Future-proofing energy companies against rising social risk
WHAT TO WATCH – SEVEN EMERGING FRONTS
May 15, 2019
What to Watch – Seven Emerging Fronts (If you’re new here and missed the first installment of Both of These Things are True, you can catch up here.)
The external financial pressures on oil and gas companies are increasing on multiple fronts. Chances are, you aren’t watching all the levers you should be.
Both of these things are true:
Most North American oil and gas companies are operating with an eye to the normal business factors that affect success, such as oil price and development costs.
Easy-to-dismiss activist pressure has begun to push multiple relevant political, regulatory, and financial levers, changing the factors that will affect company success over the next 24 months.
The problem: Seven relatively new financial fronts have opened up in the climate- and anti-fossil fuel wars – and they are gaining traction independently and in concert.
Whether you are operating in a privately-financed or publicly traded company, these pressure points will affect your company’s social risk. (At Adamantine, we define “social risk” as the combined political, policy, and community factors that could delay, increase costs, or stop your project.)
Here are the seven fronts we are watching:
Meet portfolio requirements. In private financing, there is a growing interest in creating “responsible” portfolios. These may include environmental, social, and or governance (ESG) factors and may be assessed in one of many “ratings” programs. The social risk management demands vary, but follow a few predictable themes around decarbonization, social justice, and governance transparency.
Negotiating unique ESG requirements. Publicly traded companies are increasingly negotiating with large shareholders or shareholder groups, both of which are making unique ESG demands. Both Shell and Equinor recently made significant commitments to addressing decarbonization in direct response to shareholder pressure. Even if your company is small or privately held, these are trends you should watch. This Forbes opinion piece lays out the rise of ESG prominence in investing.
Divest success. The divest-from-fossil-fuels movement – once isolated to college campus clubs – now celebrates commitments from large pension funds, academic institutions, cities, and states. Washington, D.C. for example, divested it’s $6.4B municipal pension fund of fossil fuels in 2016. Just last month, our very own Denver made its own divest commitment.
Shareholder resolutions. Resolutions focused on climate, methane, and decarbonization are both growing in frequency and success rates. Since 2017, these have increasingly succeeded in driving U.S. exploration and production (E&P) companies to take on specific climate assessments and goals. For example, an initiative targeting Oxy on climate and methane in 2014 had 30 percent support. By 2017, it passed by 67 percent. Since then, numerous climate-related resolutions have passed, including for Anadarko, ExxonMobil, and Shell.
Public figure opposition. When the movie “Gasland” first came out, I (along with many of my peers) articulated its many factual errors and waited for it to die a lonely death. It did not. Since then, anti-fracking fictional movies, public figure statements, and presidential candidate positions have all normalized an anti-fossil environment that does, indeed, affect your social risk. I sadly gave up my crush on Matthew Damon when Promised Land came out in 2012. Although Artists Against Fracking hasn’t done much since 2014, actor Mark Ruffalo’s Twitter feed shows how the conversation has morphed to climate and clean energy.
Aspirational regulatory changes. New York banned fracking; California declared a decarbonization agenda without a plan to attain it. Even in its amorphous state, the Green New Deal has changed the expectations of Democratic presidential candidates. Sweeping, aspirational regulatory proposals and changes move the public’s understanding of energy and environmental reality. A recent report, covered here by Axios, maps a path forward for California, and maybe the rest of us?
International development institutions. Organization such as multilateral development banks (i.e., the World Bank), are increasingly driven by climate and decarbonization agendas. For example, at the end of 2017, the World Bank committed to no future investment in E&P activity, covered here. This global appetite for putting energy development under climate constraint further informs the public’s expectations of the energy future.
It matters because: Even if financing activists do not meaningfully hit your company’s bottom line, they are driving public opinion that impacts politics, policy developments, regulatory approvals, and community opposition.
The critical mistake companies are making: Treating financial activist efforts as irrelevant noise, or, when targeted directly, responding in one-off reactionary exercises.
Seize the day. Successful companies will
Assess their exposure on these fronts – not just direct exposure (such as having your pipeline targeted by a Hollywood celebrity) but also secondary potential, such as regulatory changes in a neighboring state coming soon to yours.
Monitor activities targeting the international majors, and increasingly the large independents, assessing where similar fronts may open up for your company.
Consider the components of a comprehensive, proactive response. If your company were to be targeted by a decarbonization shareholder resolution in a year, what would your team do now to be ahead of the expected response?
There are many levers affecting a company’s comprehensive social risk that you need to keep an eye on. I will take each as a separate installment over the next 7 weeks, covering what we at Adamantine are watching and why. This series will help you assess your risk and consider the unique elements of your company’s comprehensive, proactive response.
You’re experts as well – let me know what I’m missing, and what you want to know more about.