A big year ahead for ESG in energy

Written by:

Hillary Holmes

Numerous factors are coming together to make the year ahead transformative for the energy sector -- particularly when it comes to ESG. We expect to see companies shift strategies, tap into new financing, and face increased litigation, all while grappling with a major job crunch.

 For everyone committed to decarbonization and the transition to renewable energy, these changes will spell big opportunities. Corporate leaders, entrepreneurs, and investors who stay ahead of the curve will reap rewards, but those lagging behind are likely to face losses.

Across years in the energy sector, we’ve come to see how underlying forces in the economy and society change the landscape for businesses large and small. And in our work together at the ALLY Energy ESG Council, we “drill down” specifically on changes affecting environmental, social, and governance initiatives.

Companies have long wrestled with the tension between profit and social purpose. In recent years, the public and investors have been stepping up pressure to advance on climate action. In this way, the “social license” and the investor license to operate have become largely the same.

The opportunities to profit from green energy are increasingly clear. Sustainability financing -- in the forms of green bonds, blue energy transition bonds, and more -- already hit a record in 2021, and is set to increase again this year. So we expect companies to shift both their strategies and their messaging in the months ahead to show concrete progress on the E in ESG.

The same incentives are also wooing more and more entrepreneurs into the field of green energy solutions. Climate-tech is growing rapidly and likely to soar in the year ahead. Expect to see some small startups scale rapidly, and new startups are formed -- likely raising large amounts of capital in their early rounds. These will include future unicorns.

Meanwhile, the S in ESG might see the most change this year. Social issues have come to the forefront as the Covid-19 pandemic exposed systemic problems. And recently, the “great resignation” and low unemployment have left companies scrambling to attract and retain talent. It isn’t just pay and benefits that people are seeking. They want to work for organizations with strong records on social issues like DEI (diversity, equity, and inclusion). They want to work for companies with strong workplace cultures that take on inequality, racism, and other forms of bigotry.

A poll by CNBC and SurveyMonkey found that 78% of workers say it’s important to them to work for a company that prioritizes diversity and inclusion. More than half (53%) call it “very important.” People increasingly want to be allies to each other -- and want their companies to show allyship as well.

We expect business leaders to heed these calls in the year ahead. It won’t be only about diversity metrics for boards of directors, but also about ensuring an equitable talent pipeline so that people of all backgrounds have an equal shot at promotions and leadership positions. And it extends to supply chains as well.

Another part of the impetus for action on ESG is the risk that comes along with new requirements on companies to disclose parts of their operations. In their filings, companies are providing more information about their activities with respect to the environment, diversity, and other concerns. This increase in disclosure has been accompanied by more and more shareholder litigation on these issues. And more requirements are coming.

Forward-thinking companies in the energy sector are seizing this moment as a chance to show the work they’re doing and to offer transparency about their commitments. They’re setting clear goals, listening to employees, measuring progress, and offering updates.

Through this process, they’re discovering that green initiatives and social good go hand-in-hand. After all, in addition to wanting to work for equitable, inclusive companies, great employees are also drawn by environmental action. The IBM Institute for Business Value (IBV) found that 71% of workers say that environmentally sustainable companies are more attractive employers.

The more that companies advance their ESG efforts, the more diverse talent they attract. In turn, having a more diverse, inclusive workforce increases innovation, speeding up progress toward climate goals -- and delivering greater profits and share values along the way. It’s a win-win across the board.

The year ahead will confirm that ESG is not a “trend,” nor an “initiative.” Instead, it is a core part of being a modern U.S. corporation.

Hillary Holmes is chair of the Capital Markets Practice Group at Gibson DunnKatie Mehnert is CEO and Founder of ALLY Energy.


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