

A strong, measured ESG strategy is a competitive advantage now for companies in the oil and gas industry, but it will be an expectation in the near future, much like safety was 20 years ago.

Not having an ESG or sustainability disclosure, be it a report or another form of disclosure, will be a barrier to entry. Without it, companies may not be able to bid on jobs or gain access to financing. They may have to pay a premium for insurance or may not be able to procure it from some insurers. Soon, it may impact businesses’ ability to attract and retain employees, particularly young people.

The goal is not a report but an improved company. Enterprises must find a way to use all the ESG tools available to their advantage and create their own story and reputation, before someone creates it and controls it for them.

It is important that the people who support oil and gas do not ignore ESG in hopes that it goes away. It is being implemented, and supporters must be aware of the requirements and get involved to shape the future of ESG disclosure.

 

Deidra Garyk has been working in the Canadian energy industry for almost 20 years. She is currently the Manager, ESG & Sustainability at an oilfield service company. Prior to that, she worked in roles of varying seniority at exploration and production companies in joint venture contracts where she was responsible for working collaboratively with stakeholders to negotiate access to pipelines, compressors, plants, and batteries.

Outside of her professional commitments, Deidra is an energy advocate and thought leader who researches, writes, and speaks about energy policy and advocacy to promote balanced, honest, fact-based conversations. 

 

  • 0062 TED_EPAC_Technology_30
    0062 TED_EPAC_Technology_30
  • 0061 SIMSA 2024 For Sask Buy Sask
    0061 SIMSA 2024 For Sask Buy Sask
  • 0060 Arizona Lithium Lease building
    0060 Arizona Lithium Lease building
  • 0059 Southeast College Heavy Equipment Operator
    0059 Southeast College Heavy Equipment Operator
  • 0058 Royal Helium Steveville opens anonymous rocket
    0058 Royal Helium Steveville opens anonymous rocket
  • 9002 Pipeline Online 30 sec EBEX
    9002 Pipeline Online 30 sec EBEX
  • 0055 Smart Power Be Smart with your Power office
    0055 Smart Power Be Smart with your Power office
  • 0015 Latus Viro
    0015 Latus Viro
  • 0052 Predator Inspections
    0052 Predator Inspections
  • 0051 JML Hiring Pumpjack assembly
    0051 JML Hiring Pumpjack assembly
  • 0049 Scotsburn Dental soft guitar
    0049 Scotsburn Dental soft guitar
  • 0046 City of Estevan This is Estevan
    0046 City of Estevan This is Estevan
  • 0041 DEEP Since 2018 now we are going to build
    0041 DEEP Since 2018 now we are going to build
  • 0032 IWS Summer hiring rock trailer music
  • 0022 Grimes winter hiring
  • 0021 OSY Rentals S8 Promo
  • 0018 IWS Hiring Royal Summer
  • 0013 Panther Drilling PO ad 03 top drive rigs
  • 0011
  • 0006 JK Junior
  • 9001
  • 0002

 

https://pipelineonline.ca/deidra-garyk-impact-esg-energy-part-1/