Investors need to go beyond aggregated views on ESG performance to understand underlying risks
National Oil Companies (NOCs) are major players in the oil and gas sector, responsible for producing more than 50% of the world’s oil and gas and possessing the majority of reserves. As the world strives to achieve the goals of the Paris Agreement and environmental, social, and governance (ESG) risk factors are increasingly considered by financial institutions, the oil and gas sector stands as one of the industries with the highest likelihood of experiencing ESG-related financial impacts. For investors who are thinking about investing in NOCs, especially those with Net Zero or more general ESG ambitions, it is key to accurately assess how well these companies are performing against ESG criteria.
A recent study by Columbia University academics compared ESG ratings of NOCs against those of International Oil Companies (IOCs) to offer a better understanding of the drivers of NOCs’ ESG performance. The research revealed that NOCs significantly underperform IOCs in the governance dimension, being this a key area to ensure an efficient management of ESG risks and the mitigation of pressures against ESG improvement efforts. Importantly, the study claims that using standard high-level ESG rating indicators to assess NOCs’ ESG risk drivers may be insufficient, particularly in the governance dimension, as a deeper analysis is necessary.
At Clarity AI, we aim to contribute to this research by leveraging our extensive database of proprietary data covering +100 indicators including quantitative, qualitative, and controversies information. Our objective is to delve deeper into the comparative analysis of ESG performance of NOCs and IOCs, using our data. Our findings align overall with the study’s conclusions regarding the underperformance of NOCs in the governance dimension. However, our data also shows that NOCs perform worse in environmental areas that are material to the oil and gas sector¹, including CO2 emissions intensity, and energy and water consumption. In the social dimension, disparities between NOCs and IOCs are less prevalent, except for gender diversity indicators, where NOCs generally lag behind.
Key findings
Clarity AI ESG scores show an overall better performance of IOCs, with a weighted median score 20% above that of NOCs. However, it is important to note that most NOCs are based in Emerging Markets (EMs), whereas most IOCs are based in Advanced Economies (AEs)². In AEs there is typically a more robust presence of ESG-related regulations and requirements, along with greater market scrutiny on these matters. This factor may be one of the reasons behind NOCs’ comparatively lower performance, as our analysis reveals a statistically significant difference between companies based on location, with those based in AEs showing stronger performance than those based in EMs. This topic merits further in-depth exploration in future analyses.
Note: Median Clarity AI ESG Risk scores weighted by revenue, subjected to treatment to mitigate the impact of outliers. Data shown for 15 NOCs and 27 IOCs, considering organizations involved in both upstream and/or downstream activities. Data as of September 2023. Source: Clarity AI
Environmental performance
When looking at the environmental dimension, our findings show that NOCs exhibit a higher carbon intensity, consume more energy and water to run their operations and recycle less of it:
- The median of Scope 1 and 2 emissions intensity is 36% lower for IOCs than for NOCs. For Scope 3 emissions intensity, the median for IOCs is 8% lower than that of NOCs. This may be partly attributed to the fact that IOCs typically have more established carbon-related policies and targets, given that:
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- 78% of IOCs included in the study have a GHG emissions reduction target versus 69% of NOCs
- 100% of IOCs included in the study have a GHG emissions reduction policy versus 94% of NOCs
Note: Median Scope 1 and Scope 2 CO2 emissions intensity measured as tons of CO2e divided by revenue in million USD and weighted by revenue, subjected to treatment to mitigate the impact of outliers. Data shown for 15 NOCs and 27 IOCs, considering organizations involved in both upstream and/or downstream activities. Analysis performed on reported data from 2019 to 2022. Source: Clarity AI
- The median energy consumption intensity for IOCs is 17% lower than that of NOCs:
Note: Median energy consumption intensity measured as GJ divided by revenue in million USD and weighted by revenue, subjected to treatment to mitigate the impact of outliers. Data shown for 15 NOCs and 27 IOCs, considering organizations involved in both upstream and/or downstream activities. Analysis performed on reported data from 2019 to 2022. Source: Clarity AI
- In terms of water consumption intensity, IOCs consume 28% less water than NOCs, and their recycling water ratio is more than 3 times that of NOCs. This may partly be attributed to their lack of established policies and targets related to water consumption, given that:
- 100% of IOCs included in the study have a water efficiency policy in place versus 81% of NOCs
- 19% of IOCs included in the study have a water efficiency target versus only 13% of NOCs
Note: Median water consumption intensity measured as m3 divided by revenue in million USD and weighted by revenue, subjected to treatment to mitigate the impact of outliers. Data shown for 15 NOCs and 27 IOCs, considering organizations involved in both upstream and/or downstream activities. Analysis performed on reported data from 2019 to 2022. Source: Clarity AI
Results are mixed when it comes to one environmental dimension: waste management. NOCs generate 34% less waste than IOCs and their recycling ratio is 36% higher. However, they generate 31% more hazardous waste than IOCs, an issue especially material for the oil and gas sector.
