-By Teddy Nwanunobi
With over $160 billion projects that are yet to see the Final Investment Decisions (FIDs) in the upstream segment of Nigeria can benefit from the global Environmental Social and Governance (ESG).
All over the world today, there is a shifting of attention by investors, from traditional sources of funding for projects, as investors look to applying the non-financial factors as part of the key analysis process to identify material risks and growth opportunities. In the oil and gas industry, funding for fossil fuel investment is waning. This is because investments in that area are being withdrawn. As a result, most analysts see priority for global ESG as an escape path to financing projects in the industry.
ESG investing story
Back in 2004, a former United Nations Secretary General, late Ghanaian diplomat, Kofi Annan, issued an ESG proposal, which he submitted to the chief executive officers (CEOs) of the world’s leading financial institutions. Annan invited the CEOs to join an initiative, later known as Principles for Responsible Investment, that would tighten the relationship between investors and environmental, social, and corporate governance issues. Participants had to submit annual activity reports on their responsible investments. More than 2000 money managers accepted the invitation, including Morgan Stanley, BlackRock, and J.P. Morgan.
This framework can be used to assess how one company performs in these three areas vs. its competitors. For instance, does the company make a positive impact on the customers and communities it serves? How does the company deal with social unrest, climate change, and racial inequality?
Within the corporate environment, institutions are prioritising their emphasis on ESG, moving beyond traditional corporate responsibility. Large financial institutions increasingly see ESG and corporate social responsibility (CSR) as a key part of their risk-management strategy.
“Awareness is also growing that responsible banking approaches and skillful management of ESG can improve risk-adjusted returns, enhance reputation, spark commercial opportunities, mitigate portfolio risks, and improve market positions and value,” KPMG pointed out.
How hot is ESG investing?
A recent report by Bloomberg said that the fund is fund projected to hit $53 trillion by 2025. This represents more than a third of the $140.5 trillion in projected total assets under management. Bloomberg predicted that ESG assets will hit $37.8 trillion by year-end.
Interestingly, data suggests that ESG investments perform as well, if not better than traditional investments. For the evidence, the S&P Global Market Intelligence analysed 26 ESG exchange-traded funds and mutual funds with more than $250 million in assets under management. It found that from March 5, 2020, the month that the World Health Organisation (WHO) officially declared COVID-19 a pandemic, to March 5, 2021, 19 of those funds performed better than the S&P 500.
Those outperformers rose between 27.3 per cent and 55 per cent over that period. In comparison, the S&P 500 increased just 27.1 per cent.
An ethical investment portfolio can actually protect an organisation from risk, while allowing it to make a positive impact.
Some key takeaways
ESG investing has disrupted the traditional corporate-shareholder relationship. A wave of activism around social and economic injustice and a heightened awareness of climate change have prompted a shift towards sustainable investing. As a result, many investors now prefer to use their money to create change in the world, especially if it generates lucrative returns.
According to the World Wealth Report 2020, 27 per cent of high-net-worth individuals are steering their investment money toward ESG companies. Additionally, the report states that 49 per cent of investors under 40 put their cash into ESG stocks. Clearly, the ESG market is not going anywhere anytime soon.
As with any type of investment, a society or an organisation would want to do its research. Within the three ESG categories, multiple metrics are employed to score ESG performance. Alternative data and artificial intelligence can provide you with details that more general reports may miss. And as ESG investing continues to become mainstream worldwide, public or private entities can look forward to more concretised reporting standards and increased regulatory focus.
Who is in danger?
As fossil fuel producers, oil and gas companies are among the most exposed to the disadvantages of the energy transition. Oil and gas prices and refining margins are extremely sensitive to medium- and long-term demand expectations. What it means is that the global ESG assets can provide leeway for most oil and gas projects in Nigeria, especially the private and public sector, to address inherent hindrances.
It would be recalled that, last June, the International Energy Agency (IEA) had called for an end to fossil fuel investment as part of an attempt to ensure net-zero ambition becomes a reality by 2050. Although stakeholders in the oil and gas sector have criticised the call, it, however, sent a negative signal to the industry, which has already witnessed about a five per cent reduction in investment, due to the COVID-19 pandemic.
The Petroleum Industry Act (PIA) may have been signed by President Muhammadu Buhari. But Nigeria is still a country of too many surprises. Presently, there are over $160 billion projects that are yet to see the FIDs in the country’s upstream segment.
Across Africa, the African Refiner and Distributor Association (ARDA) puts needed funds for refinery upgrade, alone, at $15.7 billion, while an additional $7.5 billion investment, inclusive of debt, equity, and grants, will be required to build clean cooking stoves and downstream infrastructure that are going to support the attainment of the UN Sustainable Development Goals (SDGs).
Business Development experts for Vitol Services Ltd, Richard Egan and Guillaume Quigiver noted that ESG creates a new opportunity for African countries to generate carbon credits.
According to them, Africa has the lowest cost of generating carbon credits in the world, and as such, a case should be made for a framework, whereby African carbon emissions submissions are accepted in the global marketplace.
“ESG brings new potential revenue streams that can be incorporated into a financing package,” they said.
Financial experts have also stated that ESG considerations are currently driving shifts in lending policies for various financial institutions and under what terms they are willing to lend, adding that while several key financial institutions like the World Bank and several Export Credit Agencies (ECAs) have pledged to end support for fossil fuel projects, Asian ECAs and some European ECAs have not made any such policy proclamations.
Stakeholders’ position
Stakeholders are already divided over proper consideration for the ESG.
But a petroleum economist, Prof. Wunmi Iledare, insisted that the ESG must be on the radar of the industry, as an important determinant for future investment flow.
“The oil and gas industry in Nigeria is not anti-environmental optimisation,” Iledare said.
Iledare added that the Society of Petroleum Engineers (SPE) makes conscious efforts to produce oil and gas in a safe and environmentally secure manner.
According to him, for years, health, safety, environment, and sustainability is a recognised discipline in the petroleum engineering profession.
An industry expert, Henry Adigun, was of the view that there are conscious efforts in the country to prioritise ESG.
Adigun noted that the country is making efforts to attract green bonds, adding that the focus on gas would be an elixir towards ESG investment.
Call to action
COVID-19 has spurred more interest in ESG investing, as global assets are expected to surge by 2022, according to a recent Celent analysis. William Trout, author of that analysis and Celent’s head of wealth management, said that this ESG tipping point means that no wealth managers should still be looking at sustainable investing as an asset class or portfolio strategy, rather, ESG investing is the new lens that determines how all investment decisions will be made.
“In the past, the industry was always interested if sustainable investments outperform traditional investments. Today, the narrative for advisers has changed to: ‘How do I respond to this new world where ESG investments are the de facto rule?’,” Trout said.
Moving forward, Trout said advisers should tap modern portfolio management tools via turnkey asset management platforms to customise clients’ portfolios based on ESG criteria.
Advisers should also note that fractional shares allow investors with limited wealth to get involved with ESG investing, according to Trout.