Finance

ESG provisions and litigation risks in the oil and gas industry


Introduction to ESG

ESG is an acronym for Environmental, Social and Governance. It refers to a variety of intangible, non-financial metrics like greenhouse gas (GHG) emissions; climate adaptation resilience and transition; water use; diversity and inclusion; rights of local communities; anti-corruption practices; and self-regulatory processes, used to measure the sustainability and, invariably, long-term profitability of a company. ESG has become increasingly important following shifts in societal attitude and the attendant pressure on governments and corporate bodies to aggressively tackle climate change and environmental damage. Many observers believe that the era of ESG has come to stay.

The E in ESG stands for Environmental and embraces factors like climate change impacts, mitigation and adaptation, environmental management practices, waste disposal, and energy generation and efficiency. The Social aspect of ESG examines how a company manages relationships with employees, suppliers, and communities where it operates. Such concerns can include diversity and inclusion, rights of indigenous communities, unfair wages and employment practices. Governance refers to several issues with regard to corporate management like conflict of interests, data protection, financial crime, transparency, director’s duties and whistleblowing.

ESG and business sustainability is linked to the wider sustainability movement encapsulated under the 17 United Nations Sustainable Development Goals (SDG). The rise of ESG as a global concept has its origin in the joint initiative called by former UN Secretary General Kofi Annan under the auspices of the UN Global Compact and with the support of the International Finance Corporation (IFC) and the Swiss Government, in January 2004. This initiative produced a report entitled ‘Who Cares Wins’ authored by Ivo Knoepfel, where the term ‘ESG’ was first coined. This report, alongside the United Nations Environment Programme Finance Initiative (UNEP FI) ‘Freshfield Report’, formed the backbone for the launch of the Principles of Responsible Investment (PRI) at the New York Stock Exchange in 2006, and the Sustainable Stock Exchange Initiative (SSEI) the following year. Currently, the UN backed PRI is a thriving global initiative with over 1,600 signatories representing $70 trillion assets under management (AUM), all committing to the 6 principles of responsible investing.

Key ESG Trends

Net Zero GHG Emissions: GHG like carbon dioxide (CO2) and methane are released by human activities. These gases cause global warming by trapping the sun’s energy. Net zero means not adding to the amount of GHG In the atmosphere. Achieving this means reducing emissions as much as possible, as well as balancing out any GHG that remains by removing an equivalent amount. Under the 2015 Paris Agreement, countries have agreed to keep temperatures rises well below 2°C and pursue efforts to limit it to 1.5°C above pre-industrial levels. Experts say that to achieve this, net zero must be achieved by 2050. Emissions are categorised into 3 groups as Scope 1, 2, and 3. Oil giants like ExxonMobil, Chevron, British Petroleum and Shell have all made commitments to achieve net zero from operated assets by 2050.

ESG Certification: Certifications of ESG compliance in the production of oil and gas products are starting to gain traction. Non-Governmental organisations like MIQ certify natural gas by measuring commitments to reducing methane emissions in gas productions. There are others like Equitable Origins who measure commitments to upholding indigenous rights across the oil value chain in the final product.

ESG Investing and Green Bonds: ESG investing is investing in companies that are committed to sustainability, using ESG metrics, based on the rationale that those metrics are substantially relevant to investment profitability and societal impact. Global ESG assets reached 35 trillion dollars in 2020 and are projected to hit 53 trillion USD by 2025. A Green Bond is a debt security issued for the purpose of financing projects that contribute positively to the environment. In 2017 and 2019 the Nigerian government issued Sovereign Green Bonds worth 10.69 billion and 15 billion respectively.

Carbon Pricing, Carbon Tax, and Emissions Trading System: Carbon pricing is a price applied to carbon pollution that passes the cost of emitting to the emitter. It aims to encourage companies to reduce their CO2 emissions and thereby limit global warming. Carbon pricing can be in the form of a carbon tax via setting a price for each ton of GHG emissions, or through an Emissions Trading System, where ‘allowances’ are issued and traded under the ‘cap and trade’ principle. The French President Emmanuel Macron announced in March 2022 that the EU has reached an agreement to impose a carbon tax on imports.

ESG Reporting: ESG reporting is the public disclosure of ESG data by businesses. ESG reporting requires companies to disclose the risks and opportunities that their operations are exposed to across the ESG spectrum and their commitments towards sustainability. Some of the organisations and voluntary standards that have been initiated to aid corporate bodies in ESG reporting are the newly formed International Sustainability Standards Board (ISSB), which announced 2 proposed standards in March, 2022; the Global Reporting Initiative (GRI) guidelines; and the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations and implementation guideline. There is also oil and gas centric International Petroleum Industry Environmental Conservation Association (IPIECA) Sustainability Reporting Guidance.