Social performance
When looking at social indicators, differences between NOCs and IOCs are less prevalent and currently it isn’t possible to establish a clear trend with available data, except for some gender equality indicators: NOCs lag significantly behind peers in this dimension.
- The median percentage of female Board members in IOCs almost doubles that of NOCs: 38% versus 20%. This looks consistent due to the fact that 74% of IOCs included in the study have a Board diversity policy versus only 25 % of NOCs.
Note: Median percentage of female members of the Board weighted by revenue, subjected to treatment to mitigate the impact of outliers. Data shown for 15 NOCs and 27 IOCs, considering organizations involved in both upstream and/or downstream activities. Analysis performed on reported data from 2019 to 2022. Source: Clarity AI
- In terms of the percentage of women employees, the median for NOCs is 21% against 27% in IOCs, with some NOCs being the exception and showing more female representation, notably Equinor from Norway, Gazprom from Russia, and PTT PCL from Thailand.
Governance performance
Our analysis aligns with the conclusions drawn in the research conducted by academics at Columbia University and mentioned in this article’s introduction, which highlights common challenges faced by NOCs in corporate governance. These companies exhibit limited Board independence, fewer compensation incentives linked to ESG criteria, and ethical business policies. They are also involved in controversies related to bribery, corruption, and anti-competitive practices.
Note: Median percentage of independent members weighted by revenue, subjected to treatment to mitigate the impact of outliers. Data shown for 15 NOCs and 27 IOCs, considering organizations involved in both upstream and/or downstream activities. Analysis performed on reported data from 2019 to 2022. Source: Clarity AI
This research, based on the metrics behind ESG scores, highlights the need for investors to go beyond aggregated views to understand underlying risks. By digging deeper into each environmental, social, and governance dimension, we are able to identify NOCs’ significant underperformance in environmental issues that are relevant to the oil and gas sector. These go beyond the governance issues signaled by the research conducted at Columbia University. In the social dimension, currently available data doesn’t allow us to draw clear conclusions, with the exception of gender diversity indicators, where NOCs tend to trail behind. By highlighting the disparities in NOCs and IOCs performance and the drivers behind it, we emphasize that there is room for investors to further engage with these companies, driving attention towards key areas of underperformance and helping mitigate underlying risks.
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¹Materiality assessments are based on SASB standards
²Following IMF’s country classification
Methodology
The analysis conducted was based on a sample of 15 NOCs and 27 IOCs, considering organizations involved in both upstream and/or downstream activities:
- NOCs: Bharat Petroleum Corporation, Ecopetrol, Gazprom, Hindustan Petroleum, Indian Oil Corporation, KazMunayGaz, Neste Oyj, Equinor, Oil and Natural Gas Corporation, PTT PCL, PetroChina, Petrobras, Pemex, Saudi Aramco and YPF. All except two are based in emerging markets.
- The group of IOCs analyzed includes oil and gas giants like BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Repsol, Shell, Total Energies, and more. The majority of them are based in advanced economies.
Statistical analysis and comparative assessments were conducted to evaluate the relative performance of NOCs and IOCs across the three ESG dimensions. A total of 85 quantitative, qualitative and controversy indicators were analyzed. The analysis encompassed the most up-to-date data spanning from 2019 to 2023 for each company. To offer a more precise portrayal of ESG performance within each group, the data has been weighted based on revenue at the indicator level.
