Previously, we reported on the never-ending roller coaster in the ESG movement and how some aspects move forward like decarbonization projects, and some get pushed back like the SEC disclosure rules. I found it interesting that even in the discussions on the attempted assassination of former President Donald Trump that concerns over DEI (Diversity, Equity and Inclusion) became an issue. The crux of the matter was female Secret Service agents, who seemed too short to protect the former President and at times appeared confused while they fumbled with their weapons—definitely not a good look.
Sorting out ESG. DEI can be considered a component of the overall ESG program, and like other ESG initiatives, is under attack. These are definitely interesting times, as we hope to get to some level of normalcy, but I expect that we will continue to see further push-and-pull of ESG while we work through this moment of flux within ESG. The reality is that there is some baby in this bathwater and entirely abandoning ESG is not the answer. With time, I expect we will see some consensus-building on what advances and what falls behind.
Taking a look at BlackRock is a good example of this. BlackRock was attacked by many states for it’s anti-oil stance or by some as an anti-industry stance and was threatened to be removed by a few states and state agencies from their investment portfolio. BlackRock defended their position and showed their continued investment in oil and gas and energy, as a whole, as their rebuttal. Recently BlackRock launched their new “Climate and Decarbonization Stewardship Guidelines.” This was meant to help asset managers address climate-related risk in their investment decisions. So, obviously BlackRock isn’t abandoning its position on ESG.
Additionally, recent suits filed against BlackRock by lawmakers in Mississippi and Tennessee allege that BlackRock misrepresented the extent to which they use ESG in their investment decisions. They specifically cite BlackRock’s participation in groups that promote the use of all assets under management to achieve climate-related goals. BlackRock moved their participation in Climate Action 100+ to one of their international units; not abandoning participation, just moving it. These actions are a perfect example of the push-and-pull—there is a constant reshuffling of the deck, while some aspects of ESG are removed from the top of the deck to somewhere else, but the game continues.
Climate disclosure rules. Another part of this reshuffling has occurred as the SEC Climate Disclosure rules have been challenged by Liberty. In response, individual states like California, New York and Illinois are developing their own climate disclosure rules. California recently passed SB 253, the “Climate Data Accountability Act,” while New York and Illinois are in the process of developing their own programs. Additionally, the Biden administration in 2022 introduced introduced its proposed Federal Supplier Climate Risks and Resilience Rules, set to be finalized this year and requiring federal contractors to report Scope 1 and Scope 2 emissions. Now, depending on the outcome of the elections in November, this federal action can be repealed, but you should expect the state programs to proceed. As I’ve said before, a continuous push-and-pull within ESG.
I expect ESG programs to continue to evolve and change over time, but not go away. Again, BlackRock is a good example of this change. They continue to push for ESG and then pull back when needed while continuing to invest in oil and gas. In a recent report, KPMG reported that 71% of companies surveyed said that ESG factors played into their M&A decision-making. This is in sharp contrast to other reports that ESG funds are not performing well. In addition to this, BlackRock has stated that most of their investors are still seeking ESG-focused investments. So, there continues to be an interesting push-and-pull going on. It’s interesting how BlackRock’s own ESG focus has started highlighting decarbonization.
Decarbonization is one of the areas of ESG that I expect to see continued growth. One recent report shows that over 50% of active decarbonization projects have major oil and gas participation. We’ve seen Oxy form a new subsidiary in 1PointFive, focused entirely on decarbonization efforts, with ExxonMobil and Chevron moving heavily into decarbonization, both making major acquisitions and investments in the billions of dollars. Oxy CEO Vicki Hollub announced that their low-carbon revenue would exceed that of their Oxy Chemical division. Decarbonization is becoming a multi-billion-dollar industry on its own, and the major involvement from oil and gas has been instrumental in its growth. EOR is where oil and gas began its decarbonization efforts, when operators began adding CO2 in waterflooding operations. So why is decarbonization different than other ESG initiatives?
It's realIy a for-profit venture. think the answer is simple—most ESG initiatives are viewed as an additional cost being applied to our operations and affecting our profitability, without clearly expressing what the public benefit might be. But decarbonization is different—it’s a for-profit venture. The 45Q tax credit program (and it's constant modifications) has increased the tax credit, which includes cash payment provisions that will more than offset the cost of decarbonization. We are still in the early days, and some new projects may be upside down, but everybody expects that given the scaling and optimization that come with all new industries, these costs will come down. Then, to add some icing to the cake, the CO2 reductions also can be sold as offset credits, an ever-growing market supplying additional revenue.
In fact, Microsoft recently signed the largest-ever Carbon Credit Purchase Agreement with Oxy’s 1PointFive for 500,000 metric tons of CO2 credits. These credits will come from STRATOS being built in Ector County, Texas, which is expected to be the largest Direct Air Capture (DAC) facility in the world, once it comes online. STRATOS is designed to capture 500,000 metric tons per year, so Microsoft has essentially purchased one year of capacity from this facility. STRATOS is expected to be online by mid-2025. And guess who also is involved—none other than BlackRock, which invested over $550 million to form a Joint venture with Oxy to build STRATOS.
This gets back to the complex nature of the ESG evolution. On one side, BlackRock is attacked for being anti-oil and gas, while on the other side, they are investing with oil and gas in decarbonization. ESG will continue to be a controversial topic, and we will continue to see ESG initiatives ebb and flow, but we will continue to see growth in decarbonization. And as I have always said, with change comes opportunity. WO
MPATTON@HYDROZONIX.COM / MARK PATTON is president of Hydrozonix, an oil and gas-focused water management company. He is a chemical engineer with more than 25 years of experience developing new technologies for wastewaters and process residuals.