ESG Ratings: The 3 most prominent rating agencies, Standard and Poor’s, Moody’s, and Fitch ratings have each incorporated ESG themes in their credit rating methodologies and this trend is expected to increase.

ESG Legal Framework in Nigeria’s Oil and Gas Industry

The term ‘ESG’ has slowly gained currency in Nigeria’s oil and gas industry. Some of the themes and metrics associated with the concept are already found in a number of existing Nigerian environmental, labour and corporate governance regulations. Nevertheless, current ESG trends are reflected in laws like the Climate Act 2021, and the Petroleum Industry Act 2021, and to a large extent the Companies and Allied Matters Act 2020, and the Federal Competition and Consumer Protection Commission Act.

The relevant guidelines and policies includes – The 2018 revised Environmental Guidelines and Standards for the Petroleum Industry in Nigeria (EGASPIN); the Nationally Determined Contributions (NDC) submitted to the United Nations Framework Convention on Climate Change (UNFCCC); National Climate Change Policy for 2021 – 2030; Sectoral Action Plans for Nigeria’s Nationally Determined Contribution (NDC) to the United Nations Framework Convention on Climate Change (UNFCCC); National Action Plan on Gender and Climate Change for Nigeria; Nigeria’s Adaptation Communication to the UNFCCC; and the Financial Reporting Council of Nigeria’s Code of Corporate Governance for the Private Sector 2019. Also relevant are the Central Bank of Nigeria (CBN) Bankers committee’s Sustainable Banking Principles 2012 comprising the ancillary sector based Oil and Gas Guideline; Nigerian Stock Exchange (NSE) Sustainability Disclosure Guidelines 2018; and NSE Guidelines on Sustainable Financial Principles for the Nigerian Capital Market 2021.

At the 2021 UNCCC (COP26) President Buhari, head of the Government of Nigeria(GON) announced a commitment to cut Nigeria’s carbon emission to net-zero by 2060. The Climate Act sets Nigeria’s net zero GHG target between the years 2050-2070. Entities with a minimum of 50 employees are obligated, under the Climate Act, to put measures in place to ensure the achievement of carbon emission targets in line with the Action Plan.

ESG Litigation Risks for Oil and Gas Companies

ESG litigation has the potential to profoundly impact a company’s reputation, balance sheet and long term profitability. The continued rise of ESG poses significant litigation risks for oil and gas companies. A case in point is last year’s Dutch court judgment ordering Shell to cut its CO2 emissions by 45% in 2030, compared to 2019 levels. Suits against oil and gas companies seeking damages for environmental damage are already commonplace in Nigeria and the enhanced regulatory framework of the PIA will increase this trend. Expect to see a new strand of suits directed towards changing companies’ behaviour with respect to ESG reporting and disclosure and cutting emissions (see the Dutch court Shell case). Governments and regulatory bodies in the oil and gas sector also face litigation risks in the form of administrative review suits with respect to enforcement of mandatory ESG regulations.

ESG litigation risks exist not just in Nigerian courts but in the home state courts of the parent companies of Nigerian operators. Take for instance the US Alien Tort Statute which gives US court’s jurisdiction to hear lawsuits filed by non-U.S. citizens for torts committed in violation of international law. Note also the Dutch appeals court ruling ordering Shell to pay damages for oil spill in two Niger delta villages. ESG-related litigation can also take the form of suits directed at specific oil and gas projects falling short of ESG standards.  Take for instance litigation by activists against the Keystone pipeline in Canada and the US.

Nigerian courts are starting to adopt a liberal approach towards environmental litigation issues. In Gbemre v. Shell, the Federal High Court of Nigeria ruled that the practice of massive and intense gas flaring violates the fundamental rights to life and human dignity of affected citizens guaranteed under the Nigerian Constitution and the African Charter. More recently, the Supreme Court of Nigeria, in Centre for Oil Pollution Watch v. NNPC, expanded the frontiers of locus standi in environmental litigation. The Supreme Court held that locus standi should not be used to prevent an individual or group from bringing a matter of unlawful environmental conduct to the attention of the court.

Conclusion

It is exigent that oil and gas companies are properly equipped to pass muster in the face of the rise of ESG.  ESG doesn’t portend the end of the fossil fuel industry. ESG not only creates risks but likewise opportunities. The oil and gas industry isn’t going away soon but the way in which it operates will have to change. Big oil is already embracing the ESG revolution. Mid-sized and small players, no doubt constrained by thinner operating margins, will be increasingly motivated by access to capital and consumer concerns to get in step.

Oil and gas companies should limit their ESG exposure by regularly reviewing policies and procedures to ensure they address ESG related issues. This would include setting and implementing ESG sustainability targets and working with legal counsel at an early stage to mitigate exposure or manage crises where it inevitably arises.


Ozi Nwadike Esq., Principal Counsel, Pristine and Sage Attorneys



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