Fuelling ESG

By George Esmond

In the City of London (and other financial centres) the moral and economic embrace of Environmental, Social and Governance (ESG) has been cause célèbre.

While seen as an increasing necessity for publicly listed companies (underpinned by regulations such as the EU’s Sustainable Finance Disclosure Regulation), and driven by investors and fund managers who see a new market opportunity, some commentators have continued to view ESG with a cynical eye, accusing it of being light on pragmatic day-to-day impact.   

According to new analysis from the International Energy Agency (IEA), as Prime Minister Boris Johnson welcomed banks and multi-national businesses to the Green Investment Summit in November 2021 to discuss solutions to achieve carbon neutrality, Carbon dioxide (CO2) emissions from the energy sector rose to their highest levels in history. It is unfortunate therefore that it has taken aggression from President Putin to accelerate the realisation that ESG isn’t merely a regulatory-reporting and investor relations function. Instead, it has spurred a realisation that it is also an exercise in moral leadership for private and public partners, many of whom are now finding their teeth and embracing the spirit of ESG as well as the letter of regulations.

The events of the last two weeks appear to be a seminal moment for ESG, with governments, companies, funds, and investors all forced to reanalyse the risks that the Russian invasion of Ukraine poses to their business.

Nowhere has this been more apparent than the oil and gas sector. For a sector that has dodged and weaved its way around ESG with fleet-of-foot to make Muhammed Ali proud, the public demand of moral leadership around the war in Ukraine has wrought more fundamental changes than decades of concerns about the environmental impact of fossil fuels. The industry's long exposure to and dependence on Russia, the world’s biggest exporter of gas and the world’s third-largest oil producer, was a weak spot that, despite the constant ESG microscope, seems to have gone largely unaddressed.

That was, of course, until the first Russian cruise missile hit Ukrainian soil, at which point ESG suddenly became very real. Oil giant BP announced it would end its presence in Russia and sell its 19.75 per cent stake in the Kremlin-owned oil and gas company Rosneft, allegedly costing BP around £25 billion.  Shell and Equinor quickly followed suit and announced exits from Russian joint ventures. Shell, however, continued to operate its chain of Russian services stations, before announcing on Tuesday (8 March) that it would exit. Its European peers, however, have not followed suit; TotalEnergies announced it would no longer provide capital for new projects in Russia however, it will retain its current Russian assets.

As the war tragically carries on and geopolitical tensions continue to ratchet up, investors are keeping a watching eye on whether such bans continue into other sectors.

What could be most alarming for The City is how companies choose to react if European states fail to follow the UK’s stance. While less dependent on Russian energy than it European neighbours, the UK is freer to impose its will, however, it will not be without pain. The same, however, cannot be said for Germany and France.

Significant pressure is being applied to the new German Chancellor, Olaf Scholz and French premier Emmanuel Macron to end its energy association with Russia. Both are in very precarious positions. Chancellor Scholz has already disposed of 70 years of German foreign policy towards Russia, committing to spending the NATO recommended two per cent of GDP on defence, and pledged to wean Germany off Russian energy supplies. But with the country relying on 55 per cent of its gas, 45 per cent of its coal and 35 per cent of oil from Russia, such a move would have significant financial implications for the German people so early into his tenure.

Likewise, President Macron, who is the favourite going into this year’s election, will know that the decision will pose significant domestic challenges and economic framing over the next year. Cutting off Russian oil and gas is important in signalling international solidarity against Russian aggression and the invasion of Ukraine but will have an effect on French citizens’ finances. While support for sanctions is currently high, the balance may shift if household bills continue to soar.  

All of this brings us back to the need for moral leadership from politicians and business. The war in Ukraine has reiterated that ESG is far more than an investor relations exercise. All stakeholders are looking at business and politicians to show a joined-up approach to countering Russian aggression. Being seen to be dragging your feet or having to be told to act in the face of such enormous human suffering is not going to wash.