BY GARRETT DELK, PICKERING ENERGY PARTNERS
The rise of environmental, social and governance (ESG) factors in capital markets, investing and corporate disclosure came into vogue with a rapid popularism that seemingly peaked over the last half decade. Since this apex, enthusiasm has been in a gradual decline characterized by very tangible and often loud commiserations, culminating in a nadir of interest that has been coined “anti-ESG” sentiment — a catch-all term that encapsulates a valid criticism of the utility of ESG in capital markets, investing and corporate structure landscapes.
However, while anti-ESG musings at the state and federal levels are often headline catchers, assuming this reversion provides a unique immunity or a distinct end to ESG-related mandated reporting would be incorrect. Instead, private and public U.S. energy companies need to pragmatically contextualize this sentiment, and ESG more broadly, into two buckets: investors and regulation. Combined these buckets represent some of the most crucial external stakeholders, and in both, the anti-ESG sentiment is nearly irrelevant in their context for application. In reviewing each, corporates will be better equipped to sift through the noise, not be lulled into a false sense of exemption from sustainability considerations, and better able to anticipate where these headwinds are likely to come from.
Investors – Collectively representing the buy-side, this stakeholder group’s traditional approach to ESG application and integration has evolved significantly and is often an unheard divergence from corporate understanding. While external investors and LPs still use sustainability data and metrics in the investment process, many have abandoned the ESG colloquialism. Many investors believe, and currently operate under the premise, that it is time to phase out the “ESG” label and instead focus on more precise descriptors, emphasizing aspects such as energy transition, climatic events, specific industry risks and governance concerns.
Investors are integrating sustainability data now more than ever throughout the investment process; however, they’ve ascended from thinking about these risks in the ESG nomenclature and have graduated to considering environmental, social and governance risks to ROI plainly as investment risk, not thought of separately or considered separately apart from the due diligence process. That’s to say, while many energy corporates lean on the mantra “our focus is on operating a business and allocating capital efficiently, not ESG,” investors are now widely viewing this statement and ESG as one in the same; not mutually exclusive.
Regulation – The steady stream of state and federal regulation also poses considerable ESG headwinds for corporates. While much of the anti-ESG conversation happens at legislative levels, this belies the reality as 2023 has been a regulation heavy year.
First, California‘s Climate Accountability Package, focusing on greenhouse gas (GHG) transparency, climate-associated financial risks and fossil fuel divestment. SB 252 urges state pension fund divestment from major fossil fuel entities, SB 253 requires GHG emission disclosures for big businesses and SB 261 highlights climate-related financial risks.
Nationally, the SEC is formulating a detailed climate proposal disclosure for public companies to transparently report their climate-related risks. Additionally, the Inflation Reduction Act has now added Section 136 to the Clean Air Act, inaugurating the first-ever direct methane emission “charge.” Beginning in 2024, charges of $900 per metric ton of methane will be applied, escalating annually, reaching $1,500 by 2026.
As the EPA tightens performance standards and prepares to set nationwide emission guidelines, it’s essential for both offshore and onshore operators to adapt and strategize accordingly.
Energy Workforce partner Pickering Energy Partners provides insights on ESG due diligence, disclosures and reporting. Garrett Delk is an Associate, specializing in ESG Advisory.