Article from: OGEL 5 (2020), in Editorial
2020 will be remembered for many things, but probably not because it marks the 50th anniversary of Milton Friedman doctrine. In his seminal article, Friedman established that The Social Responsibility of Business Is to Increase Its Profits, or more precisely, that "the businessmen (who) believe that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers (are) unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades." While it may be rightly argued that the Friedman doctrine dominated for the better part of the last 50 years, the emergence of Environmental, Social and Governance (ESG) requirements over the last couple of decade may seem to indicate that the crop of reformers is indeed contemporary.
The notion of "ESG" emerged from a joint initiative under the auspices of the UN Global Compact, the International Finance Corporation (IFC) and the Swiss Government. The goal of the initiative was to find ways to capture the growing concerns about the impact of economic forces on societies, and particularly the role of financial markets. Its final report, "Who Cares Wins: Connecting Financial Markets to a Changing World", established the foundation for the Principles for Responsible Investment and established ESG as criteria for capital markets. As noted by Ruggie and Middleton, the aftermath of the 2008 financial sector meltdown, which implicated failures by government and the financial industry alike fueled the rapid rise of ESG investing, where the E reflects the growing concerns about climate change and environmental challenges, the S reflects the risks of adverse business impacts on people in a globalized operating environment, in global supply chains for example and the G recognized that the quality of corporate governance is closely related to value creation-or destruction.
Few sectors are more impacted by this trend towards ESG than the oil and gas industry. Many oil and gas companies are adapting to this new environment, others are still lagging behind, but they all face challenges and open questions. This can take the form of regulatory requirements, particularly relating to the restrictions on investments and the disclosure obligations many new emerging regimes create to the energy industry. But the challenges are often much more basic. Put simply, environmental concerns are front and center as the industry, including downstream consumption, remains one of the top contributors to global emissions. Second, social risks are still prevalent due to the high footprints of operations, land use and disorders that drilling and production sites typically create for local communities, both in emerging and western markets as shown by the Trans Mountain and Keystone XL pipelines in North America. Finally, the management of oil and gas resources remains a governance challenge in many countries.
The ESG "movement" is still in its early days and faces a number of growing pains. For one, the doctrine of shareholder value remains prevalent in boardrooms and adopting an ESG approach might still be perceived as going against the fiduciary duties of the officers of the company. But what was long perceived as an unsurmountable obstacle seems to be changing as demonstrated by the 2019 US Business Roundtable "Statement on the Purpose of a Corporation" signed by 181 CEOs who commit to lead their companies for the benefit of all stakeholders - customers, employees, suppliers, communities and shareholders, effectively moving on from a single-minded focus on the interests of shareholders to maximize profits. The second challenge is the lack of definitions and thereby standardization of ESG data which leads both companies left to determine for themselves which ESG factors are material to their performance and what information to disclose to investors, and rating for the same company varying widely across different providers.
Despite these challenges, ESG regimes, soft and hard, are emerging. The European Union, South Africa, Singapore, Hong Kong, and the United Kingdom, among others, have instituted specific sustainability reporting regulations and policy-makers globally are strengthening practices related sustainable finance in various ways, including but not limited to the development of taxonomies to clarify meaning. Even the S part, long seen as the most complex area of ESG, is seeing clarification with the emergence of well-defined and authoritative standards such as the UN Guiding Principles on Business and Human Rights which allow to better judge how well companies understand and manage their social impacts.
This OGEL Special Issue seeks to provide information on these various dimensions of ESG related laws, regulation and rules and their application and impact on the oil and gas industry. The topics cover a wide range of issues, starting with "ESG in Oil and Gas: Engaging in the Market Evolution" by Alanna Fishman, which looks at how oil and gas companies can approach the ESG market evolution with clarity and confidence. It then addresses the environmental dimension in more details with "Breaking Down the 'E' in ESG: Practical and Legal Considerations for Energy Companies" by Kimberly White, the "Statutory and Voluntary Programs and Regimes in the United States Focusing on the E in ESG" by Maureen M. Crough and Samina M. Bharmal, "Breaking Down "E, S, and G": Climate Change as a Material Concern for the Energy Sector" by Hana Vizcarra and "Fixing Flawed Environmental Clauses in Joint Venture Legal Agreements: How Operators and Non-Operators Can Live Up to Their Environmental Stewardship Promises" by Shishir Bhargava, James Bamford, Noah Joseph, and Josh Kwicinski which addresses the key issue of joint ventures, and in particular non-operated JVs.
As the world reacts to COVID-19, ESG - and the interest in discerning which companies are reacting the most effectively to the rise in ESG-related issues - Mike Blankenship, Eric Johnson, Ben Smolij, and John Niedzwiecki discuss "ESG in a Time of COVID: Materiality and Energy Companies ". The next few articles bring the discussion to various geographies with ESG Considerations in "Oil and Gas Deals: Risks and Opportunities (Canada & Globally)" by Ray Chartier and Kellie L. Johnston, "Less is not More: Non-Financial Disclosures of Canadian Issuers and the Socially Responsible Investor" by Michael Garellek, and "The Jury Is Still Out on the Impact of ESG Disclosure on U.S. Oil & Gas Producers" where Cheri Hasz calls into question the impact ESG pressure has on U.S. majors, like Exxon, Chevron, ConocoPhillips, and their ilk. Finally, Isabelle Rousseau and Alberto Díaz Alavez look at the impact of the 2013 major energy reform in Mexico in "The Social Dimension of the Hydrocarbon Projects in Mexico".
The next two articles go into different regimes connected to ESG, the first where Kristina Katsos and John E. Katsos uses the existing literature on the impact of the private sector on peace to suggest a series of recommendations for management of natural gas extraction in Cyprus and "What Should be the ESG Preconditions to Development of the Aphrodite Gas Field?". Sandrine Giroud, Warren Martin, and Anton Vallélian provide an overview of legal risks arising from human rights violations for companies operating in Switzerland in "Human Rights in the Oil and Gas Trade in Switzerland - Risks and Mitigation Measures". On the same trend, "Mitigating ESG-Related Litigation Risk" by Roni Pacht aims to provide a functional and comparative perspective on ESG-related litigation risk that seeks to categorise these risks in a thematic, and therefore more manageable way. The issue concludes on anti-corruption compliance within an ESG framework where Vanessa Hans discusses "Anti-Corruption Disclosure in the Oil and Gas Industry: Challenges and Opportunities for Collective Action".
 Friedman, M. "A Friedman doctrine - The Social Responsibility of Business Is to Increase Its Profits", New York Times, Sept. 13, 1970, p. 17
 Ruggie, J. & Middleton, E. Money, "Millennials and Human Rights: Sustaining 'Sustainable Investing'", Global Policy Volume 10, Issue 1, 2019, p.145
 See for example Boffo, R., and R. Patalano, "ESG Investing: Practices, Progress and Challenges", OECD Paris, 2020