How E&Ps’ ESG Disclosures Fare Ahead of SEC Proposals

The oil and gas industry is waiting with baited breath for the U.S. Securities and Exchange Commission (SEC)’s proposed climate ruling before moving forward with any major decisions regarding emissions and net-zero commitments, Haynes Boone found in its fourth-edition ESG metrics tracking report.

Released on Oct. 17, the Haynes Boone and EnerCom Oil & Gas ESG Tracker report surveyed 30 public oil and gas companies to learn more about trends in ESG data, such as emissions disclosure rates, executive implementation and stockholder feedback.

Findings from the report included that most companies have implemented some form of ESG leadership in their boardrooms by the way of directors and/or committees, as well as into their performance targets. Additionally, while 25 of the 30 companies surveyed have disclosed their Scope 1 and 2 emissions on some level, much fewer have disclosed Scope 3 emissions.

Lastly, less than 25% of companies surveyed had made net-zero emissions commitments—not much of a change from the year prior, Haynes Boone partner Stephen Grant said—as the industry appears hesitant to make any firm commitments.

Under the SEC’s proposed guidelines, making net-zero commitments would require the companies to outline how they intend to reach those pledges and provide progress updates, deterring many from disclosing any at this time, Grant told Hart Energy.

In an exclusive interview with Hart Energy, Grant shared details from the report, such as trends within the emissions disclosure process and how the SEC’s proposals might affect these in the coming months.

Madison Ratcliff: What inspired Haynes Boone and EnerCom to embark on this study in the first place? What is the study aiming to accomplish?

Stephen Grant: HB instituted an oil and gas tracker to survey 30 reporting companies , all of who are E&Ps. The idea behind it is to really track trends in disclosure and reporting because I think we’re all seeing ESG as at the fore across industry and investor routes and regulators. It’s of primary importance right now.

There was an awful lot of attention a couple of years ago with ESG, and so we thought it would be good to track its development. If you go look year-over-year, you can really see from a governance perspective more companies appointing committees and looking at appointing executive officers with ESG related responsibilities. Also, on the reporting side, a lot of companies are really starting to try to flag their highlights in their accomplishments.

MR: What would you say are some of the most important highlights of the study?

SG: I think the biggest takeaways would be just the boardroom attention... Most companies now either have a dedicated ESG committee, or they’re delegating those responsibilities to an existing committee. We’re also seeing companies appoint management with ESG responsibilities. When you talk anything about the functioning of a company, governance, it really is addressing the ESG considerations. Like I said, the other thing, obviously, is the emission reporting.

Most companies are doing this voluntarily right now, usually in sustainability reports. That’s Scope 1 and Scope 2, so Scope 3 is a big question mark at the moment. Our expectation is that there will be some form of Scope 3 in the final [SEC] rules. This is contained in the TCFD [Task Force on Climate-Related Financial Disclosures], which the SEC regulatory framework is largely based off of. We think there will be some Scope 3, but the parameters around that remain to be seen.

MR: How do companies with ESG-appointed executives fair in their ESG efforts versus those who haven’t? Is there correlation between metrics such as GHG reporting, etc., and having ESG-dedicated committees, directors or executives?

SG: Yeah, there is a correlation, and the companies that have dedicated roles like this tend to be more intentional with their ESG policies and practices. They’re more thoughtful about anything, like targets and goals. At least internally, they’re being more thoughtful about that.

I think it's fair to say that all companies are really considering these things, and a lot of it is in response to investor demand and requests. Our view is that the companies that have the dedicated committee or the dedicated exec, they're assembling teams to really start ramping up, especially on the climate side, for reporting and other initiatives. It might be that the financial reporting team is starting to take new roles, or they're bringing in new people, or hiring consultants. These companies are dedicating more manpower and resources to ESG efforts.

MR: Do you see limited Scope 3 emissions reporting from producers changing with the proposed SEC regulations?

SG: I think that overall it really depends on SEC's final rule. It’s highly suggestive in the proposed rule that for oil and gas manufacturers Scope 3 would be material, which means it would be required to be reported. I think a lot of companies are closely watching that. I will say in response to the proposed rule, the comment window where the SEC was soliciting formal feedback and comments on the rule-making, this was... if it was not the most, it was certainly one of the most commented-on portions of the regulations.

There’s a lot of concerned companies around Scope 3 and how can you accurately assess this data and compile it and report it. Because remember, Scope 3, you’re basically asking third parties for emission data so the public company can put it all together and report. Even some private companies that are in that position, they have liability concerns with the private data.

"From the prior edition of our Oil & Gas ESG Tracker to the most recently released edition, there has been no change in companies reporting or making net-zero commitments."—Stephen Grant, Haynes Boone

So, with Scope 3, companies must look to their  value chain to report indirect emissions which are outside of their control. The reliability of the data that the public company receives, it might be questionable. That's one point, the reliability and how do we collect all this data? On the value chain, how deep do you go? The second point regards a main tenant of the proposed rule regarding comparability and consistency of disclosure. A lot of folks are saying, ‘Hey. Wait a minute. Scope 3, this isn't comparable. This is not consistently disclosed,’ or that the data just isn't there. Even more so, a well-established framework to try to collect and amass this data does not exist.

I think a lot of folks are saying, too, even across industries, ‘How is that going to be comparable or consistent?’ It’s a real challenge. I think a lot of people are focused on that, and there’s a lot of concern around Scope 3 implementation and the timing of that.

MR: As of right now, less than 25% of the companies surveyed have made net-zero commitments. Similar to the issue with a lack of Scope 3 reporting, do you foresee an increase in the number of net-zero commitments emerging alongside the SEC proposals?

SG: From the prior edition of our Oil & Gas ESG Tracker to the most recently released edition, there has been no change in companies reporting or making net-zero commitments. I think they're still pretty hesitant to do so. There's several reasons why, but I don't know if folks are there yet. One potential cause for concern is there could be a greenwashing inquiry.

The SEC back in March of last year established a task force, looking at disclosures, particularly around greenwashing, and things like this. Some of these same companies are hesitant to publicly disclose a net-zero commitment because they don't want to have to answer SEC inquiries around ‘How do you intend to accomplish net-zero?’

The second reason for this, which I think is actually pretty interesting, is in the proposed rule, the SEC said if you set a target or goal you have to disclose it. And then you have to explain how you're going to achieve those goals, and on an annual basis provide basically an update on how you're doing. It's interesting because in this sense the rulemaking may actually have a chilling effect because of the resulting required disclosure and some companies may say, ‘We're not setting a net-zero or other emissions reduction goal because then we have to disclose it and provide an update on progress each year.’

I think the larger cap companies, there's more of a movement for it. But for small, mid or even to larger independent, I think there's a lot of hesitation, especially around disclosure requirements relating to  targets and goals, and notably net zero.