The Impact of ESG on National Oil Companies
The rise of ESG investing—investment focused on environmental stewardship, social responsibility, and corporate governance—in the 21st century has created significant pressures on oil companies. Some shareholders of international oil companies (IOCs) have pressed them to pay closer attention to ESG goals and diversify their business models away from hydrocarbons and into other sources of energy amid efforts to address greenhouse gas emissions.
National oil companies (NOCs)—which currently control about 50 percent of the world’s oil production—have different corporate mandates than their IOC peers that might imply a more complicated relationship with ESG goals. NOCs are mainly owned by governments in the developing world, and thus face vastly different demands than IOCs answering to private sector shareholders. But different does not mean NOCs do not or will not feel pressure to address ESG issues.
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Given NOCs’ significant share of global oil production—and the fact that this share may increase as IOCs diversify—the pressures they face and changes they make could have a significant impact on the future of the oil and gas industry as well as countries’ abilities to meet climate goals. During the November 2021 COP 26 meetings in Glasgow, Saudi Arabia and India became the latest countries with strong NOCs to pledge to reach net-zero greenhouse gas emissions in the next decades.
This commentary examines how the ESG agenda is impacting NOCs through the ecosystem of organizations and principles that have emerged from the UN’s Sustainable Development Goals and the Paris Agreement as well as from investors and regulators in global financial markets.
The piece then describes the three components of the ESG framework in relation to NOCs and the challenges of accurately measuring adherence to them due to insufficient standardization of metrics and the variety of reporting frameworks. Also, because environmental, social, and governance competence are not strictly related to one another, companies may be strong in some areas and weak in others, making it difficult to evaluate their ESG performance as a whole. Finally, while ESG pressures are coming alongside discussions about the energy transition and climate change, ESG assessments do not evaluate companies’ energy transition plans, even if some aspects of ESG scores might provide insights about them.
The commentary pays special attention to the importance of corporate governance for national oil companies in achieving overall ESG goals, given the key differences between their ownership structure and that of private sector companies working in the oil industry.
The rest of this commentary by Dr Luisa Palacios, senior research scholar at the Center on Global Energy Policy at Columbia University, can be read here.
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