“The Accountants Are Taking Over” In The Oil & Gas Industry

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Originally published on EnergyPost.
by Clare Taylor

Most energy companies today report on their climate, environmental, and social impacts. In the EU, they are even legally obliged to do so. But how transparent are these reports? How can they be compared? And how will they be used by investors and policymakers? Clare Taylor spoke to a number of experts and learned that energy companies are increasingly under pressure to improve their non-financial reporting – and that there is more legislation to come. Meanwhile, one NGO is working on a global benchmark. “The accountants are taking over.”

“When you are a major energy company, it becomes highly important to both improve corporate social responsibility (CSR) and to disclose these improvements in a transparent way,” says Gleb Ovsyannikov, Head of Public Affairs at Lukoil.

Last year, the energy major Lukoil published a global non-financial report using the standard from the Global Reporting Initiative (GRI). The report is the company’s first to be in line with the strict requirements of the GRI-4 (the Initiative’s most recent standard) and covers the years 2015 and 2016 for its operations in 40 countries around the world. The company has carried out non-financial reporting since 2003, focused on specific regions of its operations.

“We want to be part of this trend, and to counter some of the clichés associated with oil and gas companies” — Gleb Ovsyannikov, Head of Public Affairs at Lukoil

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In an interview with Energy Post, Ovsyannikov emphasizes that, “although the climate criteria are a big part of the reporting, this is also about other environmental impacts, contributions to local communities, and the full scope of CSR criteria.”

Regarding the company’s motivation to publish non-financial data, Ovsyannikov says: “At investor roadshows, increasingly we are asked about non-financial performance. We see statements of intent from big investors, and that this is becoming normal practice. We want to be part of this trend, and to counter some of the clichés associated with oil and gas companies. For major businesses, major investors are also needed, and it is this that sets the trend. The smaller investors will follow the majors.”

Global Ranking

“For a company, it is no longer relevant whether you believe in climate change or not,” says Hendrik Steringa, program manager of the Corporate Climate Action Benchmark (CCAB) at the NGO Index Initiative, in an interview with Energy Post. “The leadership of most companies have realized that they had better get on board.”

Steringa’s work on the CCAB is focused on compiling the non-financial reporting results from the biggest companies in three sectors – oil and gas, electricity generation and car manufacturers – to establish a global ranking of the best performing companies according to the ‘less than 2 degrees’ target set in the Paris Agreement.

The first benchmark is set to be published in the second half of 2019, and the plan is to update the benchmark every year, by sector and by company. The ranking includes publicly listed companies and state-owned entities. This is an important aspect, because, according to Steringa, “globally, 70% of oil reserves are state-owned. Thirty years ago, it was the other way around with companies owning the majority of oil reserves.”

“The ninety companies in the three sectors that we are ranking together account for around 60% of global emissions. To change the system, you need to change this top level, the leaders,” says Steringa.

Quick Win

So, how do oil and gas producers reduce their carbon footprint and improve their ranking in non-financial reporting? “Ending gas flaring is a quick win,” says Steringa. “Another major factor in the emissions ranking is the type of hydrocarbon extraction. If there is a lot of energy used in the extraction process, for example as is the case in the Arctic, or in the refining process for heavy oil, then this has a big impact.”

He identifies Statoil as being “ahead of the pack in conventional oil and gas, probably in part due to a strong push from the Norwegian government. Shell and Total would also appear to be making some progress.”

“There’s a lot of money in the world that cares about more than only return on investment” — Hendrik Steringa, program manager Corporate Climate Action Benchmark

Steringa cites the Kyoto Protocol in 1997 as the milestone that first put non-financial reporting on the agenda. Leading organisations in the field of non-financial reporting include CDP, formerly known as the Carbon Disclosure Project, which boasts the “most comprehensive collection of self-reported environmental data in the world” according to their website, and the Global Reporting Initiative (GRI), an independent international organisation developing sustainability reporting since 1997.

More Legislation

Commenting on these two voluntary disclosure reporting systems, Michel Bande, Senior Principal Advisor at CSR Europe, a business network that supports its members to integrate sustainability into their governance and business models, says: “CDP have very good experts and are focused mainly on climate, whereas GRI is more general and has a more flexible methodology.”

With the adoption of the Non-financial Reporting Directive in 2014, the European Union “took an important step to harness the power of transparency to create social and environmental benefits” according to a statement from Tim Mohin Chief Executive of GRI. The law requires large companies to disclose certain information on the way they operate and manage social and environmental challenges.

However, according to Bande, transposition of the law at national level has been slow, with many Member States neglecting to impose penalties for non-compliance, but he remains optimistic. “Step by step, it will become mandatory for companies to fully disclose on certain items. There was a lack of political support for an ambitious directive, but I expect that around 2022/2023 that we will see more legislation in this area,” he says.

Real Milestone

According to Steringa, the most important recent development in the world of non-financial reporting is the output of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD was established by the Financial Stability Board (FSB), directed by the G20 Finance Ministers and the Central Bank Governors, to review how the financial sector can account for climate-related issues. On 29 June 2017, the TCFD released its recommendations for businesses to disclose climate-related financial information.

“We will need accountants and auditors who are also trained engineers and scientists” – Michel Bande, Senior Principal Advisor at CSR Europe

It is perhaps too early to quantify just how much these various efforts are influencing investor behavior, but Steringa comments: “There’s a lot of money in the world that cares about more than only return on investment. Organisations like the Institutional Investors Group on Climate Change (IIGCC) send an important ripple effect across investment circles. And then the 2015 speech from Mark Carney, governor of the Bank of England, was a real milestone, because he framed the climate change as a risk – and this is the language that the financial community understands.”

“Of course, it is difficult for oil and gas producers to reduce carbon emissions without completely changing their business model,” says Bande. “Exiting coal seems possible, but not for oil exploration.”

Accountants & Auditors

According to Ovsyannikov, decarbonization of the oil and gas sector will take place, in part, via developing technologies, modernization of recovery methods, and usage of less energy intensive equipment. “We see that there will be a mix of energy sources in play as we move towards 2050. This is not about full decarbonization, but about how all sectors are going to improve their activities. There is no ideal – every sector has its impact,” he says.

It remains to be seen whether enlightened investor appetite for a low carbon world combined with the seemingly unlikely prospect of a fully decarbonized oil and gas sector will “change the system,” as Steringa hopes, and limit global warming to less than two degrees.

In any case, the role of the accountancy profession is gaining ground in the energy sector. Says Bande: “The accountants are taking over. Now the fact that this information is publicly available means that it is also under scrutiny. This represents an evolution for the profession; we will need accountants and auditors who are also trained engineers and scientists.”