Delivering effective ESG (environmental, social and corporate governance) is paramount in today’s energy industry. But compliance and reporting transparency varies greatly, despite the increasing proliferation of glossy annual ESG reports.

Here, Alexandra Petrujinschi, Principal Consultant in the sustainability team at Bureau Veritas, and Gabriela Troncoso Alarćon, Senior Experts Services Manager at Enhesa, address some of the issues the energy industry faces.

‘The key issue when it comes to disclosing data is the need to be very honest and transparent,’ says Petrujinschi. She cites the importance of the Task Force on Climate-Related Financial Disclosures (TCFD) introduced by the Financial Stability Board in 2022, which covers the need to provide high quality information on the impacts of climate change, climate-related policy, and emerging technologies.

‘The TCFD has been adopted by many countries as a way to disclose climate-related information with clear targets and measurements for companies in the transition to a low-carbon economy,’ explains Alarćon.

Measuring Scope 1, 2 and 3 emissions is a case in point. Typically, the oil and gas sector is comfortable talking about Scope 1 and 2 measures to cut greenhouse gas (GHG) emissions. But it is cautious about Scope 3 because of the difficulty of assessing the emissions impact of its products on consumers and along the value chain.

Admittedly, some companies have started calculating Scope 3 emissions and have a focus on ‘best available technologies’ to reduce their environmental impact. Not only in the oil and gas sector, but also big gas consumers like steel producers who want to cut CO₂ emissions significantly. Alarćon maintains that most Scope 1 and 2 verification initiatives are well regulated, ‘but measurement of Scope 3 emissions is not very precise’.

‘In my opinion, the term “greenwash” has been a little weaponised against companies,’ she remarks.

However, recent analysis suggests there is room for concern. According to the European Commission, 53% of green claims give vague, misleading or unfounded information, and 40% of claims have no supporting evidence at all.

Fortunately, concerted action is underway.

A flood of legislation   
In March 2023, the European Parliament proposed a definition of ‘greenwash’ under the Green Claims Directive to stop companies making misleading claims about the merits of their products and services. Under the proposal, whenever a product or service claims that it is green or sustainable, it should be backed up with evidence and actual science. ‘For this reason, companies need to understand what are their obligations, what is the context, and what is the impact of their actions,’ says Alarćon.

Petrujinschi confirms that companies want to show ‘they are on the right path’ and ‘want to verify and assure that they are reaching their climate targets, with a high level of credibility to put in front of stakeholders, clients, investors and employees’.

She is convinced that ESG and sustainability go hand-in-hand and are crucial for business. ‘There’s no turning back. At a global level, many countries are issuing green taxonomies, with their own rules for disclosure at corporate level. This is the way for business to become future proof.’

From an international perspective, some countries take ESG more seriously than others. ‘Every area is unique. UK companies tend to be more mature in this journey. While Central European states still have some way to go,’ remarks Alarćon.

What’s more, there is pressure from the banks, investors and corporate headquarters, as well as highly vocal NGOs (non-governmental organisations). ‘It’s a huge change. In the UK, big companies have had a sustainability team for 10 years or so. These teams are now being created in other countries and are moving in the same direction due to legislative pressure from different stakeholders,’ she says.

What’s in the pipeline   
The EU Corporate Sustainability Reporting Directive (CSRD) came into force on 5 January 2023, strengthening the rules concerning the social and environmental information that companies have to report. From 2024 all listed companies and large enterprises must report on sustainability and performance in the European Union (EU).

Even if companies do not come under the scope of the CSRD, they will still have to report about their value chain. ‘No company can say: This is not going to touch me. I will be under the threshold,’ warns Alarćon.

According to Petrujinschi: ‘Big companies have started to embed sustainability KPIs (key performance indicators) in contracts with suppliers, which are monitored and physically audited.’ However, she recognises that in some countries where the data might not be reliable, or local suppliers are unable to provide the correct data, it’s not because of ‘bad intentions’ but may be the lack of sustainability teams to monitor the information.

‘Every company is unique. Some are at the beginning of the journey and some are more advanced, with a history of reporting and analysis of data. Though countries are not at the same speed, they are generally moving in the same direction in the transition to a low-carbon economy,’ remarks Alarćon.

For example, Germany has incentives for companies to conduct energy audits in order to be ISO (International Organization for Standardization) certified and they receive certain tax incentives. While in India, corporate reporting was spurred by major incidents like the Bhopal disaster. In Singapore, new legislation is being put in place which relates to sustainability and climate targets.  

Under the European Green Deal, economic activities that support ESG objectives are seen as key to fostering sustainable growth and unlocking climate neutrality by 2050.

Under the Non-Financial Reporting Directive (NFRD) 2014/95/EU companies must disclose non-financial and diversity information towards greater business transparency and accountability on social and environmental issues. On 23 February 2023, the European Commission (EC) adopted a proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and the amending Directive (EU) 2019/1937 – better known as the Corporate Sustainability Due Diligence Directive (CSDD Directive). The Directive aims to foster sustainable and responsible corporate behaviour in companies’ operations and governance to address the impact of their action including along their value chains and outside Europe.

‘Monitoring and measurement of ESG is vital. If companies don’t follow the regulations and what’s happening around them with disclosure of environmental impacts, they could go out of business.’ – Gabriela Troncoso Alarćon, Senior Experts Services Manager at Enhesa

In addition, there is an EU Taxonomy Regulation which entered force on 12 July 2020 and is an EU-wide classification system for sustainable activities, along with delegated acts and the Sustainable Finance Disclosure Regulation, which is mainly applicable to asset managers, asset owners, banks and insurers.

Farther afield, there is a Sustainable Taxonomy in Mexico, which is one of the first in the world to tackle environmental and social aspects, where the main objective is to ensure gender equality. There are also green taxonomies in Colombia and other countries.

‘It may sound a bit complicated,’ admits Alarćon. ‘It’s no longer simply a matter of monitoring greenhouse gas (GHG) emissions or non-GHG operations, but also about improving packaging, certifying paper and water consumption, for example.’

‘Monitoring and measurement of ESG is vital. If companies don’t follow the regulations and what’s happening around them with disclosure of environmental impacts, they could go out of business. Companies tended to have financial accounts and a sustainability report. But now with the CSRD this information should be in the same report,’ she says.

At a global level there are international financial reporting standards (IFRS) which cover accounting standards in over 170 countries. Increasingly, ‘your sustainability report has to match your financial accounts, subject to the same level of scrutiny, with third party verification’, comments Alarćon.

There is also pressure from peers, adds Petrujinschi, ‘with benchmarking so companies don’t lose competitive advantage’.