Environmental, Social, and Governance (ESG) criteria has become an integral part of investment decision making, especially when considering long-term growth and value implications.   At the same time, the development of strong ESG-related governance and reporting will set the industry for success as it embraces Energy Transition from fossil fuel-based sources to renewable and sustainable sources.

In a nutshell, the ESG criteria is a set of standards for an organisation’s operations that can be used to evaluate the organisation. Investors look at a broad range of behaviours under the three topics of Environmental, Social and Governance.  Based on the outcome of their evaluation of ESG criteria, investors place a premium or discount on potential investments.

The International Renewable Energy Agency (IRENA) in its Global Renewables Outlook: Energy Transformation 2050 sets out an ambitious outlook by calling to cut 70% of the world’s energy-related carbon dioxide (CO2) emissions by 2050. Over 90% of this reduction is expected to be achieved through renewables and energy efficiency measures.  IRENA estimated that around 260GW of renewable energy capacity was added globally in 2020, beating previous record by almost 50%.

The increased focus of ESG investing is providing a stimulus to Energy Transition.  There are three main influencing factors which is driving this.

Industry demand trends

There is varying opinion among experts on the so called ‘peak’ of oil and gas demand growth.  There are many corporates and industry experts who are of the opinion that peak oil and gas demand growth has already ended. However, there is widely consensus that the next decade will see massive growth in adoption of renewable energy sources such as wind and solar, and related technologies such as battery storage, to meet mainstream energy demand.

Return on Capital

There has been a long period of low prices in the oil and gas industry, sustained by an ever-increasing supply by main producers globally.  Hence it has not been a favourable investment climate recently for an industry which has historically seen a steady influx of investments in the past many decades, supporting capital intensive exploration and production projects.

Policy development  

Globally, policy makers and governments have accelerated measures to address climate change issues. In addition, laws regarding emissions standards have become more stringent.  Enhanced corporate reporting requirements has made it more transparent to see corporate initiatives on supporting sustainability.  Consequently, Global corporates, including oil and gas majors, are vying to be seen as the leaders on sustainability and all related topics.

In this backdrop of the global Energy Transition, ESG criteria provides a means for corporates to demonstrate their overall performance, including generating long term financial benefits for investors.  Proactive implementation of ESG principles and sustainable growth initiatives, helps to differentiate companies when seeking access to investors and their capital.  Large institutional investors are driving sustainability agendas by their direct intervention in the market and through Private Equity investors who control most of the capital flows globally. Hence companies who puts ESG at the forefront of their Energy Transition will be best placed to access the capital to support their transition initiatives.