June 2021 /// Vol 242 No. 6

Columns

The ESG perspective

As this is the introductory column on Environmental, Social and Governance (ESG) concerns, I would like to first discuss some of what brought us to where we are today. Many will tell you that a book by David Jones, Who Cares Wins, first published in 2011, started the latest drive for responsible investing that progressed into responsible management of corporations.

Mark Patton, Hydrozonix

As this is the introductory column on Environmental, Social and Governance (ESG) concerns, I would like to first discuss some of what brought us to where we are today. Many will tell you that a book by David Jones, Who Cares Wins, first published in 2011, started the latest drive for responsible investing that progressed into responsible management of corporations.

Prior to that, though, was the Who Cares Wins 2005 conference, sponsored by the World Bank, which focused on responsible investing. “Who Cares Wins” was a mantra being used for responsible investing and business practices, well before the David Jones book. In 2006, the United Nations published a report called, “Principles for Responsible Investing,” which began developing guidelines for investing responsibly. Then there was the infamous “Dear CEO” open letter from Larry Fink, Chairman and CEO of BlackRock in 2018 calling on corporate social and environmental responsibility. This should have been the alarm bell to many industries that investment decisions were changing.

Then, at Davos 2020, the World Economic Forum (WEF) and International Business Council (IBC), then led by Brain Moynihan, CEO of Bank of America, along with Deloitte, PwC, KPMG and Ernst & Young, the Big 4 accounting firms, announced they were developing Stakeholder Capitalism Metrics, to better establish responsible investing guidelines to support ESG principles. In January 2021, in Geneva, Switzerland, 60 companies signed on to the Stakeholder Capitalism Metrics, including oil and gas firms—BP, Eni, Ecopetrol, Equinor, Repsol and Royal Dutch Shell. Since then, ExxonMobil has had upstart activist hedge fund Engine No. 1 get three board seats with the help of BlackRock and others. The investment community will be heard, and ESG will become part of everyday oil field life.

So, what is ESG? In simple terms, it is acting environmentally responsibly and providing a positive contribution to society and your employees, while providing employees a safe workplace, free of discrimination, and the governance of these activities. The next question is why is ESG so important today, especially within the oil and gas industry? Many people say that’s the problem, that we (industry) don’t get it, that the focus has been profits and not ESG issues, which has led to what some might call an investor revolution.

I do believe that oil and gas check the right boxes, but we have had a poor record of reporting on successes. I also see a reluctance by many companies to accept that the environment matters, and we should do more. The reason people are paying attention to ESG is that investment in our industry has decreased significantly. If we want to see investment return, we better get our ESG act together.

What does “getting our act together” mean? Well, let’s start by reducing emissions and carbon footprint, where we can. One big bullseye is flaring—let’s take this issue seriously and do what we can to take a wasted resource and make energy. Just as we developed a way to evaporate produced water, there are obstacles here, but we have been an industry that rises to challenges, and I expect the same here. Pipelines versus trucks is already happening, and that brings with it a 90% reduction in emissions.

What we can’t do is not take ESG seriously. As an example, emissions are classified as Scope 1,2 and 3:

  • Scope 1 is direct emissions from your operations, under your control
  • Scope 2 is indirect emissions from power generation that you purchase
  • Scope 3 is indirect emissions from all other sources you don’t own or control.

Only scope 1 and 2 emissions are reported for public companies, and scope 3 is the largest category of emissions. So, where we can make the greatest impact is scope 3, but we don’t have to report it. In theory, you can subcontract your flare gas management to a midstream firm, and depending how you structure the contract, these are no longer Scope 1 emissions—you just made a huge impact to your ESG profile by doing nothing.

People see right through these tactics, and we deserve the bad reputation we have unjustly been tagged with, if we pursue these efforts. There is a push trying to force public companies to start reporting scope 3 emissions, which would eliminate this loophole. As an industry, we shouldn’t push back—transparency is the key to get back public acceptance.

Most oil majors have made bold announcements to reduce emissions or their carbon footprints; even Shell made the news recently, announcing it is considering selling its Permian assets. It is suspected the reason is to reduce their overall emissions. A recent Dutch court ruling requires Shell to reduce carbon emissions 45% by 2030, which could be part of the firm’s motivation to sell its Permian assets. You get the picture—we need to embrace the ESG movement and accept the reality that these issues must be taken seriously, or we will be forced to.

My last thought on this introductory ESG column is “how do we measure success?” This will be the next challenge. The world has taken a very non-technical, unscientific approach to carbon footprint. I hear all the time, “I put up solar panels, and I’m carbon zero,” or “I bought an electric car, and I’m carbon zero.” Well, let me tell you, buying an electric car or solar panels has a carbon footprint, and the question should be, “how many years do I operate these systems before I offset my carbon footprint.” Unfortunately, the term, “Carbon Zero,” is used very loosely. Who is going to decide what Carbon Zero is, and when we achieve it? How will the process be certified, and who will certify? Today, going Carbon Zero is like saying I’m going to be a better person. It sounds nice, but “how do you measure success?”

The Authors ///

Mark Patton is president of Hydrozonix and has more than 30 years of experience developing water and waste treatment systems for the oil and gas industry. This includes design, permitting and operation of commercial and private treatment systems, both nationally and internationally. He has seven produced water patents and two patents pending. He earned his B.S. in chemical engineering from the University of Southern California (USC) in 1985.

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