Regulation, Technology and Investor Pressure Mean ESG Programs Will Grow and Become Integral to the Business, Says L.E.K. Consulting
BOSTON, MA (August 11, 2020) – The novel coronavirus pandemic has significantly disrupted the oil and gas industry. But that won’t slow progress on environmental, social and governance ESG) initiatives – and might even accelerate momentum on ESG programs.
Despite the pandemic-related demand crisis and sharp downward price pressure, ESG investment will grow and ESG programs will become even more integral to business results, according to a new report from global management consulting firm L.E.K. Consulting.
The cause is not only “green” activism but also the ongoing transition to renewable energy, new waves of regulation, and investors who are increasingly limiting their portfolios to oil and gas companies committed to ESG.
The pandemic may also play a role, as lockdowns restrict driving and clean the air, and as a new focus on community and shared sacrifice takes hold. Low oil prices may undercut progress in the short term, but structural forces will push industry ESG initiatives forward and make them a strategic priority.
The report, titled How Should the Oil and Gas Industry Plan for Increasing ESG Pressure? details the sustained demand for ESG and recommends a business focused ESG planning and reporting process. It advises organizations planning ESG programs to take a systematic approach, make sure they pursue social and governance projects in addition to environmental programs, and ensure the initiatives are linked to business goals and generate measurable results.
“Conventional wisdom might suggest that ESG programs are an expensive luxury in time of crisis – but in fact the opposite is true,” said Nilesh Dayal, an L.E.K. managing director, head of the firm’s Oil and Gas practice, and a co-author of the report. “ESG considerations are central to the future of the organization and must be tightly integrated with its performance.”
Energy transition is a central concern – and industry leaders step up
Energy transition to electric, natural gas and renewables remains a central concern, the report says, both for governments and for major industry players. The European Union’s 27 heads of state have declared that “the green transition” is central to their post-COVID-19 recovery plan. BP is going ahead next year with a shareholder resolution in support of its goal of net-zero emissions by 2050. That goal is shared by Shell. Schlumberger announced a step change in its commitment to ESG and decarbonization. Total is maintaining its investments in energy transition even as it cuts elsewhere.
“But environmental goals are only one aspect of ESG,” said Clare Chatfield, an L.E.K. senior partner and a report co-author. “A comprehensive oil and gas ESG program should include not only environmental stewardship but also social responsibility – including worker safety and health, and community and supply chain relationships – and corporate governance initiatives including reporting transparency, leadership diversity and shareholder rights.”
A comprehensive oil and gas ESG program should create multiple kinds of value
According to the report, a comprehensive oil and gas industry ESG program should:
- Bolster innovation and long-term growth. Clean fuel investments provide access to high-growth markets.
- Stimulate innovation. Innovation is a proven result of employee and board-level diversity.
- Mitigate regulatory and cyclical market risks. Environmental action can preempt future regulatory restrictions and related costs.
- Enhance operational efficiency and productivity. Greenhouse gas reduction and new worker safety technologies can lead to reduced production cost and improved operational efficiency.
- Attract and retains top talent. Top performers are increasingly attracted to companies that lead in ESG.
- Expand partnership opportunities. Adoption of ESG standards expands the universe of potential business and investment partners.
- Broaden the investor base. Investors are increasingly narrowing their portfolios to include only companies that lead in ESG.
Advice to leaders: Be pragmatic, measure results, and tailor the ESG program to your organization’s reality
“The ideal program is one that achieves the highest financial impact with a clear and measurable societal impact at the minimum cost and effort,” Dayal said.
“In the real world, no program will accomplish all of that,” he continued. “Managing the program means managing trade-offs. Leaders should ask themselves how the impact of the initiatives will be measured, what should be the relative weight of financial return and societal value, which initiatives should be prioritized, and what the metrics will be. Leaders should avoid committing to too many initiatives – they should choose the most strategic and impactful.”
ESG initiatives should be authentic and achievable for the organization, Dayal said. “A handful of major players such as Shell, BP, Total and Schlumberger have staked a claim to ESG leadership. The answer is not to follow them but instead to be true to your own organizational culture, marketplace realities, and state of play in the environmental, social and governance arena.”
About L.E.K. Consulting
L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private- and public-sector organizations, private equity firms, and emerging entrepreneurial businesses. Founded in 1983, L.E.K. employs more than 1,600 professionals across the Americas, Asia-Pacific and Europe. For more information, go to www.lek.com.