Financial Health & ESG Ambition

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August 19, 2021

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Financial Health & ESG Ambition – Can they co-exist in the oil and gas industry?

By Jackson Hegland, Modern West Advisory, Methane Emissions Leadership Alliance, Carbon Connect International, Aspenwood Innovation 

Canada’s oil and gas sector is poised to continue to be at the forefront of the global clean energy transition through world class environmental, social, and governance (ESG) performance and clean technology development. Today there are over 1,600 clean technology companies in Canada, many focused in our natural resource sector. This did not happen over night however, as investment into new technology over time is essential to world class performance.

Despite this strong historical performance, energy intensive sectors with high capital requirements like the oil and gas industry are at a point of convergence. How this sector marries sustained economic growth and corporate financial health with ever increasing environmental, social, governance (ESG) requirements is the challenge ahead. 

There are several issues facing the industry that are influencing this convergence. Access to capital is perhaps the most prevalent, 

but the Paris Agreement and new domestic regulations such as carbon pricing and clean fuel standards are also driving action. Social influence, technology availability, investor expectations, corporate culture and “premium product pricing” are pushing companies to adopt ESG reporting and performance improvements. These factors are creating new opportunities and risks, which are in turn accelerating corporate commitment to and investment in ESG. 

In response to these stakeholder pressures, many organizations are releasing ESG reports, and leading companies are moving towards integrated reporting (combined ESG & financial disclosures). ESG reporting will remain an increasing priority for all companies and in particular the oil and gas sector. Global voluntary standards continue to guide how companies report, with the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD) being the most highly valued by the investment community today. There are additional reporting standards that exist, making it confusing and overwhelming for companies. Further convergence and standardization of sustainability or ESG reporting will allow for improved consistency in reporting and data quality from company to company and in turn allow a more consistent comparison between disclosures. These reporting metrics are also improving industry’s understanding of their ESG related risks and opportunities. This improved understanding allows companies to move quickly to improve ESG performance with concrete actions in air, land, water, and social impact. Large and mid-sized oil and gas companies are advanced in their ESG reporting and continue to evolve, but smaller cap companies still have catching up to do – not surprisingly they can be challenged to adopt ESG as they are more resource constrained.

Engagement and idea-sharing are critical to action. When a network of organizations works together, we can focus on scalable, economic solutions.

Reporting is a necessary step and will drive improvement, but forward-looking action is also an imperative. Companies are setting ESG goals on a longer timeframe to support their forward ESG value proposition. “Net zero” and “carbon neutral” are the well highlighted longer-term goals, but these are far reaching. There is still a lot of work to do in the development of these ambitions, notably related to the lack of widely accepted quantification standards, as well as clear identification of boundaries related to net zero targets. In the near term the opportunity exists for companies to be setting targets to 2025 or 2030 that are ambitious, but achievable and put the company on better footing to be more ESG friendly and net zero aligned. The good news is this work will improve over time, and there are many tools available. A multitude of technology and service providers are readily available with solutions1. In fact, investment by the oil and gas sector into ESG activities supports the growth and evolution of the cleantech sector, Indigenous communities and important stakeholder groups like landowners, employees, and communities. These are welcome benefits and needed outcomes from the ESG movement. 

As demand for ESG disclosure from the investment community and social stakeholders continues to increase, so too does the demand for clean energy production. As it related to “energy transition or transformation”, in the oil and gas sector we are seeing two significant developments that are sure to catch any executive’s attention. The first, and this is particularly relevant to Canadian natural gas producers, is that LNG importing countries like Singapore, Malaysia and Australia have set standards on the emissions intensity of the LNG they import. Second, and this may ultimately have a larger impact on emissions reduction activity than any of the other converging factor, is “premium pricing”. Some markets are slowly emerging in an effort to price low-emission intensity natural gas at a premium over higher emissions intensity molecules. There are outstanding questions about the methodologies and assumptions made in the quantification of these benchmark emissions intensities, but work is underway to move towards greater standardization. Notably, we are working on a life-cycle assessment project for natural gas production in Alberta’s Montney zone and we expect this work to serve as a baseline for future natural gas emissions intensity calculations throughout Canada. This project is supported with funding from Alberta Innovates (AI) and Emissions Reduction Alberta (ERA). 

Which leads us to another important point – the ESG eco-system is supported by an incredible network. Partnerships between organizations like AI and ERA, among others, are helping to position Canada as an energy industry ESG leader. Engagement and idea sharing is critical to action. When the network of organizations works together, we can focus on scalable, economic solutions. This is where creativity and pragmatism merge. Building a leadership position in ESG performance requires commitment and creativity. Then, leveraging our network, building our knowledge, improving our quantification and reporting, focusing on available solutions, all contribute to the ability to make pragmatic business decisions that support the necessary financial health and ESG ambition our sector requires to support the world’s energy needs now and into the future.

Originally published in Scovan’s IGNITE Vol. 2

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