The big picture: The Earth Day movement has been instrumental in evolving efforts to reduce greenhouse gas emissions (GHG) and other pollutants around the globe, resulting in increasing demands for a more transparent energy and utility (E&U) industry.
What you should know: As part of the evolving Earth Day dynamic, federal agencies, states, and private investors and other stakeholders are adopting regulations, laws and business policies requiring E&U organizations to disclose how much risk their operations pose to the climate and mandating mitigation measures.
The bottom line: Phase-in periods and litigation are giving E&U organizations valuable time to prepare for the changes. But to avoid corrective actions or reputational damage in the future, now is the time to establish processes and procedures.
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When Earth Day premiered on this day (April 22) in 1970, the grassroots environmentalists who organized it aimed to leverage the energy of the anti-war movement on college campuses to protest pollution. What they wound up with was a much broader coalition of organizations that garnered national attention.
Consequently, Earth Day has evolved into a well-orchestrated effort dedicated to encouraging sustainability and, more broadly, fighting climate change. Over the years, its tenets have helped lay the foundation for the global environmental, social and governance (ESG) movement, and more specifically from an E&U perspective for phasing in renewable energy.
(For more about sustainability and related matters, Protiviti has issued a Sustainability FAQ guide to answer the myriad questions companies may have — from strategy to materiality to data.)
Acknowledging Change
Recognizing an evolving compliance environment and efforts to create a lower-carbon future, energy companies are collaborating with various governments and organizations to find ways to contribute to sustainability given their high emissions profiles. These include providing more transparency into their operations to satisfy stakeholder pressure and comply with a number of emerging initiatives.
Some of these are directly targeting specific segments of the E&U industry, such as oil and gas. Late last year, for example, the Environmental Protection Agency finalized a rule that will require the oil and gas industry to reduce methane emissions and toxins.
Meanwhile, the U.S. Securities and Exchange Commission (SEC) recently adopted its long-awaited climate rule that would require all publicly traded companies to disclose climate risks, GHG emissions and related matters in their financial reports. The rule is currently on voluntary hold pending the resolution of lawsuits from the right and left: Republican-led states and fossil fuel interests argue that the regulator overstepped its authority while environmental groups complain that the commission did not exercise enough of its authority. The SEC has promised to defend the rule.
The federal government is hardly alone in crafting climate rules. California last year enacted its own climate-risk disclosure law for certain companies that is thought to be even stricter than the SEC’s — with vague definitions suggesting that those having only tangential business connections in the state will be covered. That measure, too, is being challenged in court, although some of the largest California-based firms support the law.
Pressure for more transparency is also coming from private interests. Investors and other stakeholders, including customers and suppliers, increasingly want or need to know whether — and how — companies that they are partnered or doing business with are pursuing sustainability.
Compliance Challenge
Satisfying mounting mandates in the United States — and around the world — will challenge many E&U organizations, particularly those that have been slow to embrace digital transformation or need guidance to realize its full potential. But compliance also helps E&U firms transition to a state of greater resiliency while demonstrating their commitment and transparency. In turn, that can enhance their reputation as stewards of the environment and help them attract ESG-oriented capital and customers.
While E&U organizations are likely to have varying ESG experience and capabilities, they do have a little time to digest the new requirements. Even before pausing its rule, the SEC’s timetable provides a phase-in compliance period for companies, as do the EPA and California measures. However, given the complex global compliance environment (including the European Union’s Corporate Sustainability Reporting Directive [CSRD]) and other industry challenges, it is wise to get started sooner rather than later.
In an earlier Protiviti blog, we provided CFOs with guidance on how to prepare for ESG reporting, from creating a plan to integrating sustainability into everyday culture. As part of the approach, companies must determine where to start gathering data, how to collect and verify it, and how to properly categorize it for reporting purposes. Are processes and controls in place to identify and extract all relevant data without compromise? And are the data gathering and consolidation efforts flexible enough to parse the information to satisfy the interests of different audiences?
Here are a few reporting topics that oil and gas companies, in particular, should consider as deadlines approach:
- Direct Emissions — Much of the disclosures required will be based on volumes of oil or gas processed and the estimated or measured emissions released at various points along the system, such as flares, valves, flanges, pumps and compressor seals. Because production volumes are directly tied to the financial performance of an E&U company, the information needed to make these calculations should be some of the most readily available and accessible. Organizations will need to take a similar approach when estimating emissions from other processes, such as diesel or gas-powered generators and other combustion units.
- Indirect Emissions — Most companies’ primary indirect emissions relate to the purchase and consumption of electricity for their operations. By way of example, companies will need to gather invoices from their various power providers and sum the kilowatt hours purchased each month. Depending on the size of the organization, this undertaking could span dozens if not hundreds of locations. Companies that lack automation are at a greater risk of error, as well as wasting valuable time tracking down information that could be put to better use elsewhere.
- Maintenance — Typically, E&U organizations are required to report on equipment malfunctions, leaks or other issues during operations that necessitate repairs. Consolidating this data and using it to estimate the environmental impact of the failure can be a difficult task for oil and gas companies because many tend to outsource inspection and maintenance activities. Considering that such third parties may not fully grasp the need to keep detailed records to allow the company to paint an accurate picture, increased collaboration or training may be required.
Start Today
More than 50 years after the first Earth Day introduced a new way to think about the planet, the ideals espoused that day are now guiding regulations, policy and corporate behavior in many places around the globe. But as much as governments, environmental groups and other organizations want to dial back or eliminate the use of fossil fuels, the world will still depend on them for the foreseeable future.
Still, the list of environment and disclosure requirements will almost certainly continue to grow, placing further importance on the ability of E&U companies to employ thoughtful, well-organized and nimble data-harvesting strategies to facilitate the needed transparency and enable change. We believe that the sooner organizations embark on this activity, the better. Those that successfully prepare today stand the best chance of gaining an advantage over competitors who are slow to respond tomorrow.
