Oil & Gas News

An ESG Reckoning Has Arrived

Oil and Gas, Texas, Oil

By: Barry Po – Forbes – The winds of change are howling in the world of heavy industry. If there were any doubters left that meeting environmental, social and corporate governance (ESG) standards is swiftly becoming an urgent mandate for these companies, the recent triple-whammy of news regarding Shell, ExxonMobil, and Chevron should have removed all doubt.

Between Shell’s order from a Netherlands court to cut CO2 emissions by 45% in the next nine years and ExxonMobil and Chevron both facing mounting pressure from investors — including newly appointed climate activist board members in Exxon’s case — we’re seeing a clear, historic and game-changing shift in how businesses are being held accountable for the impact they have on the environment.

Put simply, corporations are no longer being measured solely by their ability to generate returns — how they generate those returns is equally important.

What do you need to be doing in the next 365 days to make sure your company is properly equipped to pass muster in the face of increased regulation, wary investors, and activist board members?

Whether you’re in the oil and gas industry or another heavy industry sector facing ESG accountability, here are a few key activities your company should be adopting now:

Preparing For Formal Data Audits

At this point, most public companies publish ESG reports and other material featuring statistics on how environmentally conscious they are. But how many are prepared for a comprehensive audit of their ESG data? New financial reporting standards by way of the Sustainability Accounting Standards Board (SASB) and the proposed formation of a Sustainability Standards Board by the IFRS Foundation are pointing the way to a future where ESG data will be scrutinized with the same rigor as a company’s financials.

Companies that claim to have reduced a million tonnes of CO2 equivalent emissions will need to be ready for the Deloittes and KPMGs of the world to ask how those numbers were determined. What are your sources? Are they traceable and auditable?

Going forward, CFOs — yes, chief financial officers — will need to know the fine details of live operational measurements to provide unshakable supporting ESG data. That means, for instance, the finance department being asked to account for emissions at the level of the individual asset — say, the greenhouse gas contribution of an individual compressor, heat exchanger or another energy-intensive asset in the last six months. That’s right — the walls between finance and ESG are blurring on the way to vanishing entirely.

Of course, expecting finance and oil and gas operations to immediately share information after being siloed from one another for so long may not be realistic. New tools and technologies will be needed and adopted to help with this new frontier of bookkeeping. Much like millions rely on TurboTax and other related software for double-checking their tax information every year, so too will targeted software applications bring all the necessary ESG information online — with the best ones organizing it into an easily parsed report.

Continuously Collecting And Reporting All Your ESG Impact Data

Most CFOs believe they have a firm handle on their company’s finances. But how many have the kinds of numbers that forthcoming ESG standards are going to scrutinize?

The critical areas for these assessments can be broken down into Scope One, Scope Two, and Scope Three emissions as defined by the U.S. Environmental Protection Agency (EPA). Scope One concerns all the emissions that are a direct result of production and business activities. For oil and gas producers, for example, this would be a full account of every flaring incident and any other emissions created by producing their product.

Scope Two emissions are, essentially, purchased energy — electricity bought from another company. A simple enough transaction now, but soon, CFOs will need to be prepared to confidently reply in detail when asked how much carbon they purchased as a result given a certain price and amount of energy.

Scope Three emissions are all indirect emissions, and this is where it can get much more difficult to follow. This category breaks down all the minor emission sources within an operation. Given how many sources must be tracked at this level, many companies will need to devote entire teams to managing this category alone without technological assistance of some kind.

Tying ESG To Your Digitalization Efforts

Digital transformation is no longer just about creating new operational efficiencies — it’s now a critical part of your oil and gas company’s roadmap to future viability. Fortunately, there are already technologies and services that can handle all the ESG reporting challenges facing the industry.

AI and IoT technologies have begun to emerge in recent years that, with the aid of on-site smart sensors, are capable of tracking and measuring the performance of each individual asset in an operation — from gas-emitting equipment to breakroom refrigerators. As standards become stricter, these platforms will become a CFO’s best friend as the data expected in an ESG audit can be pulled and reported directly from connected assets.

All this information can be easily — and, in many cases, automatically — populated into a report capable of standing up to scrutiny. Software for these tasks will serve as a welcome tool for a sector staring down a slew of potential new compliance issues.

The bottom line: There can no longer be a disparity between the field and the back office when it comes to ESG data in the oil and gas industry. These numbers will be audited, scrutinized, and verified in much the same way as public financial information. Businesses will need help from connected technologies like AI and IoT to help them remain compliant.

Management expert Peter Drucker once said, “You cannot predict the future, but you can create it.” Those who want to stay ahead of industry and government compliance issues will make sure ESG considerations are part of their digitalization plans, especially as the spotlight on the oil and gas industry intensifies.

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