The ESG Heat Is On…For Oil and Gas Producers

ESG Continues Push Towards Higher Standards on Oil and Natural Gas Industry Undeterred by Recent Hydrocarbon Supply Constraints

Janeesa Hollingshead, Senior Editor, Wealth Solutions Report

Oil and natural gas prices rose steadily throughout last year, with Europe already experiencing a natural gas shortage before the February Russian invasion of Ukraine.

Since then, Western government sanctions and private corporate actions against Russian fossil fuels have driven a sharp spike in oil and natural gas prices on a worldwide basis.

The immediate need to fill this shortfall in supplies has, predictably, created a cacophony of voices:  Oil and gas companies complained that they needed the Keystone pipeline revived and easier access to permits and leases for drilling.

Oil and gas companies want the Keystone pipeline revived

Senator Elizabeth Warren threatened a windfall tax on major oil producers. Meanwhile, the Biden administration flirted with the possibility of bridging the gap through Venezuelan oil, all while consumers poured extra cash into their thermostats and gas tanks.

As the conflict continues, multiple policy and geopolitical risk experts have warned of Western sanctions potentially lasting for years.

This, in turn, has triggered increased attention from wealth management firms, their financial advisors and their clients about the likely effects of Russian sanctions, U.S. policy and other factors on hydrocarbon producers, transporters and refineries.

Equally important, firms, advisors and clients are increasingly asking questions about the direction ESG leaders plan to take in response to the current situation.

Obviously, ESG proponents have long advocated for reducing or ending the reliance on fossil fuels and reducing the impact those fuels have on the global environment.

What would be the outcome of ending reliance on fossil fuels?

But in a world of fossil fuel shortages, what guidance can ESG leaders offer to the wealth management space?

To learn about this, we spoke with Dennis Hammond, Head of Responsible Investment at Veriti, a provider of customized direct indexing technology designed to align investments with client values.

Dennis Hammond, Head of Responsible Investment, Veriti

WSR: In the rush to find additional supplies of oil and natural gas excluding Russia in ever increasing measure due to sanctions, how do you see demand among wealth management firms for aligning renewable and other forms of ESG energy investments with their clients – is it increasing, decreasing or unchanged, and why?

Hammond: The present shortage of oil and natural gas precipitated by the Biden Administration’s cancelation of the Keystone XL pipeline, together with recent sanctions by the U.S. and other countries against Russia in response to its invasion of Ukraine, have not curtailed demand by investors for alternative and renewable forms of energy.

If anything, these shortages and the climbing cost of gasoline at the pump are prompting more investors to consider jumping in front of what many view as the coming wave of smart investments in alternative energy. Energy shortages of whatever origin prove the point of ESG advocates.

All have felt the increase at the pump

Shortages and the accompanying daily rise in inflation lend emphasis to environmentalists’ concerns that further delay in expanding investments into alternative energy sources beyond fossil fuels is short-sighted. The lack of readily available energy options today suggests supply disruptions in energy distribution will necessarily precipitate concomitant hikes in energy prices.

The Chairman of Vestas, a Danish wind energy company, put it this way, “Russia’s invasion of Ukraine continues to demonstrate why vulnerability to geopolitical coercion should cease to be an option in our energy systems.”

Last week, Columbia University’s Center on Global Energy Policy surveyed 15 upstream oil and gas companies and 12 investors active in oil and gas which collectively manage and/or supervise $8 trillion in assets.

They all agreed oil and gas companies must reduce Scope I and II emissions and at least report their indirect Scope III emissions, although the “investors preferred a strategy of engagement rather than divestment in promoting change within the oil and gas sector.”

It’s all in the strategy

WSR: Do you see any movement in the ESG world to modify its views or give temporary abeyance to oil and gas industry participants in light of the current reduced oil and gas supply? Does the ESG world have concerns about some of the proposed short-term solutions, such as reaching out to Venezuela, shipping North American hydrocarbons to Europe, etc.? 

Hammond: Some estimates place the amount of crude oil the U.S. lost to Russian sanctions at 245,000 barrels per day (bpd). Alternative sources, such as Venezuela’s oil fields, may prove of little help. Venezuela’s oil production has fallen precipitously from the 3.5 million bpd produced in 1998, to roughly one-fifth as much, or around 668,000 bpd today, according to a January OPEC report.

Moreover, shifting oil sourcing from one dictator to another will hardly appease ESG proponents, who are critical of the lack of workers’ rights and human rights abuses which are rampant in these states.

ESG proponents view this as a short-term hiccup produced by a longer-term terminal illness. Opportunities to limit global warming in accordance with the Paris agreement are fading fast. To reach the 1.5 C (2.7 F) level, global greenhouse gas emissions, including methane, must decline quickly to reach sustainable levels by 2030: otherwise, the moment is lost.

As the Intergovernmental Panel on Climate Change’s (IPCC) recent Sixth Assessment Report states, this is a “now or never” moment.

WSR: Over the next few years, will this shortage and the sanctions impede or accelerate the movement to renewable and ESG-friendly energy, or have any other effects on the trends in ESG treatment of energy?

Hammond: Regardless of the present shortage, ESG investing constraints – avoiding companies with significant fossil fuel reserves, high greenhouse gas emissions or a high carbon footprint or lending to a company with one or more of these characteristics – is “here to stay” according to Nick Volkmer, VP of ESG and renewables at Enverus.

Last year over 40 U.S. companies called on Congress to prioritize investments accelerating the transition to a net-zero economy.

Continuing commitment to these goals were made at last year’s COP26 in Glasgow. S&P Global Trucost data shows that the failure to address climate risks, including carbon prices, could prove costly. “Major global companies face up to US$283 billion in carbon pricing costs and 13% earnings at risk by 2025 under a high carbon price scenario,” according to S&P Global.

200 companies and counting committed to reducing carbon emissions by 2040

In 2019, Amazon teamed with Global Optimism to establish The Climate Pledge, a corporate commitment to reduce carbon emissions to net-zero by 2040, ten years before the 2050 target set by the Paris Agreement. Today, over 200 companies have elected to sign The Climate Pledge.

Janeesa Hollingshead, Senior Editor at Wealth Solutions Report, can be reached at editor@wealthsolutionsreport.com


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