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ESG Standards and the Regulations of the Oil and Gas Sector

By Blanca Martínez Mendoza - ASEA
Director of International Cooperation


Blanca Martínez By Blanca Martínez | Director of International Cooperation - Tue, 07/25/2023 - 16:00

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Since the early 2000s the United Nations (UN) has referred to environmental, social and governance (ESG) standards. However, recently, the growing focus in the financial and business community on sustainability and corporate responsibility has become more noticeable, perhaps due to the also growing awareness and involvement of the public. ESG standards have become a key factor for companies seeking financing, and the oil and gas sector is no exception. In this article, we will explore the importance of complying with ESG standards as well as its relationship with the activities of national regulators. 

ESG standards refer to the environmental, social, and governance criteria that companies must meet to demonstrate their commitment to sustainability and responsibility in their operations. These standards have become a reference framework for investors who seek to support companies that adhere to sustainable and ethical practices. 

On the other hand, the oil and gas sector faces several challenges due to its nature and its impact on the environment and local communities. The negative environmental impacts frequently associated with fossil fuel activities have led to global concern, especially over the climate change crisis. Consequently, several countries are considering or have already implemented measures to transition away from fossil fuels and are even contemplating or have announced plans to ban the hydrocarbons industry from their territories. 

Such actions further emphasize the importance for companies from the hydrocarbons sector to comply with ESG standards and demonstrate their commitment to mitigating environmental impacts and promoting sustainability.

It is worth noting that the industry is also undergoing a significant transformation as it seeks to adapt to changing regulations and the expectations of society. Companies within the hydrocarbons sector are investing in implementing measures to reduce emissions, to enhance energy efficiency and are even eager to comply with regulations that aim to protect the environment.

Aligning with ESG standards and actively working toward reducing their negative impact on the environment can help companies become part of the solution to tackle negative environmental effects. On top of that, companies that can address these challenges and adopt sustainable practices have more options to obtain financial benefits.

That would be one of the main advantages of complying with ESG standards in the oil and gas sector. Increasingly, investors and financial institutions are integrating ESG criteria into their investment decisions. Companies that can demonstrate their commitment to sustainability and the mitigation of environmental and social risks are more likely to obtain financing.

Additionally, compliance with ESG standards could also help oil and gas companies to mitigate operational and reputational risks. The implementation of sustainable and responsible practices can help to prevent environmental disasters, reduce exposure to social conflicts, and avoid regulatory sanctions and fines. In that way, companies can strengthen their position while complying with the requirements to operate.

It is worth mentioning that these standards are also recognized by the general public and in that way, they also help companies to build and improve their image and reputation. However, it is important that companies demonstrate that their commitment to sustainable practices is genuine.

People are becoming increasingly aware of environmental and social issues. Therefore, greenwashing, or adopting superficial practices to appear sustainable, can backfire into reputational damage and loss of trust. In that sense, the commitments must be sustained with tangible actions. This is particularly important to be able to measure the commitment and effective compliance with the goals and targets. Such actions may be supervised or reported at an international or national level. 

Further, when companies in the hydrocarbons sector are required to comply with certain standards or regulations, they are incentivized to find ways to reduce their negative impacts, to optimize the use of resources and to improve their efficiency. This can directly or indirectly lead to savings of resources, increased productivity and even the development of  new technologies and solutions to the problems they face. 

Once these potential benefits have been listed, it is also necessary to address  some of the criticisms. It has been pointed out that when it comes to understanding what these standards comprise, criteria differ among institutions as well as among regions. Some institutions may prioritize certain standards over others. However, since 2015, the Sustainable Development Goals have provided a clear general foundation for the goals to be achieved. However, it can be noted that at a domestic level the ESG standards are already incorporated within the legislation and regulation issued by states. 

Therefore, it is important to mention the important role of regulators, such as the Agency for Safety, Energy, and Environment (ASEA) in Mexico. ASEA promotes and oversees obligations in the hydrocarbons sector that serve as the foundation for ESG standards. In that sense, regulators have a fundamental role in establishing and enforcing regulations that promote sustainability as well as corporate responsibility.

ASEA supervises compliance among the companies in the hydrocarbons sector with the national laws and regulations related to the protection of the environment and safety. It also needs to ensure compliance with the provisions related to public consultations, prior to the development of projects, with local communities. Therefore, regulators ensure that companies in the sector adhere to safe and sustainable operational practices. 

The existence of effective regulators provides confidence to investors and to the stakeholders involved with the industry. Furthermore, regulations in Mexico go through a process that includes submitting the draft to a public consultation where citizens and businesses can submit comments. This process also has to consider that regulations must promote innovation, productivity and efficiency in favor of the well-being of society. Finally, the regulations must be published and are known by all the relevant stakeholders, addressing the concerns of ESG regarding the disparity in the criteria applied by different institutions and regions.

In conclusion, complying with ESG standards is of the greatest importance for oil and gas companies. It can be said that companies that already comply with their legal obligations demonstrate commitment to sustainability and responsible practices and, also, may find other benefits, such as improving their image, generating innovation and efficiency, and obtaining access to more financing sources. Therefore, implementing ESG principles not only benefits the companies themselves but also contributes to a more sustainable and responsible oil and gas sector as a whole.

Photo by:   Blanca Martínez Mendoza

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