A major oil and gas trade group is embracing sustainable and socially conscious investing metrics to woo investors increasingly focused on issues like climate change.
The Independent Petroleum Association of America, which represents thousands of small- and medium-sized oil and gas producers, recently launched an ESG Center focused on environmental, social, and governance metrics that investors are increasingly applying when deciding where to put their money.
The value of global assets applying ESG to their decision-making has nearly doubled over the last four years, now up to $40.5 trillion this year, IPAA said in a fact sheet about its new ESG Center, citing data from Opimas.
“If you go back five years, this wasn’t even really something that anyone was talking about,” said Mallori Miller, IPAA’s vice president of government relations. “Now, it’s something that everyone’s talking about.”
Miller said the ESG Center, launched late last month, is about providing IPAA’s member companies with a resource hub so they can determine how to set up their own ESG programs and boost their standing with investors using those metrics. IPAA is partnering with FTI Consulting, the University of Houston, Nasdaq, and several not-yet-named law and accounting firms on the initiative.
“We’re getting a lot of questions on where they should start,” Miller said. “For a lot of our smaller companies, this is something they hadn’t necessarily fully thought through, but they’re realizing this is where the conversation is going, and they want to be a part of that.”
They have good reason, too. Financing for the oil and gas sector could start shrinking as banks and asset managers commit to aligning their investments with global climate targets. Companies that focus heavily on oil and gas production without giving much attention to environmental sustainability could become a harder sell over time.
A lack of focus on ESG metrics could dry up companies’ access to capital.
“By not doing ESG well, it puts you behind an eight ball,” said Travis Windle, a senior managing director for FTI Consulting’s energy and natural resources division, who is helping coordinate the ESG Center.
“Strong ESG performance drives higher valuation,” he said, adding that it is also something oil and gas companies can increasingly control even as the pandemic and other changes in society leave energy prices and demand more volatile.
Climate activists, however, are wary of IPAA’s efforts to engage on ESG metrics, in part because of the oil and gas group’s record fighting climate regulations.
“The defining ESG issue for oil and gas is climate change, and IPAA lacks basic credibility on the ‘E’ because it has assaulted the environmental regulatory framework for oil and gas,” said Ben Ratner, a senior director at the Environmental Defense Fund.
IPAA, for example, was one of the loudest industry voices calling on the Trump administration to eliminate Obama-era limits on methane, a potent greenhouse gas and the main ingredient of natural gas, from oil and gas operations. The group has argued that the regulations were overly burdensome on smaller producers that tend to operate lower-production wells and are unable to absorb the costs of emissions monitoring and leak detection programs.
Ratner said that for oil and gas companies to score well on ESG metrics, they have to be addressing methane emissions head-on. That includes improving the monitoring of emissions as well as putting in place new technologies to capture leaking methane, he said.
Investors will be expecting companies’ lobbying to match up with their talk, too, said Danielle Fugere, president and chief counsel of As You Sow, a shareholder advocacy group.
“What investors and others will look for is actual on-the-ground change,” she said. “Not just statements, but are these companies actually changing their behavior? Are they reducing climate emissions? Are they transitioning?”
Fugere added a key element of oil and gas companies’ ESG commitments should be a goal of net-zero emissions by 2050 with short-term targets baked in so investors can track a company’s progress. While European oil and gas majors such as BP and Shell are changing their tunes to focus on net-zero targets, just one American company, ConocoPhillips, has moved in that direction so far, and its goal doesn’t address indirect emissions from its products.
Miller of IPAA, however, doesn’t see the oil and gas group’s objections to climate regulations as inconsistent with its push on ESG. She still sees room for growth within IPAA’s member companies on ESG even as they push back on what they see as regulatory overreach.
“I really kind of see those two issues as apples and oranges,” she said.
More broadly, Miller said all the member companies she’s spoken to are excited about how they can use ESG metrics to showcase their efforts.
Oil and gas companies are already undertaking measures to improve the efficiency of their operations that could fit well within the ESG landscape, Windle said.
Climate activists, however, want to see much more from oil and gas companies, and they warn that firms that don’t pivot strongly to ESG will suffer.
Ratner said private equity leaders have already told him upstream oil and gas is “borderline uninvestable.” As financial risks from climate change grow, investors won’t want to put capital into companies that aren’t addressing emissions, he added.
“The risk is that they become obsolete,” Fugere said. “They will continue to have stranded assets, lost opportunity, higher cost of capital. They will see write-downs. Share values are falling.”
“What we see now will continue and play out probably more quickly in a world that’s changing to adapt to climate change,” she added. “It’s not a pretty picture.”
