ESG Path to Energy Transition
Two complex subjects are driving pain and gain in the energy industry – the Energy Transition and Environmental, Social, and Governance (ESG). Every energy company must establish and defend its role in the transition to a lower carbon landscape – including power generators, oil exploration & production companies, infrastructure, and service providers. Since the impacts of climate change continue to make front page news, the public as well as investors expect all members of this industry to show how they are contributing to the Energy Transition or else lose support.
We tell companies that an ESG report helps to tell their story. The report should inform the audience how the company is operating in the current market and how it intends to be relevant and create enterprise value in the future. An effective ESG report will define how a company is part of the Energy Transition, both quantitatively and qualitatively, and provide the needed context to support and educate the audience.
ESG Lynk advises companies to use the Value Reporting Foundation, which publishes standards under the Sustainability Accounting Standards Board (SASB) because they are industry-specific and most relevant to their existing business. They are often related to or include existing performance indicators at the company, and SASB standards can efficiently build an underlying foundation for the ESG story. Environmental, social and governance topics can all credibly make the case for your role in the Energy Transition. Here are some examples of how performance in the Energy Transition is presented by SASB’s standards[1].
[1] The examples in this piece are from the five SASB categories of Environment, Social Capital, Human Capital, Business Model & Innovation, and Leadership & Governance. Need help navigating the ESG landscape? We invite you to read Navigating the ESG Landscape .
Environment
The core objective of the Energy Transition is the reduction of carbon dioxide (or carbon dioxide equivalent) in the energy ecosystem. An ESG report should communicate how the company is identifying, measuring, and targeting reduction of emissions. This section of the report could include how the company defines their carbon footprint, including where emissions exist within
operational boundaries (direct emissions, or Scope 1) and also where emissions are a consequence of their business (indirect emissions, or Scope 2 and 3).
To make a clear connection between being a player in the Energy Transition and your company’s environmental performance of your operations, the ESG disclosure strategy may include:
- The methane emissions intensity of your production activities (Scope 1)
- Metric tons of carbon dioxide (equivalent) emitted by your fleet (Scope 1)
- Percentage mix of power from renewable energy used by your buildings and assets (Scope 2)
This environmental section of your ESG report should communicate how your business performs while reducing carbon dioxide equivalent (CO2e) and position your company in the energy transition.
[1] The examples in this piece are from the five SASB categories of Environment, Social Capital, Human Capital, Business Model & Innovation, and Leadership & Governance. Need help navigating the ESG landscape? We invite you to read Navigating the ESG Landscape .
Social
In an ESG report, social topics cover how the company is valuing and managing its social capital and human capital and is an important consideration for success in the Energy Transition. The transition to lower carbon energy still means that all human beings have the right to energy. More than 700 million[1] people in the world do not have access to a reliable electricity source for basic needs such as lighting. There are low-income populations in the United States who face high “energy burden” which means a larger portion of their income is spent on home energy costs than
national or regional average. In an ESG report, electric utilities and power providers can show that they can provide accessible and affordable energy. And even as renewable energy increases its share in the generation mix and utilities transform their business, the basic human right to energy remains. Companies can report on how they engage and support the communities where they operate. For oil exploration & production companies, as part of their Social disclosures, SASB recommends disclosure of reserves that are in or near areas of conflict or indigenous land.
These two social ESG topics are foundational to environmental justice, which is defined as every person having a right to protection from environmental and health hazards. Environmental justice is becoming foundational in the in the Energy Transition conversation and the transparency enabled by ESG disclosure provides reporting companies a communication and engagement platform.
Another Social topic critical to the Energy Transition is Diversity & Inclusion. Energy companies know that talent will be critical to success as their business transforms and adapts to the Energy Transition. Their ESG report will communicate and hold accountable the performance of initiatives, and measurements of employee engagement, diversity & inclusion. Disclosing this human capital information demonstrates that the company is committed to a talent strategy that will make them competitive in the future energy industry.
[1] Source: IEA SDG 7: Data and Projections: Access to Electricity
Governance
We think of Governance in two ways – how your company is led and the specific attributes of your business model. Your report should communicate how leadership is structured to consider and manage risks. These risks may include environmental risks to humans and nature and how your company prevents contributing to widespread, societal, and systematic risks, as well as risks from safety-critical operations. Within the SASB standards, governance topics may include Business Model Resilience, Product Design & Lifecycle Management, Regulatory Environment, and Supply Chain management.
The Energy Transition will require new players such as hydrogen, increased penetration of renewable energy, and reduced environmental impact of existing sources. In a SASB-defined ESG
report, Business Resilience communicates how a business will compete in Energy Transition, which demands a low-carbon and climate-constrained economy. How is an oil company planning for a tightening regulatory environment and changing market demand? How is the price of carbon integrated into the value of their reserves? How are they identifying and managing climate-related risks?
In addition to how the company’s business model is operating, the ESG report may have quantitative data and qualitative (strategy) information on the company product mix. SASB’s Product Design & Lifecycle Demand category includes information on how companies may be meeting customer and societal demands for sustainable products, which could be analyzed by measuring the percentage revenue generated from sustainable products.
A company that discloses sustainability topics through an ESG report is not only committing to the Energy Transition, but also has a program that can help adapt or transform business practices and operations. Internally, it provides the company a new way to look at business-relevant data that can be used for improving performance. Externally, it communicates commitment to the Energy Transition, builds support and trust, and creates long-term value.