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Energy and ESG: Navigating an evolving future

RFP
Gold mining With consumers, governments, regulators, and investors focusing on climate change, energy companies are working to address related key operational and reporting objectives. The SEC is poised to release a proposed rule in the coming months on climate change disclosure and is actively commenting on climate change disclosures (or lack thereof).

Institutional investors are also increasingly raising their expectations related to the climate-related financial risk to their investments, as well as other priority environmental, social, and governance (ESG) topics. They are asking not only which companies are most likely to deliver higher returns but also how resilient their investments are and how much they contribute to positive societal outcomes.

Situated as both a catalyst of climate change and the figurative key to a clean energy future, this is an opportune moment for the energy industry to embrace ESG as an action-oriented framework toward sustainability and resilience.

To help energy companies plan proactively for upcoming regulatory action and increasing pressure from investors, Angela Jhanji, Grant Thornton ESG and Sustainability Services director, led a panel discussion on ESG and the energy sector at the recent Grant Thornton Energy Symposium. The consensus among panelists: You don’t have to be perfect, but let the public know what positive steps you are taking to show that your company is making progress. The following represent highlights from the panel discussion.

Investors call for increased ESG disclosures Interest in clean energy goals has ramped up substantially and the stakes are rapidly changing as both stakeholders and investors are looking for more information around ESG efforts. Energy companies of all types and sizes are facing questions about sustainability. Energy companies can respond to inquiries by highlighting their strengths and areas in which they are making progress on clean energy and other ESG topics.

Developing a cogent narrative about clean energy accomplishments and future ambitions is an effective response to an investment community that has become increasingly suffused with more generalists over time. This environment, in which investors cover a wider range of industries than in the past, makes it more important for organizations to convey a clear position on clean energy. In order to facilitate understanding and stay ahead of investor expectations, the onus falls to energy companies to disclose the steps being taken – or those which are not – and the decision-making underlying those actions. While not all investors will be satisfied with current levels of investment in clean energy and ESG, organizations should begin outlining their clean energy and ESG trajectories and sharing them with shareholders. Even if plans are not fully established, partial progress beats surprises.

What to expect from the SEC The SEC is expected to issue a proposed rule on climate change disclosures in late 2021. SEC Chairman Gary Gensler has indicated the proposed disclosures will include both quantitative and qualitative disclosures on climate change. Companies, particularly those with material risks and opportunities related to climate change, should monitor the SEC’s activity and provide feedback on the proposed rule.

Even in the absence of rule-making, in late September, the SEC’s Division of Corporation Finance (CorpFin) released a sample letter illustrating comments that CorpFin staff might issue to companies related to climate-related disclosures. Drawing from the SEC’s 2010 guidance, which explains how the impacts of climate change may require disclosures under the SEC’s existing requirements, the sample comments in the letter illustrate how the staff may apply that guidance in the comment letter process. Registrants should review the guidance and update their upcoming filings as the staff is actively issuing comments.

In addition, in preparation for proxy season, energy companies should articulate how they are addressing climate related risks and opportunities, as shareholders are likely to demand answers. Accordingly, energy companies should evaluate salient climate-related risks and opportunities, plans related to climate change and net zero ambitions, exclusions to the goals being established, and the processes through which data and information will be collected to substantiate disclosure.

Companies seek clarity Across energy efficiency, renewable energy, and natural gas industries, many players support the SEC’s anticipated new regulations related to climate change disclosures. However, they have expressed a desire to see the agency consider three factors in its new guidance:

  1. Allow for flexibility. In a fast-changing marketplace, having the ability to adapt and be flexible over time is important to successfully implementing new rules or regulations.
  2. Ensure that the information required is relevant to investors.
  3. Remember that while many types of businesses are energy-related, they can be very different. In turn, accepting both qualitative and quantitative information will allow energy companies to tell their story in terms of the broader economy, not just the energy industry itself.

As rings true across industries, data quality entails both sufficient time and attention to process. Companies take a variety of approaches to collecting concise, relevant information. As they anticipate responding to potential disclosure requirements or data calls from investors, energy companies should start early. It can take multiple reporting cycles to develop data sets and determine if the figures tell investors what they need to know.

Beyond climate change – human capital management In addition to reducing carbon emissions, another prominent ESG focus area is human capital management. Within this umbrella, the concept of diversity, equity and inclusion (DE&I) is receiving increased attention from employees to the board room. Amidst a turbulent workforce and generational shifts, DE&I issues present challenges for many energy companies, particularly as long-time industry employees retire. There remains a significant need for qualified workers to fulfill industry needs and build careers, as well as a desire for employees to mirror the populations that energy companies serve as customers.

Industry players expect that energy companies will soon have to provide information about the diversity of their workforce and their boards of directors, as well as employee turnover rates and a breakdown of full-time and part-time employees. While there is some acknowledgement that the energy industry has work to do related to DE&I issues, human capital disclosures can be helpful, if, for example, a company can point to its culture and safety record. Many energy companies have adopted strong governance and practices to preserve worker safety. Highlighting these actions in initial disclosures while establishing baselines and working to improve around other human capital priorities, like DE&I, will foster sought-after transparency from investors.

Planning ahead Whatever path the SEC decides to take with respect to climate change and potentially broader ESG disclosures, energy companies should start now to determine what they want to accomplish and who will take charge of that effort; to determine what type of data they need and how to collect the data across annual cycles; to set policy controls; and to publish results. Energy companies are talking about ESG, whether asking questions about tightening regulations around emissions, expectations for net zero targets, or holding ESG conversations in board rooms. Furthermore, it is clear that investors are playing a big role in the voluntary disclosure environment and placing higher value on organizations and companies that have clear ESG practices and goals as they make portfolio decisions.

For more on these topics, listen to Grant Thornton’s webcast “ESG & the Energy Sector: Navigating an Evolving Future” here.

Contacts:

Angela Jhanji
ESG & Sustainability Services Director,
Grant Thornton
T +1 202 250 0463

Andy Brown
Partner, Audit,
Grant Thornton
T +1 918 877 0863

Marjorie Whittaker
Managing Director, Audit,
Grant Thornton
T +1 202 521 1535