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Getting ESG disclosure right is key to access transition financing

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The North Sea oil and gas sector needs investment to fund its transition. Having ESG reporting in order is a crucial part to attract financing – Joanne Edgeler, head of licensee governance and ESG at the North Sea Transition Authority (NSTA), explains why.

  • Companies in the North Sea oil and gas sector have plans in place to take part in the energy transition, but need financing to implement them.
  • Insufficient or inaccessible ESG disclosures, however, can act as a barrier to attracting investors.
  • According to the NSTA, the industry is making progress with ESG reporting but more work needs to be done to spread awareness of its importance.

The NSTA has published its first ESG Disclosure report, which looked at a sample of 31 UK licensees in the oil and gas sector. 

Why do oil and gas companies need to focus on ESG reporting?

The sector needs to access capital to decarbonise operations as part of the energy transition, and to meet the UK’s net zero target by 2050. The NSTA says it is “fully committed” to helping the country towards its goal, “while supporting energy resilience and the drive to develop home-grown hydrogen and carbon storage”. This will be achieved by using oil and gas infrastructure and capabilities for carbon capture and storage, as well as to support renewable energy production and hydrogen generation, transportation and storage. Companies also have their own individual emissions reduction plans.

ESG reporting is a crucial part of the financing process as banks and investors hold it at the heart of their investment decisions. Edgeler says: “I was told back in 2019 by a number of the key London shareholders and institutional shareholders and banks that… if licensees did not disclose what they were doing on ESG, access to finance would dry up. So it was quite a stark message.”

“Obviously, it’s not the only driver, but it’s right up there. And many, many banks now have sustainable investment committees that have to sign off on this. So we know, and that’s really what we’re trying to tell our licensees, how important it is to do this and to get it right, in order to communicate your story to your future investment lending people.”

The challenges of ESG disclosures

As seen in other industries, the fragmentation of ESG reporting frameworks and standards is the main challenge faced by oil and gas businesses in developing disclosures. There is no ‘one size fits all’ approach, resulting in a lack of clarity on what to report and how to report it.

Regulations are getting increasingly stringent in the UK, which is pushing companies to ramp up transparency. Regimes being used include Streamline Energy and Carbon Reporting and the Task Force on Climate-related Financial Disclosures (TCFD) framework, which is reported against by listed companies on the main segment of the London Stock Exchange, and those listed on the AIM segment with more than 500 employees.

Apart from those required to report via TCFD, various other frameworks are applied in oil and gas reports. The most frequent alternatives are the Global Reporting Initiative, the Sustainable Accounting Standards Board, the International Petroleum Industry Environmental Conservation Association, and the UN Sustainable Development Goals. According to the NSTA, materiality assessments are a practical way to understand stakeholder expectations and to focus reports on what matters. As such, companies should consider how these are presented to key stakeholders to ensure they are useful for investors.

What can companies do?

In its report, the NSTA found that the 31 licensees being assessed had aligned with the recommendations issued in 2021, signalling that there had been some progress. Most of the efforts, however, were on the ‘E’ of ESG, which is easier to quantify, with less focus on the ‘S’ and the ‘G’.

Because of the fragmented nature of reporting practices, the ‘best in class’ companies were the ones using a standardised ‘data centre’. The NSTA said this provides more consistency and clarity as it pulls all ESG data into one easy-to-find location and lends itself to common templates.

Researchers found that the best data centres had become a ‘one-stop shop’ for investors and stakeholders, containing the description of a business’ ESG Strategy, materiality assessment, goals and KPIs. There were also considerations relating to socioeconomic reporting, such as increased disclosure of taxes paid, and the number of jobs supported directly and indirectly by the organisation. The ESG metrics had accompanying methodology or independent verification reports.

Edgeler comments: “There were certain companies and various websites that you had to dot around from different reports. And we know that the investment community, they haven’t got the time to be searching in half a dozen different locations for the information… Being clear and transparent and having all your information in one place is such a benefit.”

Need to spread awareness

According to Edgeler, people in the North Sea oil and gas sector are becoming more aware of the importance of ESG transparency, but more work needs to be done – not only at the executive level, but across the whole company.

She says: “You can get caught up in the day-to-day business of running the company and, you know, sometimes that the additional bits get lost in the noise… It’s really important on the top level to communicate the importance of this.”

She adds: “You have to have the right people writing these reports, and the right people looking at the data and coming up with the plan and working with different teams, to actually create something of value that’s going to make a difference.” 

According to Edgeler, it can take a while for businesses to get the ESG reporting right, and they need to accept that “it’s going to be trial and error”. While the NSTA focuses on oil and gas companies in the North East of Scotland, its principles and recommendations on ESG reporting can be applied to all sectors looking to access financing for the transition.

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