Three Key Questions To Ask On Decarbonization Risks

Jason Clifton, EY Canada

By Jason Clifton,
EY Canada Energy Risk Leader

The thing about risk is it’s all interconnected. We know stakeholders, shareholders and regulators are increasingly keen to understand how the oil and gas sector will decarbonize and create the kind of long-term value that extends well beyond profits alone. But decarbonization itself fuels a whole host of new risks to consider. Put simply: decarbonizing effectively means doing so while simultaneously tackling the related environmental, social and governance (ESG) risks that come along with it. Your organization’s viability, sustainability and future growth depend on it.

Striking that balance begins by asking key questions to figure out where your blind spots lie, and then tackle them systematically with proactive risk management plans. Asking three key questions now can help you get clear on what decarbonization may trigger, and how that could affect the overall success of your business.

Does our enterprise risk management (ERM) system surface the right risks to manage at the right time?

Timing is everything. Risk is evolving rapidly, and it’s not enough to know what you’re up against at a static moment. Your ERM process must be capable of continuously highlighting emerging risks in near real time. That kind of always-on intel can enable C-suites and boards to get, and stay, ahead of the game.

Almost 90% of board members say their organization’s ERM system isn’t highly effective at providing predictive insights. They also cite a lack of agenda time dedicated to discussing emerging risks, trends and scenarios that threaten the business model. In an environment that’s transforming as quickly as ours is now, those factors could fuel a perfect storm. The harder it is for leaders to access risk information that’s as timely as it is accurate, the harder it becomes to plan ahead.

For organizations across this sector, now’s the time to review ERM systems, ensuring they focus on current and future risk in equal measure. To be fit for purpose today, ERM must be capable of delivering a holistic view of residual (post-treated) risk. Invigorate refreshed processes with fresh insight from the board around appetite and tolerance for ESG risks. Armed with that knowledge, you’ll be better positioned to build effective risk management plans informed by the right data, and shaped by compelling scenario-based planning. This drives the risk resilience the industry needs next.

Are we primed to deliver on external-facing, forward-looking ESG information?

Communication is critical. More and more organizations are publicly declaring their ESG intentions to manage stakeholder expectations, support share price and encourage investment. Proactively sharing plans, tactics and progress for everything from reducing greenhouse gas emissions to meeting carbon reduction targets is driving new dialogue across industries, including oil and gas.

As regulators shift gears around disclosure expectations, doing so is also becoming more than a “nice to have.” In 2020, SEC committees approved recommendations for reporting requirement updates that cover material, decision-useful ESG factors, including human capital disclosures. They also issued preliminary recommendations for new standards governing corporate issuer disclosure materials for ESG risk. That regulatory focus is only likely to heat up in the months and years ahead, making its way to Canada, too.

Read: increased scrutiny and evolving compliance requirements mean your disclosure plans must be more accountable around forward-looking ESG-related information than at any other time in history.

Fresh perspectives can help organizations strengthen their approach and prepare for whatever comes next on the regulatory front. Engaging an external provider to get a third-party opinion on the quality of your information is a strategic way to test the effectiveness of your evidence and metrics.

But make no mistake: your internal teams should play an integral role here, too. Empowering assurance functions like internal audit and your second lines of defence to address key questions around quality and the organization’s ability to achieve forward-looking plans is critical. Their line of sight is invaluable. Enabling these functional groups to do what they do best — regularly, consistently and with the right budget allotments — can go a long way towards improving disclosure and compliance.

How can we align decarbonization with the talent agenda in a market transformed?

People are pivotal. Newer approaches to energy production in Canada (think hydrogen and renewables) are driving decarbonization efforts — and increasing the need for multidisciplinary talent right along with it. However you’re focused on decarbonizing: chances are, your organization is actively seeking non-traditional skillsets like digital capabilities, change management and more. That’s not an easy proposition for an industry that’s under increasing pressure to ramp up its focus on ESG, at a time when the workforce is heavily invested in putting purpose ahead of profits. The folks you’re hoping to attract — and retain — have greater choice in where they work both within the industry, and in other sectors where their portable skillsets are also in demand. That means your brand and reputation around the broader ESG agenda, and your commitment to creating long-term value through a broad societal footprint, is fundamental to recruitment and retention.

Cultivating meaningful change on this front begins with tone from the top. Leaders need to walk the talk on ESG, and bring all levels of operations and management on board. Doing this well means authentically connecting ESG within your talent strategy. Companies that embody purpose are three times more likely to retain employees, outperforming the S&P by 10 times. But it’s not enough to have a purpose that no one knows about. Weave what you’re doing to create true long-term value, and how you’re focused on ESG levers (like diversity, inclusion, and more) into your external and internal talent narrative. Engage your people with opportunities to contribute to the dialogue and innovate together with leadership. Go beyond welcoming bottom-up ideation to foster a culture that deliberately invites, encourages and celebrates open innovation daily.

What’s the net net?

No one can afford to focus on decarbonization alone. You must do so while simultaneously addressing its related risks with a real intention to make a significant impact. That’s how you turn risk management momentum into sustained progress capable of driving future results — and bottom-line growth.

Based out of Calgary, Jason Clifton is EY Canada’s Energy Risk Leader and co-leads EY Canada’s national third-party risk management approach. Throughout his 20+ years in the energy sector, Jason has worked with many leading national and international oil and gas and power and utility organizations providing risk management services. His experience in risk management includes enterprise and operational risk management, internal audit, program and project risk management and governance, operations, root cause and incident loss prevention assessments, cybersecurity and operational technology reviews, and business process reviews with a focus on risk and controls.

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