Private equity companies focused on upstream investment based in places like Houston have not faced pressure from their investors to show environmental stewardship in their portfolio. That is changing.
Both of these things are true:
1. International oil and gas majors are contorting themselves under shareholder pressure to respond proactively to climate concerns.
2. Privately held oil and gas companies have largely remained immune to financially-backed pressure for environmental stewardship.
The problem:
Investors in privately held companies are facing new pressure from institutional investors on environmental standards, particularly related to climate. Their individual investors are increasingly interested in holding their portfolios to some kind of “green” standard, often referred to as sustainable or responsible.
An investor’s motivation can range from climate activism to managing infrastructure risk in the event of extreme weather, and many things in between. Just last week, Moody’s announced a “framework to assess carbon risk” including policy vulnerability. As a result, of these drivers, the institutional investors are passing those expectations on to their portfolio companies, including oil and gas private equity firms. The private equity companies are going to pass them along to you.
Today, you will most often hear these efforts described in the short hand “ESG” for “environmental, social, governance.”
The first volley comes as a checklist or interview process. The investing world has not settled on a common name, approach, or scope — so companies often must respond to queries in different forms. An entire consulting world has sprung up to both assess companies and help them improve their score, often using a one-size-fits-all checklist approach.
For oil and gas, the trend began first in western Europe, trickled into Canadian oil and gas, and is now coming to an investor in you. Some more sophisticated investment entities began tracking the carbon intensity of their investment portfolio a few years ago. Although their approaches are confidential, you can get a feel for this kind of assessment following Adam Brandt’s work at Stanford.
The availability and cost of capital will increase for companies slow to embrace a proactive ESG strategy. From sustainability checklists to proactive decarbonization strategies, investors are going to expect your company to have a philosophy and an execution strategy. According to the WSJ, in 2018 U.S. money managers overseeing $11.6 trillion in assets considered ESG criteria.
The critical mistake companies are making:
1. Dismissing the trends as irrelevant to them.
2. Reacting in a one-off fashion when the requests begin.
3. Relying on “checklist” ratings agencies and consultants to repackage their current operations in the expected ESG narrative.
Seize the day. Successful companies will
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Query your investors: Are they getting this kind of pressure? If yes, what are the expectations of their portfolio companies?
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Conduct a series of board- and executive-level risk assessment sessions to understand the external pressures coming to you. I provided an overview of 7 areas to assess in the last installment of this series.
- Chart an authentic, unique, and proactive path. Repackaging current operations will not get your company ahead of what’s coming in the way of ESG expectations.
- Align the plan with your company’s values and culture, driving the values and culture where required to meet the incoming expectations of the company.
Privately funded investment is a varied and complex subject area — hit reply and let me know your experiences. With your permission, I’ll share excerpts with our audience.
