Introduction
ESG achievements
ESG disclosures
Impact of proposed rules for oil and gas producers
Comment
A recent report surveyed public disclosure by 30 US-listed middle market onshore oil and gas producers around various environmental, social and governance (ESG) matters to help the market better understand current disclosures among oil and gas producers, as well as to identify trends and takeaways across the industry.
The report indicates that oil and gas producers have adopted varying levels of ESG policies and initiatives into their businesses with 97% of the surveyed producers disclosing ESG policies – up from 70% in Spring 2021 – and many dedicating considerable resources to the implementation and maintenance of such policies. ESG considerations are also playing an increasingly important role in a producer's ability to access capital and in M&A activity as the oil and gas industry continues to consolidate
Sample producers are forming ESG committees and reporting more accomplishments than ever regarding notable ESG metrics, including greenhouse gas (GHG) emissions, reductions in water usage, employee and board of director diversity, company safety records and investments in local communities. Corporate attention has been allocated to monitoring and reducing direct – and in some cases indirect – GHG emissions, with many oil and gas producers pursuing emission reduction programmes that may include:
- leak detection and repair strategies;
- electrification of drilling activities and operations;
- elimination of old/high-emitting equipment;
- implementation of strategies to reduce or eliminate routine flaring;
- installation of emissions monitoring equipment and surveillance technologies; and
- implementation of renewable energy in the field.
Such programmes are being developed alongside "net zero" commitments from some oil and gas producers, which are generally accomplished through:
- technological improvements and operational efficiencies; and
- purchasing carbon offsets (eg, reforestation).
Most ESG disclosures are currently found in corporate sustainability reports and on company websites, rather than in filings with the US Securities and Exchange Commission (SEC). As a result, and as noted by the SEC, disclosures made outside of SEC filings are not subject to the full range of liability and other investor protections that help elicit more complete and accurate disclosures. In order to enhance and standardise climate-related disclosures to provide investors with more consistent, comparable and reliable information prior to making an investment decision, the SEC recently proposed its long-awaited climate-related disclosure rules (the proposed rules) that would require public companies, including public oil and gas companies, to disclose GHG emissions and climate-related risks that are reasonably likely to have a material impact on their businesses.
Under the proposed rules, a public company would be required to disclose emissions that occur from:
- the sources owned or controlled by the company (scope 1 emissions);
- emissions resulting from the generation of electricity (or other sources of power) purchased and consumed by the company (scope 2 emissions); and
- in certain circumstances, all other indirect emissions in the company's value chain, upstream and downstream (scope 3 emissions).
Although compliance with the current version of the proposed rules would place a considerable burden on the oil and gas industry generally, the recent report reflects that most sample producers already monitor and disclose scope 1 and scope 2 GHG emissions in corporate sustainability reports and on company websites. However, few are currently disclosing scope 3 emissions, which could present substantial hurdles to accurately quantify and report.
Impact of proposed rules for oil and gas producers
In response to investor and stakeholder demands, many public oil and gas producers have prioritised ESG and already incorporate various aspects of ESG into their business practices and strategies. However, even those producers with relatively extensive disclosures will likely have to devote more corporate resources and incur additional costs to comply with the comprehensive disclosure regime in the proposed rules.
In addition to penalties for failure to comply with the proposed rules, the failure – or perception of failure – to meet ESG expectations can damage business reputation, harm long-term competitiveness, and impact access to capital. As regulators and stakeholders focus on a lower carbon future, oil and gas producers will need to adapt to meet the changing business environment and business expectations.
ESG continues to garner much attention from all stakeholders, including investors. Of the producers surveyed by the report, those producers that made more comprehensive ESG disclosures are more widely held than those producers lagging in ESG disclosures, implying greater investor confidence in companies that disclose ESG achievements and related goals.
For further information on this topic please contact Stephen Grant, Christopher Reagen or Jennifer Wisinski at Haynes and Boone by telephone (+1 202 654 4500) or email ([email protected], [email protected] or [email protected]). The Haynes and Boone website can be accessed at www.haynesboone.com.