ESG is not a black box

Investors and consumers today base important decisions on ESG performance. Blackrock, an investment management company, recently reported that from January to November 2020, investors in mutual funds and ETFs globally invested $288 billion in sustainable products – a 96% increase over 2019.

Expectations are changing on a lot of levels. In June 2021, a Dutch court ruled that Royal Dutch Shell must reduce its CO2 emissions by 45% from 2019 levels by 2030. This reduction goes beyond Shell’s own operations, extending to the energy products it sells.

The same day, a minor shareholder in ExxonMobil made climate change a focal issue for the board of directors, forcing the removal of several board members. And at Chevron, 61% of shareholders recently voted in favor of a proposal to cut emissions generated by the use of the company’s products.

Soon, regulators will be demanding evidence of compliance as well.

This changing operational landscape dramatically impacts the importance of ESG accounting. What used to be a side note is now front and center.

The challenge for most companies is that this type of accounting is new, and many are having a tough time figuring out what to measure and where to start.

Nobody wants to be accused of greenwashing, but without metrics, it is hard to report accurate verifiable numbers of improvement to a company’s performance. The struggle is real, and the consequences of failure can be damaging to the company’s reputation and detrimental to their bottom line.

On the other hand, companies that are successful in documenting ESG stand to benefit in multiple ways. They improve their brand, they position themselves to obtain federal tax credits, and they can put a premium on the products they sell.

Quantifying ESG improvements might seem like a daunting challenge, but it is not mission impossible. Although traditional approaches won’t work in today’s complex operating environment, the good news is that accurate accounting is achievable. Many companies have already implemented successful programs in as little as 60 days.

When the only tool you have is a hammer, every problem looks like a nail

Estimating potential emissions using spreadsheets has too many limitations, but for some companies, there are no other tools on hand to provide the insights that enable them to tie actions to improvements. And adding hardware, devices and instruments to generate more data can be cost prohibitive. The result is that these companies see no way forward, so they end up resorting to estimating improvements instead of calculating them.

In the absence of verifiable numbers, however, “improvement” is a matter of interpretation, and that raises the specter of potential accusations of greenwashing. Perhaps more importantly, it means these companies are leaving a lot of money on the table. Simply put, a company that can’t reliably quantify ESG improvements is not capturing and monetizing gains.

Fortunately, ESG can be measured and allocated, and in most cases, this can be accomplished using data that is already available.

Measure and track more than 30 ESG attributes

Getting to the bottom of things doesn’t have to be hard. If a company can measure ESG attributes, quantifying progress not only becomes possible, it becomes an integral part of day-to-day operations.

The process begins with establishing a baseline from which progress can be measured. Understanding current conditions positions a company to measure and allocate emissions, enabling it to provide proof of improvements that can be used to capitalize on ESG initiatives.

Companies that were in business in the 1990s when an amendment to the Clean Air Act introduced a nationwide requirement for tracking sulfur emissions have dealt with this type of challenge before. Today, measuring sulfur emissions is commonplace, and before long, the same will be true for other types of emissions.

► More than 30 ESG attributes can be tracked. These include such things as:
► Calculations like Methane Intensity, Carbon Intensity, Water Usage (fresh water vs recycled water)
► Certifications like Methane Performance (Xpansiv’s MPCs), Equitable Origin, Trustwell and MiQ
► Emissions like SOx, NOx, CO2
► Gas Composition
► Fuel Type, Fuel Source

Before a company starts tracking attributes, however, it has to define its ESG goals. Once that has happened, the next step is to identify the most significant ESG attributes. For example, if a company wants responsible water usage, it will need to measure freshwater vs recycled water and factor the results into calculations to show that water usage is being improved.

Capture hidden value to realize up to 5% premium on ESG-conscious products

Establishing a baseline, defining attributes and measuring emissions reduction as products move through the supply chain ties relevant qualities to each molecule. When measurement is achieved this way, the solution can scale quickly and seamlessly, making companies more agile in aligning and adapting to changes in what is becoming a more and more competitive market.

Similar to how the market responded to sulfur regulations in the 1990’s, these verifiable qualities will begin to define the value of the product, where ESG-concious products will be seen as higher quality with desirable attributes allowing our clients to realize a premium, with some early market transactions indicating a value increase of up to 5%. Barrels of crude could start to be defined by their density, sulfur and carbon intensity and valued as such.

Capitalize on clarity

Gaining insight into operations puts an end to the idea that ESG is a “riddle, wrapped in a mystery, inside an enigma.”

When calculation replaces estimation, companies move away from generalizations and “feel-good” buzzwords and toward informed conversations and profitable initiatives based on data.

Capturing verifiable operational data and sharing it with stakeholders positions companies to capitalize on improved ESG performance to differentiate themselves in the market and create value on the bottom line.

 


 

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Tamara Teofanovic