July 2022
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The ESG Perspective: The ESG fork in the road

On June 30, 2022, the U.S. Supreme Court ruling in the case of West Virginia vs. the EPA caused a panic amongst anti-oil activists. Some consider this the beginning of an ESG rollback, but I believe this is an overreaction.
Mark Patton

On June 30, 2022, the U.S. Supreme Court ruling in the case of West Virginia vs. the EPA caused a panic amongst anti-oil activists. Some consider this the beginning of an ESG rollback, but I believe this is an overreaction. Let’s first understand what this ruling is about. To understand this, we need to go back to 2015 and creation of the EPA’s Clean Power Plan (CPP).  

The CPP set new emission standards for power plants—standards that could not be achieved by fossil fueled power plants, forcing utilities to invest in solar and wind to meet their energy output. This resulted in the legal challenge. What the ruling found is that EPA authority is limited to what has been legislatively allowed under legislation like the Clean Air Act (CAA), and the EPA overstepped their authority. Basically, the EPA needs to be granted the legislative authority to enact new rules like the CPP.  

Originally, the CPP was intended to take a legislative path when introduced under Obama’s EPA. Even though there was a Democratic majority in both houses of Congress, the CPP was never voted on and died. Many believe this was because it was disclosed within the CPP that utility rates would rise significantly, and nobody wanted to go on the record as having voted for the legislation that led to this significant increase. Regardless a non-legislative path was selected, and the CPP was challenged via a lawsuit filed by the state of West Virginia. The Supreme Court ruled that this was a government overreach. This should have been expected, as during this period, we saw many attempts by the Executive Branch to issue executive orders in an attempt to create new laws without the support of Congress. In many of these cases, we witnessed these types of executive orders challenged legally. So how does this impact the current ESG movement? 

On the surface, this ruling states that government agencies are limited by the authority granted legislatively under the CAA. There are some thoughts that this opinion could potentially be extended to the Securities and Exchange Commission (SEC) and its pending climate disclosure rules. The question has come up as to whether the SEC has the legal authority to extend this requirement. Let me remind you that it was the expectation of this rule that motivated public companies to increase their ESG focus and reporting. Yes, pressure from the financial community was also a factor. And public opinion that seems to endorse ESG reporting was additional pressure, but if the pending SEC disclosure requirements weren’t on the horizon, would have there been more push-back? 

What does all this have to do with a fork in the road? We can proceed on the path of zero carbon, or there could be a shift pushing back against this path. This is where things can get messy. There are many that will argue the goal of ESG is to eliminate oil, so why even continue down this road? Aren’t we giving in to the same movement that wants to end our industry? This is why we are in dangerous territory. In my opinion, we need to stay on the carbon zero path. I believe logic will prevail—we already have witnessed the European Commission (EC) rule that natural gas and nuclear energy are now sustainable energy sources. They went too far, too soon down the alternative energy path and lived through brownouts, blackouts and a lack of heat during the winter, along with increasing utility rates. Regardless of the pressure from the anti-oil lobby, the EC proceeded. The current gas price crisis should reinforce the idea to everybody that oil production is a necessity today.  

Alternatively, we are not prepared, nor do we have the infrastructure today, to go full-alternative energy. In addition to the reliability issues surrounding wind and solar, gas and oil become necessities. Add, in addition to that, all the other industries, like chemical, cosmetics, clothing, automotive, plastics (among others) that rely on oil and gas or their by-products. I do believe the only practical way is a slow transition, where we can better understand the limitations of our utility infrastructure and wind and solar. This means that oil and gas will continue to do the heavy lifting until we understand the limitations and have answers for them. I suspect we will see a maximum level of solar and wind, that will be far less than 100%. Nuclear will enter the picture, and maybe hydrogen and hydrogen fuel cells, but there will always be a need for oil and gas. 

National Security angles. Then, there is the issue of National Security. Our fleets of ships, aircraft and vehicles run on oil and gas. Imagine what would happen, if we became reliant on foreign oil and gas, and war broke out with a supplier’s ally. Oops. We need to move back to energy independence, just from a National Security standpoint. 

There are numerous reasons that oil and gas will remain important to our energy future. But imagine an industry that can lower its carbon footprint significantly. Add that to the effect of gas prices on the economy, and both public perception and the financial community will find a way to support this. Like the EC’s decision on natural gas, there was opposition, but they proceeded anyway, because logic prevailed. 

Logic is on our side, and pursuing carbon zero will be the leverage we need to bring back the acceptance we have lost from the public and financial community. So, let’s take a pause at this fork in the road and choose wisely. A low-carbon or even zero carbon oil and gas industry is on the horizon. We cannot let our momentum or path be influenced by these recent legal rulings. Slow and steady wins the race. Let’s hope logic continues to prevail.  

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