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ESG regulations pose biggest risk to energy and chemicals sector

Published by , Senior Editor
Hydrocarbon Engineering,

Energy and chemicals executives view environmental, social, and governance (ESG) disclosure regulations as the biggest environmental impact related regulatory risk to these sectors, according to a sentiment survey carried out by ICIS.

Over two-fifths (41%) of respondents stated they were most concerned about ESG disclosure regulations above any other, which require the publication of data to reveal the impact of a business in ESG terms. This was significantly higher than concerns for the EU Ecolabel framework (20%), and Taxonomy regulation (18%).

This does vary region to region, however. Just over half (51%) of respondents from Germany cited ESG disclosure regulations as their biggest concern, but this fell to just one in three equivalent respondents from the UK (33%). Executives in North America were more concerned with the EU Ecolabel framework – with 36% citing this as their biggest regulatory risk linked to environmental impact. Contrastingly, the regulation that least concerned energy and chemicals executives was imposing the need to be ‘net zero by 2050’. Only 3% of businesses said this was their greatest regulatory risk. This is perhaps not surprising in the wake of COP26 at which some nations key in ensuring this goal is met have pushed back on the deal. As such, governments around the world are setting their own new and more ambitious targets, such as Boris Johnson’s plans to decarbonise the UK power system by 2035, encouraging the switch to more sustainable energy sources such as hydrogen.

With disclosure regulations the biggest concern for executives in these sectors, governments and regulators around the world need to provide vital support if the industry is going to continue on the path to sustainability and reduced climate impact.

Alison Jones, Strategy Director at ICIS, comments: “Governments and regulators are pushing the decarbonisation of industries by mandating companies to release data on how they are meeting ESG standards. As such, companies must ensure they are planning and on the right side of forthcoming regulation.

“You can’t manage what you can’t measure and more openness on ESG is important to make businesses more aware of their energy outputs, which will help solidify reporting and aid them in achieving sustainability goals. Greater transparency will also benefit the whole industry and encourage other businesses to pivot operations to reduce their carbon impact. However, it’s clear that businesses are worried about the burden that these regulations will create.

“The final climate agreement from COP26 is yet to be confirmed, but if we don’t see steps within it to help the vital energy and chemicals industries with environmental goals then we are missing a key point.”

When it comes to due diligence, only 40% of energy and chemicals companies conduct extensive due diligence including ESG benchmarking, with 6% stating they do not do any due diligence at all. The UK is leading the way with ESG benchmarking, with over half (52%) conducting extensive due diligence when divesting assets, but respondents in the Middle East were the least likely to conduct due diligence on buyers (10%).

Alison continues: “It’s vital that businesses conduct proper due diligence when divesting assets and understand that the responsibility is still on them to ensure that buyers meet ESG standards and plan on running these assets accordingly.”

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