How can national oil companies overcome the challenges of ESG reporting?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Doug Johnston, Energy Leader, Climate Change and Sustainability Services, EY, Renée van Heusden, Head of Oil and Gas Industry, World Economic Forum Geneva, Marlina Razak, Project Fellow, Platform on Shaping the Future of Energy, Materials, and Infrastructure, World Economic Forum

• National oil companies (NOCs) fulfil multiple roles and deliver complex national mandates.
• There is urgent need for improved environmental, social, and governance (ESG) reporting to help tackle climate change.
• Stakeholder capitalism metrics offer a framework to support NOCs to fulfil their ESG responsibilities.

National oil companies (NOCs) are oil and gas companies that are fully or majority-owned by a national government. According to an International Energy Agency (IEA) report, NOCs produce 50% of the oil and gas globally and control almost 60% of proven reserves. Energy production in oil-rich countries is generally dominated by NOCs where some hold a pivotal role in the country’s energy sector and will somewhat determine the choice of the country’s energy mix, especially in the emerging economies market.

Share of oil reserves, oil production and oil upstream investment by company type, 2018. Image: IEA

Moreover, from the country’s development perspective, particularly for emerging economies, NOCs play multiple roles and deliver complex national mandates. Some NOCs are purely business entities generating revenues and prioritising profit whilst others might be focusing on performing a wide range of public functions, including creating jobs, and providing societal needs.

ESG momentum and what it means to national oil companies

According to the Intergovernmental Panel on Climate Change (IPCC) report, within the next two decades, the world will get closer to its tipping point of average temperatures of 1.5ºC. The only way to prevent an environmental disaster is to ensure drastic cuts in carbon emissions.

Despite a declining trajectory, demand for fossil fuels is expected to continue, with the IEA estimating under its most climate ambitious scenario (net-zero emissions) that demand for oil will drop to around 24 million barrels per day and demand for natural gas to 1,750 billion cubic metres by 2050, versus around 100 million barrels per day and 4,100 billion cubic metres respectively today.

Amidst the growing urgency to reduce and remove greenhouse gas (GHG) emissions from the energy mix, with renewables at currently 14% of the global energy mix and the substantial required investments and growing energy demand, the global energy mix will not be able to exclude hydrocarbons overnight. Many emerging economies are expected to continue relying on hydrocarbons as they transition to a lower emissions energy mix over time.

As a result, there is growing need for improved transparency and accountability in the reporting of ESG disclosures, particularly on climate change and it has become a key priority to investors and other stakeholders around the world today. The oil and gas industry, in particular, is facing greater scrutiny from stakeholders on their ESG performance. Within the global oil and gas industry, international oil companies (IOCs) are generally perceived to be leading the response to the ESG agenda as more and more IOCs are shifting their portfolios to clean or new energy solutions including renewable energy.

Unlike IOCs, NOCs generally have more limited portfolio flexibility to substantially move away from oil towards renewable energy at pace. NOCs face a trilemma to balance low carbon investments with national economic development and growth as well as providing local access to affordable energy.

Hence it is crucial for NOCs to start assessing and adopting the most appropriate ESG measurements and disclose their ESG performance. This will enable them to continue to attract investment, meet stakeholders’ expectations, and keep their commitment towards long-term sustainable value creation.

Growing need for transparency in ESG using stakeholder capitalism metrics

Presently, there is no single globally agreed ESG framework with comparable and transparent metrics to measure ESG performance. In September 2020, the World Economic Forum and its counterparts from the big four accounting firms published Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation with the idea to accelerate convergence among the leading private ESG standard-setters and bring greater comparability and consistency to the reporting of ESG metrics.

Drawn from existing standards and disclosures, our Stakeholder Capitalism Metrics (SCM) have identified a core set of 21 priority sustainability topics and related ESG metrics. The metrics are organised under four pillars: principles of governance, planet, people and prosperity.

The definition of four pillars developed by the World Economic Forum in discussion with Deloitte, EY, KPMG and PwC. Image: World Economic Forum

Over 150 global companies have joined the SCM community and could play a vital role in transforming the ESG landscape by advocating for the establishment of globally-accepted, international sustainability reporting standards. Currently, 18 oil and gas companies including several NOCs have committed and/or are reporting on these metrics.

At COP26, the International Financial Reporting Standard (IFRS) announced the creation of the International Sustainability Standards Board (ISSB) as an entity that will develop a comprehensive global baseline of sustainability disclosures for the financial markets, leveraging the work of SCM. ISSB has since then launched its first two proposed standards.

Discover

How is the World Economic Forum helping companies track their positive contributions towards achieving the Sustainable Development Goals?

Measuring the impact companies have on society and the planet is essential if practices are to be managed and improvements to be made.

To promote alignment among existing environmental, social and governance (ESG) frameworks, the Forum, with partners including Deloitte, EY, KPMG and PwC, has drawn on existing frameworks and identified a set of universal disclosures – the Stakeholder Capitalism Metrics.

During the Sustainable Development Impact Summit 2021, the Forum announced that over 50 companies have begun including the Stakeholder Capitalism ESG reporting metrics in their mainstream materials, including annual reports and sustainability reports.

Contact us for more information on how to get involved.

National oil companies’ ESG priorities and unique perspectives

Acknowledging the unique perspective of NOCs, EY in collaboration with the oil and gas community at the Forum, organized a dialogue series with NOCs. It was designed to create awareness on SCM, build a deeper understanding of the unique NOC-ESG context and explore the opportunity for NOCs to work together to strengthen performance, understanding and reporting on ESG.

While sharing their ESG framework and metrics adoption journey, many NOCs acknowledged ESG reporting, and disclosure is a significant step towards articulating their sustainable value creation strategy. However, the prevalence of multiple, different ESG frameworks and key performance indicators (KPIs) in the industry is a key challenge and they often lack the flexibility to reflect the unique ESG context of NOCs. Current metrics focus on the risks and impacts and insufficiently address considerations such as:

• Socio-economic contributions towardsnational development and transformation programmes.
• Access to affordable energy to fuel economic growth and meet basic societal needs.
• Ability to produce lower carbon intensity of hydrocarbons and to utilise the latest technologies such as carbon capture to reduce carbon emissions.

As a result, ESG reporting practices among NOCs vary from the choice of ESG KPIs to be reported or disclosed, to adopting one or multiple global frameworks to demonstrate their commitments to sustainability reporting. NOCs’ national context also leads to several challenges on their ESG journey:

• Emissions from the use of hydrocarbons – calculation and reporting: the current approach to measuring emissions from the use of hydrocarbons makes it challenging to demonstrate the efforts made to channel the hydrocarbons towards lower emission usage.
• Supply chain and social risks: global operations, opportunities and partnerships can often create supply chain and social issues for NOCs which need to be tackled with other national stakeholders.
• Diversification in new energy: while investing into new forms of energy, NOCs need to continue producing fossil fuels to maintain their fiscal contributions to the state, support employment and balance (potentially lower) returns.
• Safeguards for being transparent: hesitation to actively track and disclose ESG performance could also be driven in part from instances of growing activism against leading oil companies that are already reporting on their emissions and are developing specific emissions reduction plans.
• Cultural and mindset change: NOCs will need to promote transparency and embed ESG performance and disclosures in their reporting processes beyond regulatory compliance.

An inclusive approach

The global momentum around ESG reporting is intensifying and many NOCs are looking to operationalize their net-zero pledges in alignment with their respective aspirations. Strong ESG performance and reporting could enable NOCs not only to maintain a social license to operate, but also to enhance their brand and ensure access to capital and consumer markets around the world as ESG considerations become increasingly important.