LEGAL & FINANCE
THE ESG OPPORTUNITY By Hazel Gray – Investment and Innovation Incentives Tax Partner, Deloitte
Climate change has been a topic across boardrooms for some time, but it hasn’t always been at the top of the agenda. However, as eyes turn to Glasgow for COP26, business leaders are keen to be seen to place great importance on the actions they are taking across environmental, social and governance (ESG) initiatives. This focus has been given renewed attention as business leaders look for ways to contribute to climate change targets and solutions; a result of shifting societal, political, and regulatory environments as the world aims to address this challenge and the threat it poses. These initiatives are already delivering progress, and there is evidence that this shift has had the desired effect in accelerating environmental sustainability efforts. However, there is always more that can be done, and when done well, an effective ESG strategy can have a positive impact for an organisation at all levels, driving growth and contributing to long-term competitive advantages. Additionally, customers, investors, and potential employees increasingly look to a company’s ESG impact before making purchasing and investment decisions. It can also help attract millennial talent, enhance brand value and reputation and support growth ambitions. In a survey conducted by Deloitte Global and Forbes Insights on the impact of sustainability efforts of 350 executives, more than half of respondents indicated a positive impact on revenue growth and overall company profitability. Beyond positive financial implications, 48% of respondents indicated increased customer satisfaction, while 38% indicated that embracing strong ESG values enhanced their ability to attract and retain talent. For some firms though, there may be questions about how to create and integrate an effective ESG strategy. For these companies, there are some key things to keep in mind. Firstly, because an ESG strategy impacts every facet of an organisation and is relevant for all stakeholders, integrated thinking is key. This collaborative and connected approach ensures ESG principles remain at the core of a business and helps companies understand value creation through a new lens that balances short- and long-term outcomes and acknowledges the diverse range of resources on which all companies rely. Setting the foundation and committing to action is an obvious starting place and without that, it’s impossible for businesses to set meaningful targets or measure progress and Deloitte’s study into Business’ views on environmental sustainability highlighted the issues created by an inconsistent measurement and reporting process. Setting targets aligned with the Science Based Targets Initiative can add additional rigour and credibility to stated ambitions. It also allows businesses to demonstrate that their subsequent targets are in line with the latest climate science. Already we are seeing these types of metrics being asked for by providers of finance. Something else for businesses to remember is the ‘social’ side of ESG. This is typically forgotten about in strategies, perhaps because it is less easy to define or capture in metrics. However, there is no doubt it makes a difference to trust, confident, diversity & inclusion and the engagement of its stakeholders. A social impact mindset could just be the key to driving your business forward. Ultimately, the development of a strategic plan is generally accepted as the easy part and the difficulty is how to turn it into reality. However, ownership and accountability of aligned goals for business units, geographies and individual teams can help meet goals, as can willingness and openness to transformation. In doing so, businesses can benefit operationally while accelerating solutions to climate change.
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OIL & GAS: IT’S TIME FOR SOCIAL CONSCIENCE
Our social licence is under threat – not delivering is not an option.
When discussing ESG in oil and gas, the focus traditionally is on the ‘E’ in ESG (especially Health, Safety and Environment). This is rightly critical amidst this rapidly shifting societal and political landscape. However, in the eyes of third-party rating agencies, it’s not just a climate story, it’s a whole story, with all three pillars of ESG equally weighted. A low score in one aspect of ESG could result in a missed opportunity to secure capital from potential investors. While the governance and environmental aspects of ESG now, to some degree, take care of themselves due to standardised metrics and frameworks; social disclosure continues to be a laggard, yet it remains a financial imperative. The oil and gas sector has the potential to be an exemplar of good social practice. Its global supply chain, which heightens exposure to potentially poor working conditions and human rights challenges, has seen many in oil and gas demonstrating strong corporate social responsibility such as supporting opposition to modern slavery, responsible sourcing of human capital and investing in local communities. Furthermore, recent OGA/industry workshops on the ‘S’ of ESG have highlighted that many in the sector are doing great work on diversity and inclusion, and this needs to be made more apparent to investors. Despite this, internal OGA analysis has shown that disclosure of social metrics pertinent to the investor community is varied. In order to meet an increasing demand for transparency of social targets many businesses struggle to showcase all the social good they do. Companies need to understand that there is a changing investor landscape amid radical shifts in societal attitudes and keep pace. This is evidenced by global fund manager Blackrock’s new 2021 proxy voting guidance which requires businesses to be clear and consistent in reporting their handling of human capital management. There are many frameworks, and sector reports available to the oil and gas sector, but these can be confusing, and may add to the alphabet soup of ESG standards. The OGA is committed to assisting the sector in improving and demonstrating its social disclosure, and the revised OGA strategy highlights the importance of good ESG policies and practice. In addition, the North Sea Transition Deal includes guidance on how businesses should approach critical social challenges including equality of opportunity, workforce upskilling, and utilisation of local content. The OGA recognises the challenges associated with the disclosure of social issues and has reconvened its ESG taskforce which has agreed to review social disclosure to better help businesses meet the demands of investors.
Our sector cannot afford simply to take a wait and see approach, we must adapt quickly to improve our social performance and report clearly on those areas in which we already do brilliant work. Failure to do so will see our social licence to operate further decline.
