SASB’s Jean Rogers: Stranded assets and the social license to operate

Sustainabilty in the non-renewable resources sector

From oil spills to fracking, Stanford’s coal divestment to ExxonMobil’s carbon asset risk report, sustainability issues in extractives industries frequently make news. Extractive industries face distinct risks, such as increased regulatory pressure due to carbon emissions and the need for a culture of safety and emergency preparedness. But they also have unique opportunities, including those stemming from product innovation and maintaining positive relations with communities directly affected by their activities.
For the past 12 months SASB has been developing standards to help companies manage, and investors evaluate, increasingly important non-financial risks and opportunities in the Non-Renewable Resources sector. The following sustainability topics – among others – are drivers for capturing and communicating sustainability value:

1. Social Capital Sustainability
For metals and mining companies, maintaining a social license to operate through positive community relations is imperative. Mines with poor records of community relations can have significantly reduced valuations due to the uncertainty in bringing products to market. The engagement of local communities displaced by extraction activities or impacted by environmental issues from mining operations is critical to the continued operations of mines that have a planned 80-100 year life span. And with mining operations continuing to expand into increasingly remote and sensitive ecological regions, community relations are now seen as a standard operating expense. For example, the global bauxite mining industry invests on average $400,000 annually per mine in support of community programs.

2. Leadership and Governance Sustainability
In a changing hydrocarbon market underpinned by future climate change regulations, the pricing of hydrocarbon is a significant risk for reserve valuation. Yesterday marked the release of a report called Risky Business, which outlines the economic risk of climate change by industry and region. For the coal industry, a 2012 HSBC stranded asset risk assessment found that future carbon prices could negatively affect coal reserve valuation by as much as 44 percent. Historically, the pricing scenarios of regulation regimes has not been considered or identified as relevant for reserve valuation. However, with the continued development of stricter limits on GHG emissions, companies in the business of extracting fossil fuels face a risk of asset write-off. Investors are taking note—last year 75 institutional investors asked 45 of the world’s largest fossil fuel companies to address the risks posed by climate change. As another indicator of investor interest in this issue, Bloomberg has developed a carbon risk valuation tool.3. Environmental Sustainability
The NRR sector is not just about providing energy to markets. It also uses significant amounts of energy to produce products. The American Petroleum Institute reports that the energy costs for the petroleum refining industry are about 44 percent of operating expenses. This is the second-highest industrial energy consumption in the U.S. Cogeneration technology – which can achieve total system efficiencies of 60 to 80 percent for electricity and thermal energy production – is being widely adopted to improve energy management. The EPA reports that cogeneration has not only increases efficiency, but reduces energy costs, offsets capital costs, protects revenue streams, and hedges against volatile energy prices.
Today SASB (June 25) issued provisional standards that address the environmental, social, and governance (ESG) issues most likely to contain material information for companies in eight industries in the Non-Renewable Resources sector: Oil & Gas – Exploration & Production, Oil & Gas – Midstream, Oil & Gas – Refining & Marketing, Oil & Gas – Services, Coal Operations, Iron & Steel Producers, Metals & Mining, and Construction Materials. Examples of issues included are greenhouse gas emissions; air quality; community relations; and health, safety, and emergency management. SASB standards are designed to be concise and cost-effective for companies and decision-useful for investors. The average number of sustainability issues in each industry standard in the Non-Renewable Resources sector is eight, and 76 percent of the suggested accounting metrics are quantitative.
As an ANSI-accredited standards setting organization, SASB’s standards development process includes evidence-based research, multi-stakeholder industry working groups, a 90 day public comment period, and review by an independent Standards Council. The working groups for the Non-Renewable Resources sector— which included 221 registrants— represented publicly traded companies with more than $2 trillion market capital and investment firms with more than $3.3 trillion in assets under management. A full list of working group members can be found here.
The Non-Renewable Resources sector is the fourth set of industry standards released by SASB to date, bringing the total standards produced to date to 27 industries and completing 40% of the work to create a complete set of 80+ industry standards pertaining to material sustainability factors for use by the capital markets. Join us in the standards development process.

Dr. Jean Rogers is Founder and CEO of the Sustainability Standards Board.