What lies ahead in 2023: Critical Resource’s picks for the top 3 ‘E’, ‘S’ and ‘G’ trends following a tumultuous 2022
From Russia’s military invasion of Ukraine, to ballooning inflation, to record-high temperatures, 2022 saw turbulent political and environmental developments on a global scale. Below are Critical Resource’s picks for the top ESG trends which are likely to continue evolving into 2023, posing both risks and opportunities to extractives and energy sector companies.
By Eliza Topliff, Analyst, and Juliet Carter, Senior Advisor
The ‘E’: A more holistic understanding of corporate environmental obligations emerges
While it is undeniable that greenhouse gas (GHG) – and increasingly methane – emissions management remain front and centre of the green agenda for extractive industry players, a more holistic understanding of environmental best practice is progressing into the mainstream. With reports of a 69% decline in animal populations globally in the last 50 years, language around biodiversity is increasingly using extreme terms such as ‘crisis’ and ‘mass extinction.’ Last year saw upscaling of responses to these issue through new legislation and institutions, broader reporting expectations and increased public awareness. For example, Panama became one of the growing group of countries to enshrine the rights of nature into law, with others such as Ireland also considering holding a referendum on the subject. New reporting requirements emerged, such as RepRisk’s recently launched biodiversity tools, developed specifically for use by extractives companies, and COP15, the biggest biodiversity conference in a decade, was held in Canada. Another headline topic in 2022 was deforestation, with the EU’s Imported Deforestation Law signed in December, obligating companies to prove that their supply chains are deforestation-free before they can import many commodities into the EU. The relationship between illegal mining and high levels of deforestation in rain forested areas also saw increased traction, with some major NGOs such as WWF calling on the UK government to temporarily ban all gold imports from Brazil.
One reason for this increased attention on a broader range of environmental issues may be that civil society is increasingly viewing environmental issues as interconnected with each other and with other material risks like health and economic livelihoods. Both biodiversity loss and land degradation pose a risk to ecosystems and fertile land which, in turn, can jeopardise the ability to cultivate crops and therefore endanger food security – which is especially pertinent following news that the global population surpassed 8 billion in November 2022 (with some projections suggesting that this will surpass 10 billion by end of century). Another plausible reason is that the goalposts for a ‘good enough’ sustainability or climate strategy are being shifted through advances in emissions management. At least for the major companies, it may soon be seen as unacceptable to invest heavily in emissions reduction technology while neglecting to consider management of, and innovation in, other aspects of their impact on the environment. We are already seeing this to some extent with the push for ‘net positive’ rather than acceptance of ‘no net loss’ becoming more commonplace.
Our view is that this will almost certainly continue beyond 2022 – and we can therefore expect new regulations emerging at the national and international level, and a crackdown on greenwashing through more stringent reporting expectations – especially in higher-profile commodities such as gold and bauxite.
The ‘S’: Civil society is increasingly vocal and is making use of investor-driven, legal and reputational avenues to affect change
The economic crises facing both major and emerging economies, demographic shifts, and increasingly sophisticated media campaigns are just some of the factors contributing to progressively more vocal social activism. 2022 saw increasing examples of social actors making a big impact on extractives companies, through targeted campaigns and successful, high-profile lawsuits. Some NGOs have become huge global players, able to challenge major companies in courts and deliver precedent-setting legal outcomes. One notable example this year was the landmark victory for a group of Torres Straight Islanders who managed to prove in court that the Australian government’s inaction on climate change is a violation of their human rights, causing harm to their daily lives. In a slightly different vein, the concept of a Just Transition is becoming more prominent amongst civil society at the same time as oil and gas companies find themselves increasingly under pressure over news of record profits and soaring cost to customers, partly due to supply issues caused by the impact of the sanctions on Russia.
Towards the end of the year, we also saw Extinction Rebellion announce a move away from their more disruptive activism, which previously included climbing on top of an Underground train in London during rush hour, road blockades or nude protests. The organisation has instead decided to prioritise mobilising attendance at mass rallies and expanding relationship building, as part of a ‘necessary evolution.’ This comes in the wake of some ill-received activism by other groups such as Just Stop Oil, which was criticised for throwing soup on Van Gogh’s famous ‘Sunflowers’ painting on the grounds that the paintings are sealed behind glass and the stunt therefore had no lasting impact. However, this move may well increase public support and respect for the organisation from new facets of society – for example, older demographics or those who believe that policy reform and legislation are the answer to the climate crisis.
It is looking as though the trend of increasingly calculated and high-profile campaigns will continue into 2023 – including more sophisticated legal action and social mobilisation – with the implication for extractives sector countries likely being an even greater emphasis on the social impacts of their operations, as well as greater internal focus on the social aspects within ESG. Within these social aspects, a particular topic to watch will be indigenous rights, as GRI Sector Standard for Oil and Gas (GRI 11) comes into force in 2023 and includes Indigenous Community Impact as a material topic for the first time, putting the topic firmly on the agenda for many companies.
The ‘G’: Companies increasingly must consider (geo)political risk as a corporate governance issue
The Russian invasion of Ukraine and the resulting sanctions by the EU and US have led to the effective partitioning of the oil market and re-emerging East-West divisions. The full implications of this are still evolving, but already, a reconfiguration of alliances has occurred, which is changing and challenging the order of global energy politics. For extractive sector companies, a change in this order necessitates strategic responses. In parallel to scenario analysis becoming a more commonplace tool for testing the resilience of portfolios to climate change risks, companies are also beginning to deepen and expand measures such as wargaming exercises, to identify – and protect their assets from – geopolitical risks. Companies are also beginning to diversify supply chains and create more optionality in response to issues created by the sanctions on Russia or looking to capitalise upon increased demand for domestic or regional production in the countries in which they operate.
Another way political risk is making its way onto the corporate governance radar is through a renewed focus on transparency and reducing corruption, especially in light of major corporate scandals across Europe. A report by Transparency International in October 2022 announced that nearly every country has serious inadequacies to prevent bribery in their laws and institutions. Deeming the results ‘worse than ever before,’ a number of countries dropped in the 2022 ranking, including the United Kingdom, Denmark and Italy. Several mining and energy majors also hit the headlines in the past year for high-profile corruption scandals. They will now have to invest heavily in upgrading or restructuring their governance systems to ensure robustness, managing the fallout of the immediate crises, and minimising harm through well-considered communications and government relations processes.
Should these geopolitical pressures continue to impact the operating environment, we expect to see increased consideration for how to best manage these issues at the highest levels of management for extractives industry companies into 2023.