What does ESG mean for oil and gas sector?
8 August 2023
by Rewaldo Quest
For international oil companies (“IOCs”) to develop oil and gas fields sizable funding is required, however, there has been a noticeable trend by some financial institutions who announced that they will no longer fund oil and gas projects.
For example, in December 2022, the global banking and financial services company HSBC resolved to no longer provide financing for new oil and gas projects and new metallurgical coal mines. On 11 May 2023, the Paris-based global bank BNP Paribas followed suit and announced that it will end its direct financing for new oil and gas fields. A study titled “Banking on Climate Chaos” found that between 2021 and 2022, loans and underwriting bonds and equities to IOCs declined by USD128-billion.
There is no doubt that this trend is driven by commitments made by nearly 200 countries in the Paris Agreement to decarbonise and achieve net zero by 2050. However, the transition to a decarbonised economy will take time and questions around baseload power will remain until there is sufficient renewable energy capacity and enhanced and scalable battery capability. The production of renewable energy and related battery power at the scale required to decarbonise the world economy will require significant finite resources such as lithium, nickel, cobalt, copper and rare earth elements. Unless there is a significant technological breakthrough, these constraints may increase the length of time it will take to fully decarbonise the world economy.
In Namibia, there is a drive to promote both renewable energy and the oil and gas sector. Hyphen, a company that specialises in renewable energy, was awarded the contract to develop a USD10-billion project to produce 350,000 metric tons of green hydrogen per year, from a 7GW of renewable generation capacity and a 3GW electrolyser. This project enhances Namibia’s ability to meet its nationally determined contribution towards achieving net zero by 2050 in line with the Paris Agreement. In the oil and gas sector, significant oil discoveries were made in the offshore Orange Basin by Shell Namibia and Total Energies on the Namibian Coastal line, which is estimated to have 11 billion barrels of oil reserves. The aforesaid oil discovery, although significant, may be seen as hindering the achievement of the 2050 carbon net zero goal in terms of the Paris Agreement.
To not be shut out of further available funding opportunities arising from the application of environmental, social and governance (“ESG”) considerations, the question is what can IOCs do to align with the ESG global trends?
- IOCs can invest in renewable energy projects from the proceeds made from fossil fuels
According to the International Energy Association’s 2021 Global Energy Review, renewable energy grew by 3% in 2020, inclusive of a 7% increase in electricity generation from renewable sources. The market growth of the renewable energy sector has made renewable energy a financially viable option to invest in. IOCs can invest in renewable energy projects and diversify their exposure away from a concentrated carbon portfolio of assets.
- IOCs can develop ESG policies and frameworks
Companies are compelled by financiers to be transparent and to disclose ESG governance policies and frameworks. They are also required to utilise metrics, screenings and reporting standards to track ESG initiatives and account to stakeholders.
In Namibia, there is no hard law on ESG policies and frameworks, although the Corporate Governance Code for Namibia (“NamCode”) provides a list of best practice principles to guide directors to make informed decisions that concern ESG-related issues. The NamCode specifically highlights that –
“the company is so integral to society, it is considered as […] a natural person who has citizenship. It is expected that the company will be […] a responsible citizen. This involves social, environmental and economic issues […] in which companies in fact operate. Boards should no longer make decisions based only on the needs of the present because this may compromise the ability of future generations to meet their own needs”
The board of directors is responsible for considering the ESG interests and expectations of the company’s stakeholders in its deliberations, decisions and actions. Having board-level ESG policies and strategies enhances the ability of the board to discharge its fiduciary duties to promote ESG objectives.
- ESG disclosures on risks and impacts
Directors and asset managers are required to report on ESG initiatives in their annual reports by company shareholders and fund investors. The NamCode encourages Namibian companies to prepare integrated reporting to capture ESG initiatives. Under the Companies Act, of 2004, boards of directors are obligated to maintain financial reporting standards which are essential for corporate transparency and accountability to ensure consistent disclosure of information among public companies as it allows investors, creditors, analysts, regulators, and other stakeholders to compare financial statements for investing purposes. Financial institutions and investors see the annual reporting of public companies and institutions as a vehicle for directors to report on ESG risks and impacts.
Examples of voluntary ESG reporting standards that can be utilised by IOCs. include:
- Code for Responsible Investing in South Africa
- United Nations Principles for Responsible Investment
- Sustainability Accounting Standards Board and Global Reporting
- Global Reporting Initiative
- Task Force on Climate-related Financial Disclosures
- the latest IFRS – ISSB inaugural global sustainability disclosure standards
For the foreseeable future, there is likely to be a place for the Namibian oil and gas sector to provide baseload and allow for a gradual transition in line with the Paris Agreement. But there are actions that IOCs can take to ensure greater alignment with the megatrend of understanding and disclosing ESG risks and ESG related impacts. This will make IOCs more competitive when seeking to attract sustainable finance from those jurisdictions whose taxonomies or policies allow for funding of the oil and gas sector.
Reviewed by Wolf Wohlers, an Executive at ENSafrica Namibia.
Associate | Namibia