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Exclusive Article

ESG criteria and the Oil & Gas market, by Antonio Augusto Reis, Adriana Moura Mattos and Gabriela Trovões Cabral

04/16/2021 | 09h03
ESG criteria and the Oil & Gas market, by Antonio Augusto Reis, Adriana Moura Mattos and Gabriela Trovões Cabral
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The transition to a low-carbon economy has driven changes in the energy industry around the world. For this reason, discussions about energy transition including the Oil & Gas sector have increased, especially under a perspective of sustainability and concerning environmental, social, and governance criteria — also called ESG.

 

The low-carbon economy has been a broadly discussed topic since the Eco92 — United Nations Conference on Environment and Development, in 1992 — and in recent decades, the international community has made positive commitments to reduce the emission of greenhouse gases, such as the Kyoto Protocol (1997) and the Paris Agreement (2015). But there are new nuances to the debate, especially regarding the regulation of carbon offsetting and trading mechanisms, the 2030 Agenda (Sustainable Development Goals), and the growing interest in ESG criteria by investors and society.

 

Since 2020, companies have driven their agendas towards positive commitments. One of the steering forces to this change was the publication of Larry Fink's annual letter to the world's CEOs in January 2020. The CEO of BlackRock recognized climate change as a decisive factor in long-term economic activity and brought attention to the urgency for structural change in finance to understand the changes as an investment risk. Beyond mere reflection, BlackRock has set the trend by putting sustainability at the center of investment decisions.

 

Therefore, the adoption of ESG criteria can be seen as an opportunity by Oil & Gas companies. ESG criteria are applied in business planning and help identify, manage, and mitigate the risks inherent to an industry's activities. They are intersectional and appropriate to the reality, business performance, and the locations and communities where each company operates. Adopting ESG criteria allows greater resilience for the business while promoting an adaptation to market trends.

 

For the next five years, especially given the post-Covid-19 pandemic context, the World Economic Forum signals challenges such as an increase in extreme weather events, prolonged economic stagnation, commodity price shocks, among others, which will require even more resilience from companies and a more interdisciplinary and innovative approach to their businesses. Also, according to S&P, the main ESG risks in the Oil & Gas industry go hand in hand with the energy transition, given the increased market appetite and the interest of regulators in the low-carbon economy, which makes these stakeholders more alert to the risks and socioenvironmental impacts of the activity.

 

These risks are added to the industry's traditional challenges, meaning that the issues of interest to the sector are becoming broader and more complex, not just being replaced. The need for technological innovation to solve the growing complexity of transactions, social disputes arising from the implementation of infrastructure, price fluctuations in the market, and the demand for greater transparency are traditional challenges that can also be addressed from an ESG perspective.

 

The ESG path is certainly not simple, but in addition to clearly showing the company's weaknesses and strengths, it presents relevant competitive advantages in the long term. In 2020, 81% of the companies listed in sustainable indexes outperformed the benchmark indexes, according to research by BlackRock. This happens because ESG metrics aim to contemplate all stakeholders equitably, combining financial performance and investment security with the proper management of environmental impact and the continuous improvement of working conditions, meeting the wishes of the impacted communities, and good operational performance and adaptability. Considering this scenario, it seems unquestionable that companies that structure and implement serious and effective ESG integration processes will prosper in the medium and long term.

 

About the Authors 

Antonio Augusto Reis, partner at Mattos Filho - Holds a degree in Law from the Pontifical Catholic University of Rio de Janeiro (PUC-Rio) and a Master's degree in Environmental Law (LL.M) from Pace University School of Law (USA). Reis works in the areas of Environmental, Litigation and Arbitration and ESG in topics related to consultancy and environmental litigation, M&A operations, audits, project structuring, environmental licensing processes, consultations and opinions in general.

Adriana Moura Mattos, associate at Mattos Filho - Holds a degree in Law from the Federal University of Bahia and a Master's degree in Management and Public Policies from FGV. Mattos works in the areas of ESG and Civil Society Organizations, Social Business and Human Rights.

Gabriela Trovões Cabral, associate at Mattos Filho -Holds a degree in Law from Mackenzie Presbyterian University. Cabral works in the areas of ESG and Environmental Law.



Font: Antonio Augusto Reis, Adriana Moura Mattos and Gabriela Trovões Cabral
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