Q&A: Transparency and Standardization in ESG Reporting

Mark Green
Posted June 24, 2021

As an integral of its Climate Action Framework, API has developed a template of core greenhouse gas (GHG) indicators to guide individual natural gas and oil companies in their climate-related reporting. The template will help standardize reporting on a base set of specific indicators. Companies that use the template will do so in 2022 to report 2021 data. In the Q&A below, Dr. Aaron Padilla, API manager of climate and ESG policy, explains what the template is, how it was developed and its role in industry’s efforts to address the risks of climate change.

Q: First, what is ESG, and why is it important to the natural gas and oil industry?

Padilla: ESG is environmental, social and governance and really comprises a breadth of issues that we often also refer to as sustainability issues. And these cover the environment, health and safety, social responsibility and human rights, and the internal company governance of all these issues. I would say they are increasingly recognized by a range of stakeholders as important for oil and natural gas companies to manage well.

Climate-related risks and opportunities for companies are a part of ESG, they’re a part of the environmental part of ESG or sustainability. The reporting that companies do on these ESG or sustainability issues … reflects how they work to reduce their impacts and reduce the risks to them represented by these issues, and to give stakeholders confidence that they can manage these well just like they want to give stakeholders a sense that they manage well the commercial risks and opportunities of the of the company.

Our industry, on an individual company basis, has been reporting on these sorts of things for well over 20 years, and API and some of our counterpart associations we have produced a guidance for sustainability reporting since 2005. What is a newer dimension to all of this is the more granular focus on climate as a risk and an opportunity for companies. What is also newer is an expansion of companies’ audiences for this sort of reporting to many different kinds of stakeholders – and now increasingly including financial-sector stakeholders. ESG reporting or sustainability reporting is done for a variety of audiences: policymakers, communities around where our companies operate and then also financial sectors.

Q: What are individual companies reporting, specifically?

Padilla: They are reporting on the way in which their business creates potential impacts that are environmental or social in nature and how they manage those impacts, how they reduce the negative effects that can be associated with their business and how they can also how they realize opportunities associated with the environmental and the social dimensions of their business.

ESG reporting provides a comprehensive overview of the company’s full range of assets and the impacts and risks associated with those assets and how the company systematically manages these issues across the firm, wherever they operate, and how they do so in a in a systematic way. . When you read a company's sustainability report or an ESG report, you get a good picture of the issues and impacts that are environmental and social in nature that are relevant for the company and how they're managing them.

Q: What are the audiences for GHG reporting?

Padilla: It's fair to say that the audiences are many. I think that we recognize that many stakeholders, from the general public to communities where we operate to policymakers, especially those that are engaged in climate policymaking, and then certainly the financial sector, investors and banks and credit rating agencies, they are all, and we are all interested in this information.

Also, we are interested to see progress in the oil and natural gas industry to reduce the profile of GHGs associated with the energy that we produce. This template shines a spotlight on a company's performance from one year to the next. It shines a spotlight on a company's performance at a given point in time compared to its peers, and so it's geared to all of us, all of those audiences that are interested in seeing the industry improve on reducing GHGs.

Q: What is API’s reporting template, and what is its purpose?

Padilla: It fills a need that hasn't yet been fully realized, and that is to standardize the reporting for a concise set of GHG indicators to provide for like-for-like reporting by individual companies that is consistent and comparable. When you're a reader or an audience for the reporting of an individual company on GHG indicators, our template standardizes a short, foundational set of the reporting to these indicators that will give you an ability to compare one company to another. And that specific standardization for a core set of indicators has never been accomplished before in the way in which we have done it in in the API template.

This will be used by an individual company on a voluntary basis, but we expect quite extensive uptake across our industry, because of the significant importance that our member companies have placed on this initiative and the buy-in that they have to the template that they have developed. We expect that it will be used quite widely in our industry across many companies.

Q: How important is transparency and data verification in ESG reporting?

Padilla: We want to be transparent about companies’ performance on these issues, and our template includes different sections that will give audiences a good foundational sense of companies’ performance in in two respects.

One is in the GHG emissions that are associated with their business. We have indicators that cover GHG emissions associated with companies’ operations and GHG emissions that are associated with the energy that companies use. This will give transparency on those emissions associated with their operations.

The template also will give transparency into companies' efforts to mitigate GHGs, meaning their work to reduce their GHGs and also to take proactive actions to reduce GHGs in the atmosphere that may be their own or maybe others. We have a whole section on GHG mitigation, and we have a section that gives a company a place to indicate whether they have targets associated with reducing their company's greenhouse gas emissions or their work on GHG mitigation and also whether they have more climate-related reporting than this foundational template. Many of our companies that are quite experienced in reporting report this foundational set and more. Our template will give stakeholders and audiences an opportunity to know where they can go for even more information.

The final piece of this that really relates to transparency as well is a section in our template on third-party verification that will give companies an opportunity to signal to their audiences the level of assurance that they get on their reporting and who they hire as a third party to verify the data that they present in their reporting across the template.

Q: What was API’s role in developing the template?

Padilla: We have filled a natural role as the convener of companies across the industry. Because we are the largest trade association representing all segments of the industry across the value chain and then back into the supply chain, we were able to bring together the member companies across the breadth of the industry in order to develop this template that is fairly broad in its coverage so that all of our member companies, wherever they are in the value chain or in the supply chain, will have a place in this template to report the most relevant or foundational GHG indicators that apply to them.

We've facilitated the discussion for our member companies to reach an agreement on what they thought would be the core set, the foundational set. That’s a platform and a kind of a base or a foundation on which many of our companies will build or already extend their own reporting, and they'll do more. For our companies that are advanced in reporting and have been doing this for a while, the benefit for them and for their audiences is that it standardizes the foundational set that will allow for greater comparability than we've had before, even though they've been reporting this information before.

For other companies that are newer to this sort of reporting, it gives them a place to start, and it will bring them up to a certain foundational level that'll give stakeholders a clear picture of individual companies’ performance on this when you might not have seen this sort of reporting from them before.

Q: What it like to develop the template, who contributed and what kinds of indicators were included?

Padilla: We've been at this for a year. It has taken a full year to get to this point, which I think is important to emphasize because when you look at the template and the list of this concise set of indicators it might appear like it's kind of easy to get to that point. But there's detail behind the list of indicators – definitions that standardized the boundaries for the reporting for each one of the indicators. So, we had to dig into those details and then convene discussions across our member companies to reach an agreement about what was relevant, what was the right answer for the boundary that we drew in the definition that we produced. All of that took a lot of time in discussions within our membership.

Then part of our process was also a consultation with the financial sector – one of the key audiences for this sort of reporting – and we had engagements with some of the world's most prominent institutional investors, commercial banks and credit-rating agencies that are the largest business partners for our industry. We really prioritized their feedback and their input because of their enhanced interest in all of this reporting in recent years. We were able to take on board some of their suggestions, answer their questions and incorporate that into template 1.0, which we've produced now. We aim to continue the dialogue within our membership, with the financial sector and with other stakeholders as we work to continuously improve and enhance this template going forward.

Q: Why has so much time an effort gone into developing this template?

Padilla: It shows a willingness of the industry to say we want to show you where we're at and the progress that we aim to make and give you data that allows for you to see our progress over time, to see the performance of one company to another. That’s a big step, and that's all about transparency, and I think we should be proud that we've been able to rise to that challenge. I think that that really shows a commitment from the industry to just really be transparent about all this to meet society's expectations that we improve over time.