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A new term of reference: Managing risk through corporate responsibility

The past year has transformed the North American energy landscape, bringing seismic shifts, groundbreaking innovations, and industry-defining moments. As we enter 2024, DNV’s experts will write a series of blogs to dissect the major trends and developments from 2023 and provide insight on what we can expect in 2024.

2023 saw risk-averse corporate leaders distance their brands from Environmental, Social, and Governance (ESG) principles after seeing their peers and competitors lose brand equity, market share, or share price because of a perceived overcommitment to ESG.

But what they are really pushing back on is three letters with a branding problem. Behind the scenes, DNV sees a commitment to responsible operations.

Our belief is that that the companies that will emerge winners from the energy transition are the ones which safeguard life, property, and the environment.

New term, who’s this?

The future of ESG as a common term is uncertain, but what is certain is that investors and businesses continue to demonstrate a sustained commitment to identifying and mitigating environmental, human rights, and corporate governance risks.

Last year, DNV saw a surge in demand for our due diligence services related to corporate responsibility. We provided environmental and human rights due diligence for one of the largest clean energy infrastructure projects in the U.S., corporate responsibility due diligence for the closing conditions of a significant merger and acquisition, and support for the stakeholder engagement process around key clean energy projects.

Anticipating more demand, we are continuing to expand in this space.

Good business is shaped by good, responsible operations

The energy industry has always had a heightened awareness of environmental, human rights, and governance risks.

Underlying these concerns is the simple concept of reputation – if a company doesn't get this right, they lose their license to operate.

This is more an unspoken rule, as regulations have not really kept up. But that is changing.

Energy companies keen to take advantage of Inflation Reduction Act (IRA) funding are in many cases being asked to demonstrate to an international collection of lenders that their project meets internationally recognized standards to ensure that environmental and human rights risks have been identified and are being addressed.

For some, this is a new space, but fortunately DNV can help. Our experts have been following standards and requirements to guide due diligence reviews and advisory services:

  • Equator Principles
  • International Finance Corporation (IFC) Performance Standards
  • World Bank Environmental, Health and Safety (EHS) Guidelines
  • International Labor Organization (ILO) Standards and Organization for Economic Cooperation and Development (OECD) Guidelines
  • EU Taxonomy Regulation
  • Sustainable Finance Disclosure Regulation
  • Taskforce for Climate Related Disclosure Recommendations
  • Taskforce for Nature Related Disclosure Framework
  • Corporations’ own standards for corporate responsibility

More broadly, the policy front is a mixed bag

  • The U.S. Securities and Exchange Commission (SEC) is slow to establish requirements for disclosure of climate risk. California doubled-down on its climate-related disclosures in 2023, but other U.S. states banned ESG related investing through their state pension funds.
  • Canada’s Bill S-211 requires companies operating in Canada to report on measures to mitigate child and forced labor, and the country introduced mandatory reporting of climate and transition risks and mitigation measures.
  • The E.U. continues to strengthen or introduce regulations designed to increase corporate transparency around identifying and mitigating environmental, human rights and governance risks.

While businesses face short-term uncertainty when it comes to ESG, the long-term trend is clear. The future will require more transparency. The winners will be the ones who act now by demonstrating good due diligence.

2024 is the year of “S” - society and supply chains

In the U.S., energy investments are expected to grow in volume and size spurred by the Inflation Reduction Act (IRA). Most Funding Opportunity Announcements (FOAs) released by the U.S. Department of Energy (DOE) require a community benefits plan (CBP). DNV prepared (and won) several of these in 2023 for both its own and client DOE bids.

The significance of CBPs for all types of energy infrastructure projects funded by DOE will come to the surface at a national level in 2024 as DNV supports Americans for a Clean Energy Grid (ACEG) with facilitation of a stakeholder engagement process to develop consensus-based recommendations for the Biden Administration and other federal agencies about the best ways to build and maintain community support for transmission lines while advancing siting and permitting.

DNV also expects energy developers and suppliers to fill gaps in the risk management of their supply chain.

Developers, utilities and financiers face acute exposure as they work together to build out much needed battery energy storage projects. The Democratic Republic of the Congo (DRC) produces around 70% of the global cobalt supply, but cobalt mining and smelting operations are rife with child labor, sub-human working conditions, unfair wages and environmental pollution. This means that almost every company involved in the battery supply chain, including U.S. developers, states, utilities, and investors are exposed to irresponsible sourcing of cobalt in the DRC.

When it comes to sustainable liquid fuels, savvy end users are already requiring due diligence from producers to show that feedstocks are not associated with deforestation in the Amazon or Indonesia and do not contribute to human rights violations.

No company wants to be associated, even inadvertently, with blood batteries and fuels.

Conclusion

Already, non-profit organizations are increasing their support for alleged survivors of human rights and environmental violations with public awareness campaigns and legal efforts to hold companies, as well as corporate directors and senior management, accountable.

The companies that will thrive and benefit from the energy transition will be the ones who go above and beyond to demonstrate good corporate governance and due diligence on environmental and human rights risk within their operations now, rather than wait until this is mandated.

1/18/2024 3:00:00 PM

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Bridget McEwen

Bridget McEwen

Principal Consultant, ESG & Equity

 

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