Even though demand destruction and oversupply has threatened bankruptcies for many U.S. oil and gas companies, increased focus on environmental, social and governance (ESG) activities could offer some relief to energy companies in the upcoming months.

Several ESG-focused factors, including the safety of workforce, supply-chain diversity and community impact have been key to the survival of companies during the market downturn, said corporate partners at law firm Winston & Strawn LLP, Eric Johnson and Michael J. Blankenship, in a recent article in Lexology.

“Certainly, there is going to be pain in the short term because the balance sheets are not where they need to be,” Johnson told Hart Energy, adding companies will need to recalibrate their financial structure by reducing debt and improving asset bases, both in size and quality.

Longer-term, though, ESG’s influence on capital access is here to stay, he said, elevating the importance to embrace ESG principles to ensure future access for oil and gas companies to sufficient and cost-effective capital.

Common framework

Moving forward, companies that survive the downturn will need, at least to some degree, ESG-focused investors to meet their capital requirements. The biggest issue for the industry, though, is finding a common ESG framework and consistency in reporting, Johnson said.

“We’re strongly encouraging companies to get involved with trade associations that are proactively developing ESG resources for their member institutions and providing networks for sharing information and ideas,” he said.

Investors have been pushing for standardization of sustainability reporting and other ESG-related disclosures for several years, according to Johnson.

Cross-vertical organizations such as the newly formed Energy ESG Council, are creating forums for companies in the upstream, midstream, downstream, renewable and service sectors to work together on industry-wide ESG objectives. These include reporting frameworks in order to help the industry communicate a cohesive and positive ESG message.

Johnson also pointed out a strong need for the board of directors to clearly communicate to the corporate stakeholders their commitment to ESG principles. Those involved in strategic planning must focus strategies on developing new technologies that can improve the environmental impact of existing businesses, restructuring organizations to maximize the health and safety of workforce and defining ideal supply-chain configuration.

Incentivizing ESG

Johnson also highlighted a need for the industry to adjust its compensation programs and policies to incentivize and drive ESG success. ESG metrics must become a key performance indicator and a significant component of incentive programs, together with strategic, financial, operational and other traditional performance metrics, he said.

The lawyers agreed that the corporate strategy developed by the board must follow through with incentives that will motivate and encourage the desired ESG-related behaviors. Failure to do so will permit competing incentives to potentially derail or postpone ESG success and unnecessarily divert needed capital.

Energy transition

As for the energy transition, Blankenship noted a need by the oil and gas industry to adopt new technologies. This will include continuing to invest significant capital into technological innovation, such as ones that help the transition to a low-carbon future.

“Oil and gas is not going away but we need to be safer and adopt better practices to attract investment,” he said.

This period of market depression, however, presents a chance for the industry players to forge a better and more sustainable path to global energy leadership, he said. New technologies will also attract capital, which will sustain existing oil and gas operations as the transition continues.

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