ESG metrics – why, how and what?

How can we support a world seeking to move towards greater sustainability? Giulia Chierchia, EVP of strategy & sustainability, explains the important role of environmental, social and governance (ESG) metrics in helping investors to monitor and assess the performance of companies

I recently got the chance to speak at CERAweek – a big event in our industry calendar that always offers insightful discussion and food for thought.  

I took part in a session on environmental, social and governance, or ESG, metrics with Allison Herren Lee from US Securities and Exchange Commission and Lydie Hudson from Credit Suisse. You can watch the full session here, but I wanted to go over some of the key points I made around how we think ESG metrics and performance can support a world – and companies such as bp – seeking to move towards greater sustainability, on climate but also on people and the environment.

1. Strong ESG performance is an indicator of long-term financial performance 

Today, the world is on an unsustainable path: Global temperatures have already risen by 1.1 degrees Celsius compared to the pre-industrial baseline used for the Paris goals; one million species are threatened with extinction; and societal inequalities have only been exacerbated by the pandemic. In this context, good environmental social and governance performance is not only relevant to society, but also an indicator of long-term resilience for a company.  

There are four key reasons for this: 

First, risk management – good ESG performance helps with this on all fronts, whether those risks are in relation to human rights, biodiversity or climate.  

Second, ability to create shorter-term, direct value, coming from more efficient operations; for example, reducing water usage which saves costs for treatment.    

Third, when we look at the longer-term and how sustainability is central to the energy transition, we can see there is huge opportunity. For example, in the bp 2020 Energy Outlook Rapid scenario, by 2050, electricity demand doubles, with renewables the clear winner; hydrogen accounts for between 7-16% of final (non combusted) energy use, and there are around 900 million EV passenger cars by 2040. If a company embraces the transition, it is accessing those growth markets and the trillions of dollars of investment opportunities required to rewire and decarbonize the energy system and global economy. 

And finally, it is becoming increasingly important to employees that they work for companies with purpose – that are doing the right thing – so transparency around ESG factors is important for attracting and retaining the best talent. 

2. Good ESG metrics should be simple, standardized and informative 

Given what I outlined above, metrics have a significant role to play. But to be as useful as they should be, an organized and unified approach is required, so ESG metrics need to be three things: 

• Simple – as simple as they can be while not oversimplified. For us as an energy company, this is critical given the complexity of the value chain we have to navigate.
• Standardized – to allow for comparison within the same sector and ideally across sectors. This will drive transparency, which is important for investors – to assess both risk and opportunity – but also companies, creating the opportunity to benchmark themselves among peers. There are already multiple disclosure initiatives that work in this direction and we are very much supporting these efforts.
• Informative – so that they can be used to make decisions. They shouldn’t be binary – good or bad, yes or no – but forward-looking and a way to set the pace in terms of progress made against ESG goals.
  

3. ESG metrics should support and reward progress  

I have talked before about the need to create conditions that support greening companies, like bp, who are transitioning to low carbon on the path to net zero. Of course, ESG isn’t all about climate and carbon, but I do believe that greening companies should be able to use ESG metrics as transparent proof points of progress. 

Because in every sector, the world needs greening companies as well as companies who are already green to work towards the Paris goals at the pace and scale necessary to achieve them. But the transition is more complex for some sectors than others. All greening companies can contribute in different ways and they can’t all move at the same speed – what matters is the global outcome.  

Take electric vehicles for example: it is unlikely that today’s electric vehicle pure plays like Tesla, which sold half a million vehicles last year out of a total of 73 million, will take combustion engines off the road on their own. Tesla’s journey is incredible, becoming one of the highest valued companies in the world, but the whole industry will have to play a part.

This is where metrics can help – having consistent disclosure standards and comparability is how greening companies can be held to account on how they are translating their plans and ambitions into demonstrable action and progress. 

4. So, what should the metrics be? 

In this instance, let’s focus on climate metrics and on our sector in particular. We see three main types that we think can collectively help to characterize climate risks and opportunities while being useful to investors, as well as our employees and wider society: 

• Carbon metrics – these need to cover scope 3 emissions – this is 80-90% of the total emissions for the oil and gas sector. We need metrics for the absolute emissions from the oil & gas production and for the carbon intensity from our marketed product. Without both, a company could reduce its carbon intensity by adding low carbon energy to its offer, while continuing to increase absolute emissions and produce more hydrocarbons. We also support the continued work to develop well-designed, forward-looking metrics, such as implied temperature rise. 
• Financial and business metrics – such as the share of capex invested in the low carbon and transition business, or specific metrics, such as our renewables development aim, which directly illuminates low carbon activities.
• Governance metrics and activities – for example, the skills and experience of the board and executive committee to manage the energy transition.

Getting to a point where we have, organized, informative and fit-for-purpose metrics for all will require collaboration between the private sectors, financial institutions, regulatory bodies on the metrics themselves, as well as the right policies to make low carbon options as commercially viable as possible.

And we are supporting the process – we are actively engaging and working with ESG reporting disclosure frameworks (e.g. TCFD, SASB, CDP and more recently the WEF-IBC), rating agencies (MSCi, Sustainalytics) and climate initiatives (e.g. SBTI, TPI, IIGCC, CT, CA100+) to shape metrics together with all stakeholders and drive standardization and a consistent and robust approach. This will allow us to move forward with a set of metrics that will help companies and the world to transition and meet the Paris goals and get to net zero.