How can national oil companies overcome the challenges of ESG reporting?

National oil companies (NOCs) are oil and gas companies that are fully or majority-owned by a national government. According to an International Energy Agency (IEA) report, NOCs produce 50% of the oil and gas globally and control almost 60% of proven reserves. Energy production in oil-rich countries is generally dominated by NOCs where some hold a pivotal role in the country’s energy sector and will somewhat determine the choice of the country’s energy mix, especially in the emerging economies market.

Moreover, from the country’s development perspective, particularly for emerging economies, NOCs play multiple roles and deliver complex national mandates. Some NOCs are purely business entities generating revenues and prioritising profit whilst others might be focusing on performing a wide range of public functions, including creating jobs, and providing societal needs.

According to the Intergovernmental Panel on Climate Change (IPCC) report, within the next two decades, the world will get closer to its tipping point of average temperatures of 1.5ºC. The only way to prevent an environmental disaster is to ensure drastic cuts in carbon emissions.

Despite a declining trajectory, demand for fossil fuels is expected to continue, with the IEA estimating under its most climate ambitious scenario (net-zero emissions) that demand for oil will drop to around 24 million barrels per day and demand for natural gas to 1,750 billion cubic metres by 2050, versus around 100 million barrels per day and 4,100 billion cubic metres respectively today.

Amidst the growing urgency to reduce and remove greenhouse gas (GHG) emissions from the energy mix, with renewables at currently 14% of the global energy mix and the substantial required investments and growing energy demand, the global energy mix will not be able to exclude hydrocarbons overnight. Many emerging economies are expected to continue relying on hydrocarbons as they transition to a lower emissions energy mix over time.

As a result, there is a growing need for improved transparency and accountability in ESG reporting and disclosures, particularly on climate change, and it has become a key priority to investors and other stakeholders around the world today. The oil and gas industry, in particular, is facing greater scrutiny from stakeholders on their ESG performance. Within the global oil and gas industry, international oil companies (IOCs) are generally perceived to be leading the response to the ESG agenda as more and more IOCs are shifting their portfolios to clean or new energy solutions including renewable energy.

Unlike IOCs, NOCs generally have more limited portfolio flexibility to substantially move away from oil towards renewable energy at pace. NOCs face a trilemma to balance low carbon investments with national economic development and growth as well as providing local access to affordable energy.

Hence it is crucial for NOCs to start assessing and adopting the most appropriate ESG measurements and disclose their ESG performance. This will enable them to continue to attract investment, meet stakeholders’ expectations, and keep their commitment towards long-term sustainable value creation.

Presently, there is no single globally agreed ESG framework with comparable and transparent metrics to measure ESG performance. In September 2020, the World Economic Forum and its counterparts from the big four accounting firms published Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation with the idea to accelerate convergence among the leading private ESG standard-setters and bring greater comparability and consistency to the reporting of ESG metrics.

Drawn from existing standards and disclosures, our Stakeholder Capitalism Metrics (SCM) have identified a core set of 21 priority sustainability topics and related ESG metrics. The metrics are organised under four pillars: principles of governance, planet, people and prosperity.

Over 150 global companies have joined the SCM community and could play a vital role in transforming the ESG landscape by advocating for the establishment of globally-accepted, international sustainability reporting standards. Currently, 18 oil and gas companies including several NOCs have committed and/or are reporting on these metrics.

At COP26, the International Financial Reporting Standard (IFRS) announced the creation of the International Sustainability Standards Board (ISSB) as an entity that will develop a comprehensive global baseline of sustainability disclosures for the financial markets, leveraging the work of SCM. ISSB has since then launched its first two proposed standards.

Acknowledging the unique perspective of NOCs, EY in collaboration with the oil and gas community at the Forum, organized a dialogue series with NOCs. It was designed to create awareness on SCM, build a deeper understanding of the unique NOC-ESG context and explore the opportunity for NOCs to work together to strengthen performance, understanding and reporting on ESG.

While sharing their ESG framework and metrics adoption journey, many NOCs acknowledged ESG reporting, and disclosure is a significant step towards articulating their sustainable value creation strategy. However, the prevalence of multiple, different ESG frameworks and key performance indicators (KPIs) in the industry is a key challenge and they often lack the flexibility to reflect the unique ESG context of NOCs. Current metrics focus on the risks and impacts and insufficiently address considerations such as:

As a result, ESG reporting practices among NOCs vary from the choice of ESG KPIs to be reported or disclosed, to adopting one or multiple global frameworks to demonstrate their commitments to sustainability reporting. NOCs’ national context also leads to several challenges on their ESG journey:

The global momentum around ESG reporting is intensifying and many NOCs are looking to operationalize their net-zero pledges in alignment with their respective aspirations. Strong ESG reporting and performance could enable NOCs not only to maintain a social license to operate, but also to enhance their brand and ensure access to capital and consumer markets around the world as ESG considerations become increasingly important.