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Gas, Oil Investments Likely to Face Greater ESG Scrutiny

Copyright © 2021 Energy Intelligence Group

President-elect Joe Biden’s administration is expected to place oil and gas investments under tougher scrutiny, particularly by requiring stronger analysis of climate risks. Biden's appointees to the independent Securities and Exchange Commission (SEC), for example, may raise the bar for climate risk disclosures by requiring more details in financial filings. "There is potential for the SEC to take a very different approach to how it regulates disclosures from the oil and gas sector and the industry should prepare for real change," says Andrew Logan, director of oil and gas at sustainable investment coalition Ceres. Pressure is also coming from within, as the US gas industry learned in October with a stern warning from institutional investors: take environmental, social and corporate governance (ESG) seriously or be prepared to suffer the consequences (NGW Oct.26'20). Biden's Departments of Labor and Treasury may also clear the way for investor activism around climate risk disclosure or other ESG concerns. “The issue of climate risk disclosure -- or the lack of disclosures -- has become more important to the largest investors," Logan says. "We are going to see much more pressure under a new administration for a more aggressive approach to regulating disclosure than what we have seen in the past.” For the SEC, a starting point could involve breathing new life into climate risk guidance rolled out 10 years ago under Chairman Mary Schapiro, an appointee of former President Barack Obama. The 2010 guidelines had urged companies to consider impacts to their bottom line from climate-related legislation, regulation, international accords and physical climate risks such as rising sea levels. Some companies followed the guidance in greater depth than others, and some ramped up disclosure as a public relations exercise but didn't publish the same level of detail in their official financial filings. In the years ahead, the SEC may come down harder by issuing guidance that is mandatory or more detailed. Although the SEC is an independent agency not bound by White House directives, Biden would appoint the next chairman and would eventually have the opportunity to bring the commission to a 3-2 Democratic majority. Currently, Republicans hold a 3-2 majority. The commission cannot have more than three members from a single party. Much potential exists for the SEC to bring uniformity across the climate disclosure practices of oil, gas and other fossil fuel companies. ConocoPhillips, for example, offers some of the most thorough disclosures, while its rivals offer much less detail, Logan said. In particular, the agency could encourage or require companies to be more transparent on the oil and gas prices they are assuming in their forecasts and planning. That’s a concern because strict carbon controls would presumably cause oil prices to drop in line with falling demand. “All of the European oil companies disclose their oil price assumptions, and I don’t think a single US company does,” Logan said. Tougher disclosure under a new administration “isn’t all necessarily bad” for oil and gas companies because it may help the industry survive as the economy decarbonizes, Logan argued. “This isn’t an industry that thrives in a world of lax regulation.” Any new rules could take 12-18 months for the Biden administration to complete. Yet “the prospect of such requirements could affect capital costs in the near term, as financial markets consider the risk and impact of future cost-of-capital increases,” says Neelesh Nerurkar, a policy expert with consultancy ClearView Energy Partners. Tighter disclosure rules tend to be seen by Republicans and conservative business leaders as an infringement on the free market. In this vein, President Donald Trump’s administration has taken several steps to shield businesses from investor climate activism, including some last-minute pushes before Biden takes office. For example, the Department of Labor is drawing up a rule that would limit shareholders from considering “unrelated objectives” in decision-making on the direction of retirement plans. Essentially, this would make it more difficult for shareholders to consider ESG criteria in selecting investments. Further, the Office of the Comptroller of the Currency, an independent Treasury agency, recently said it is developing a rule ensuring coal projects and Arctic oil and gas projects aren’t blacklisted from financing. The regulation would require banks and savings associations to provide “fair access to financial services,” the proposal states. Biden appointees would naturally try to reverse such actions, and may move in the opposite direction by encouraging greater attention to ESG considerations. Lauren Craft, Washington

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