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ESG has moved from sidelines to strategy — here's what that means for Houston companies

Amy Chronis of Deloitte shares why now's the time to invest in ESG — and the impact this movement is having on Houston. Photo via Getty Images

The Houston business community has embraced environmental, social, and governance investments, with a majority of deals in the past two years valued at $50 million or more, per PitchBook Data, Inc. In 2022, Houston companies invested just more than $1.25 billion in clean technology, climate technology, and impact investing. Nationwide, ESG investments totaled north of $15 billion across 330 deals, according to Deloitte’s latest Road to Next report, released late in 2022.

What might this mean for Houston companies? In our view, it demonstrates that ESG appears to be moving from sideline to strategy and in the process, providing potential wins across multiple fronts for companies. As companies prepare for upcoming SEC regulations around reporting greenhouse gas emissions, much of the work they’re doing is not simply “because we have to.”

Increasingly, businesses are realizing that prioritizing ESG can be good for the bottom line, for the planet and for employees. As they prioritize ESG, they’re involving teams, accepting accountability and often reaping the benefits of ESG reporting, according to Deloitte’s 2022 Sustainability Action Report. The report surveyed 300 legal, accounting, finance, and sustainability leaders from companies with annual revenue of $500 million or more. Here are some ways that ESG activity is becoming part and parcel of corporate life.

Teamwork. Fifty-seven percent of executives surveyed note that their companies have assembled cross-functional ESG teams, and another 42 percent say they plan to. That’s a considerable increase from 2021, when a similar study showed that only 21 percent of respondents had such teams in place.

Accountability. A large majority (89 percent) of executives polled have enhanced internal goal setting and accountability mechanisms to promote readiness. These executives realize that their companies can have both an impact and dependence on the environment and society, and that ESG reporting measures may not just be reporting requirements, or a box to check, but a meaningful way to align strategy with commitments to sustainability and the social good.

Proactive moves. Nearly all (96 percent) of executives surveyed plan to seek external assurance for the next reporting cycle. Among executives in the oil and gas sector, 67 percent say they will continue to obtain assurance and 31 percent will seek it for the first time. Executives are also proactively investing in technology and tools to help them meet reporting needs, with around half saying they are very likely to invest in these tools in the next 12 months. These planned investments indicate that leaders appear confident in the business benefits of ESG.

Reaping the benefits. ESG commitments, it turns out, can be good for business. They are yielding benefits, including attracting and retaining talent, increasing efficiencies and ROI, boosting trust among stakeholders, and enhancing brand reputation. Another, perhaps surprising benefit of enhanced reporting is that it can enable some companies to premium-price their products, a benefit acknowledged by nearly half (49 percent) of respondents.

Facing challenges. Businesses have challenges, especially when something new comes along. While many executives (61 percent and 76 percent, respectively) are prepared to disclose Scope 1 and Scope 2 greenhouse gas emissions, Scope 3 remains a challenge because it involves data from external vendors. As such, only 37 percent of executives surveyed are prepared to disclose Scope 3 details, the top challenges cited being lack of confidence in the data supplied by external vendors as well as lack of data availability.

In just over a year, we’ve seen ESG reporting morph into a powerful tool, one that can inform business strategy. We expect that in the coming years, leaders may see even more benefits from ESG reporting and integrate it even more fully into the way businesses are managed.

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Amy Chronis is the Houston managing partner and vice chair of energy and chemicals at Deloitte. Geoff Tuff is the sustainability leader for ER&I practice at Deloitte. This article originally ran on InnovationMap.

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A View From HETI

Some of those counties affected include production hot spots within the San Juan Basin in northwestern New Mexico and the Permian Basin, which straddles the New Mexico-Texas line. Photo via Getty Images

The New Mexico Court of Appeals has upheld regulations aimed at cracking down on emissions in one of the nation’s top-producing oil and gas states.

The case centered on a rule adopted in 2022 by state regulators that called for curbing the pollutants that chemically react in the presence of sunlight to create ground-level ozone, commonly known as smog. High ozone levels can cause respiratory problems, including asthma and chronic bronchitis.

Democratic Gov. Michelle Lujan Grisham's administration has long argued that the adoption of the ozone precursor rule along with regulations to limit methane emissions from the industry were necessary to combat climate change and meet federal clean air standards.

New Mexico Environment Secretary James Kenney said the court's decision on Wednesday affirmed that the rule was properly developed and there was substantial evidence to back up its approval by regulators.

“These rules aren’t going anywhere,” Kenney said in a statement to The New Mexican, suggesting that the industry stop spending resources on legal challenges and start working to comply with New Mexico's requirements.

The Independent Petroleum Association of New Mexico had argued in its appeal that the rule disproportionately affected independent operators.

“The administration needs to stop its ‘death by a thousand cuts’ hostility to the smaller, family-owned, New Mexico-based operators,” the group's executive director, Jim Winchester, said in an email to the newspaper.

The group is considering its legal options.

Under the rule, oil and gas operators must monitor emissions for smog-causing pollutants — nitrogen oxides and volatile organic compounds — and regularly check for and fix leaks.

The rule applies to eight counties — Chaves, Doña Ana, Eddy, Lea, Rio Arriba, Sandoval, San Juan and Valencia — where ozone pollutants have reached at least 95% of the federal ambient air quality standard. Some of those counties include production hot spots within the San Juan Basin in northwestern New Mexico and the Permian Basin, which straddles the New Mexico-Texas line.

The industry group had argued that Chaves and Rio Arriba counties shouldn’t be included. The court disagreed, saying those counties are located within broader geographic regions that did hit that 95% threshold.

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