Need for a petchem sector specific ESG reporting template increases
12:37 PM | March 16, 2020 | Francinia Protti-Alvarez
The ability of petrochemical companies to raise funding is increasingly becoming tied to environmental, social, and governance (ESG) frameworks and reporting mechanisms. As these become the norm, companies must work together to develop sector-specific metrics, says Kevin Roy, vice president/research, and analysis at IHS Markit.
As the ESG information ecosystem evolves and continues to grow, investors—including the world's top asset manager BlackRock—have warned company boards to step up efforts to tackle climate change.
Worldwide, investors across all asset classes are increasingly incorporating ESG characteristics into their investment decision-making. In a 2017 buy-side survey, IHS Markit found 25% of the respondents had integrated a fundamental ESG analysis quantitatively into their decision-making. By 2019, the figure had risen to 50%.
"Over the past five years, ESG equity assets under management, meaning they screened with ESG characteristics, have grown by 23% on a compound annual growth rate," says Roy. "The number of investors not doing ESG screening at all is shrinking."
The fragmentation of the ESG data is one challenge companies as asset managers are forced to take in multiple sources. A handful of third-party entities—such as MSCI and Sustainalytics—currently provide the information, which some investors may complement with dedicated in-house research and analysis teams.
Although these third-party research and data providers publish ratings on competence by gathering all the information disclosed and issuing a score, assumptions have to be made in the absence of a sustainability or ESG lens. "We tell companies to engage with MSCI, Sustainalytics, and other large third-party research/data providers to make sure their data is accurate," Roy says.
For some companies, responding to all the third-party ESG information requests can be a burdensome task in the absence of a dedicated in-house team. The lack of a standardized, sector-specific ESG reporting template can exacerbate the burden.
"The requests for information and formal surveys have multiplied in recent years. It's hard for us to have the bandwidth internally to respond to all of them. But with the Edison Electric Institute [EEI] template, we make sure we know what information investors want. We can provide that information and then prioritize those surveys and indices that we need to spend time on," says Chuck Barlow, vice president/sustainability and environmental policy at Entergy (New Orleans, LA), a utility company.
Under EEI auspices, the industry developed a standardized ESG reporting template in collaboration with investors and analysts back in 2017.
"Primarily, it was making sure we were giving information the investment community wanted to see. [But] another big reason we are doing this is to get ahead of the curve because we have seen a proliferation of investment analyst groups who give us scores as companies," Barlow adds.
Thanks to the standardized reporting, the EEI can now assert the group's CO2
emissions have gone down around 28% since 2005, says Barlow. "We've been able to look at the goals and targets that companies have set for 2030 (even 2050 sometimes) and make projections about how those reductions would align with the Paris Agreement."
Despite the intention of the United States to pull out of the Paris Agreement, increasing investor screening for ESG and climate change is driving the adoption of ESG targets that align with climate change mitigation goals.
"We have many international investors in the electric utility sector. We have conversations with people from Europe frequently, and they do not care whether the United States is in or out of the Paris [Agreement]. They want to know what Entergy is doing to be a responsible company," Barlow continues. "Over the last ten years, ESG and climate have become much more important issues for investors. [P]robably, half of the time set aside for every phone call we have with investors is taken up with climate or ESG issues. Ten years ago, it might have been something we discussed sporadically."
The utility sector is also developing opportunities that arise from sustainability concerns. In the case of Entergy, the company is in discussions with industrial customers around electrification as a means of further reducing CO2
emissions. One example is in transport and logistics, which, in the United States, has overtaken the utility sector as the biggest emitter of CO2
ESG screening may have begun as a tick-the-box exercise, but time has demonstrated that ESG-focused investing works, Roy says. "[I]mplementing it into your decision-making process, whether that's from a company strategy or an asset management perspective, helps to identify risk and improve performance."