In the past year alone, the term ESG has gained more popularity than it had in the last decade and a half, so much that one would think the three-letter abbreviation only just emerged.

In fact, the term has been around since 2006, coined in the United Nations Principles for Responsible Investment (PRI) report. The term is a triad of metrics by which sustainability of businesses and investments may be assessed – environmental, social and governance standards.

The environment metric refers to how the business utilises energy, its potential for climate/environmental litigation, how it manages its waste and how it deals with pollution and greenhouse gas emissions.

The social metric focuses on its relationship with the community it operates in and with its workers- things like human rights, environmental justice, and employee health and safety.

Governance refers to its manner of operation, compliance, tax remittance etc.
The aim of introducing ESG was to provide a sustainability standard by which companies could measure their activities and a metric for reporting for investment institutions. One report has it that ESG indexes grew by 40% last year as investor interest grew in sustainable investing. It is no surprise that in response, multilateral oil companies have continued to pledge net zero targets, divest from fossil fuel assets and consider factors like diversity and community concerns in their business models.

There has also been a sharp rise in gender diversity in higher echelons of their leadership. The Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD), amongst others are defining standards for incorporating ESG metrics into the investment process. In global energy deals, especially where financing is coming from development finance institutions and developed country capital markets, financiers are increasingly requesting ESG and climate-related disclosures. In the US, the SEC is mulling mandatory climate disclosures for all public companies due to high investor demand for the same.

It would appear that the “E” in ESG is not just the first in the triad for aesthetic purposes, but has become the most important factor too, spurred by the spate of climate change-related events, the Paris Agreement commitments and recent reports on worsening global warming. A new poll by Interactive Investor, found that 60% of investors say the “E” in ESG is most important to them when making investment decisions. Also, while issues like labour rights and corporate governance have always been heavily regulated, the same cannot be said of environmental and climate issues.

With the rise of ESG, what are Nigerian indigenous oil and gas companies doing? Is the extent of their response limited to HSE policies, haphazardly conducted Environmental Impact Assessments and newsworthy corporate social activities for host communities? The catch for ESG is integrating it into the lifeblood of the business, as it is ultimately for the business’ benefit. Merely posturing and greenwashing is akin to the typical Lagos danfo driver’s behaviour of running a rope across his chest disguised as a seatbelt when he sees a traffic enforcement official, and throwing it off afterwards; when an accident eventually happens, the driver is at risk. While there is no concrete regulation involving ESG metrics in Nigeria, with significant funding for the oil and gas industry originating offshore, the impact of ESG in developed countries and in the operation of international financial institutions will very quickly affect the kinds of projects that can attract financing.

ESG integration also brings profitability to business, and ignoring it may equally lead to losses. In 2015, Bank of America re-evaluated its practices and established more businesses with renewables, adjusted its employee contracts, and promoted diversity in the company and senior management. The company made $16.5 billion in that year. On the other hand, according to a study by McKinsey, the 2003 heatwave cost the European economy around $15 billion while in 2012, Hurricane Sandy caused a loss of $62 billion in the US.

Recent events like climate litigation against big oil companies, shareholders voting for climate-conscious directors on the boards of big oil companies and the discontinuation of one of the biggest oil infrastructure projects in North America worth $8 billion resulting in a loss of at least $1.3 billion to the developers point to the need for ESG integration in business. Also, only a few days ago, the G7-backed Task Force on Nature-related disclosures was launched to develop standards for business and financial institutions that measured the impact of business activities and investments on nature. This, added to the work of the TCFD will no doubt strengthen ESG metrics and in no time create mandatory ESG standards globally.

These occurrences, if nothing, have caused the boards of companies in the oil and gas space to begin to reconsider their business models. Nigerian indigenous companies should do likewise and tailor their models to explore low carbon opportunities, tackle environmental justice issues and ensure top-notch environmental standards in their operations. Investors are looking for companies that are not just builders of profit, but also builders of society and companies that move in line with ESG standards early will be poised for significant investments.