Blueprinting the Successful Implementation of ESG Data & Frameworks

  • The complexity of the ESG landscape presents a variety of recent challenges, but effective and efficient execution can assist in attracting incremental capital, augment competitive differentiators, and allow a management team to regain control of the investment narrative.
  • If a reasonable proxy for significant and impactful innovation can be derived from green patent production, then empirical research suggests that we should first look to oil, gas, and energy producing firms as leaders in green technology.
  • Paradoxically, ESG data methodologies are generally considered flawed, inaccurate, and unstandardized, yet their capital markets’ utility has become increasingly more influential.
  • ESG strategy and implementation should center on “disclosure optimization,” defined as the ability to present an ESG profile that quantitatively highlights the nuances of the business model, objectively conveys economic reality, and complements the long-term strategic directive of management.
  • For nearly a decade, the team at Pickering Energy Partners has assisted clients in marginalizing the “noise” associated with ESG execution, outlined successful blueprints centered on narrative control and simultaneously used ESG-related data to accentuate competitive differentiation and uncover potential vulnerabilities in the investment thesis.  

Best practices should be defined as the set of proactive, non-fundamental disclosures that accomplishes two primary goals.  First off, the identified ESG datapoints proactively disclosed to external stakeholders should complement the overall investment thesis, pinpoint distinct competitive differentiators, and aim to mitigate/explain idiosyncratic risk.  Secondly, the narrative resulting from ESG disclosure should convey the economic reality of the business from a forward-looking strategic perspective. Management teams should make a concerted effort not to fall prey to the “Square-peg/Round-hole” dilemma.  It is entirely reasonable and, in most cases, appropriate not to automatically acquiesce or default to sector representation since it can potentially not convey company-specific economic reality and forward-looking strategic directives.   

For example, conventional frameworks and ESG “report cards” that outline disclosure guidelines for oil & gas do not necessarily allow for an expanded narrative on future strategic pivots or operations, especially if those goals are related to energy transition.  As previously stated, energy transition disclosures align closer to those displayed in the technology space or blend a variety of different existing sectors.  Unique aspects of innovation, excitement, investment narrative, and opportunity/differentiation could be overlooked if an energy company were to “check-the-box” and/or rely on generic/templated disclosure recommendations.  This is not to say that any of the frameworks or data providers should be ignored or relegated.  They clearly display a distinct utility, but frameworks typically result in outputs that reflect generic bare minimums.  Diving headfirst into any framework, set of principles or data provider without initially addressing the following five key points increases the probability of failure.   

To read the full piece from Dan Romito on the emergence of ESG and the ongoing energy transition, please fill out the form below.