Investors and other key stakeholders increasingly expect robust and rigorous environmental, social, and governance (ESG) reporting from corporations as part of a drive for greater transparency and disclosure about the full range of company impacts and the consequences of ESG factors, such as climate change to future financial performance. These demands are particularly acute for the oil and gas industry as societies across the globe face the need to transition toward a lower-carbon economy with the ambition of sustainable, healthy, safe, and inclusive recoveries from the current COVID-19 economic downturn.
A critical component of this growing demand is a clear step change in the weighting that investors and other stakeholders give to ESG factors as indicators of company performance and the ability to preserve and create value in the long term. Whether from investors, lenders, future employees, or customers, the demand for corporate transparency and commitment to sustainability goals, aligned to commercial and financial performance, has gathered significant pace over recent years.
While ESG reporting remains largely voluntary, assessing corporate sustainability management and performance is seen as an essential part of an investor’s remit. Last year, research published in the Harvard Business Review noted, “The impression among business leaders is that ESG just hasn’t gone mainstream in the investment community. That perception is outdated.” This mainstreaming, and the increased demand for transparency, are exemplified by statements from Larry Fink, the chief executive officer of Blackrock, in his most recent annual letter to other chief executive officers. These messages focus on the fact that climate risk—and ESG more generally—is central to investment risk and that investors need robust, comparable, and decision-useful information from companies.
The largest corporations have rapidly adapted to this new reality, with the number reporting on ESG issues or climate-related financial risk going from only 20% of S&P 500 companies a decade ago to almost 90% now. Reporting by smaller and mid-sized public companies, however, is yet to reach the same level.