Responsible investing has developed over the past 30 years, transforming to its current manifestation as a must-have capability for top-tier investment management firms. Environmental, Social and Governance (ESG) is a matrix, or a criteria, for assessing the impact of related practices of a business on its financial performance and operations.

Though the first generation of ESG investing was often associated with the belief  that investments should align with moral and ethical values, responsible investing now looks to assess how environmental, social and governance issues can impact value of a business over the short and long term. Over the past five to 10 years, ESG criteria and data have gained increased attention across the investment industry; the United States and Europe, Middle East and Africa (EMEA) are beginning to see financings and loans tied to ESG matrices. ESG information disclosed through corporate sustainability reporting and survey responses is incorporated into assessments, tools, and analytics that inform mainstream investors' responsibly investing strategies and products. ESG information is tied to positive price adjustments in financings and loans.

Companies with high rankings and ratings in ESG factors seem to have a lower cost of capital for both debt and equity, indicating that more and more investors are looking for energy companies that are committed to conducting their business in a manner that accounts for sustainability. Further, lenders have indicated that in the near future they will be more inclined to lend to an energy company that can demonstrate a strong ESG performance, rather than abandon energy clients altogether. Therefore, to be attractive to investors, lenders and other stakeholders, energy commodities marketing and trading companies need to:

• Begin exploring mechanisms to address ESG factors at both an operational and corporate level (Part 1).
• Pay attention to ESG-related developments that affect their business (Part 2).
• Implement mechanisms to measure and quantify ESG to have something to show to investors and potential financing sources (Part 3).

Part 1—ESG Factors

ESG: Operational Level

Commodities marketing and trading companies have the opportunity to improve how they respond to environmental and social issues in the day-to-day operations of their business.

To explore these opportunities, we examine a physical settled energy commodity transaction. In such a transaction, a company is either buying or selling the energy commodity, transporting such commodity and subsequently selling, buying or consuming such commodity. The information below is purely an example—a list of suggested steps that can be taken by energy commodities marketing and trading firms. To determine if these actions are a good fit, an in-depth cost-benefit analysis would need to be conducted by the relevant company.

Next Steps: Buying and/or Selling Energy Commodities

Energy commodities marketing and trading companies can improve their ESG performance by buying and/or selling commodities from companies that have a proven record of accountability and successful management of ESG factors.

For counterparties that have the same internal credit rating associated with the ability to make payment on physical commodity transactions, the commodity marketing and trading company would approve a larger trading quantity for the counterparty that has the more favorable ESG. Energy commodities marketing and trading companies can also diversify their portfolio, if economically feasible, to allow them to buy and/or sell cleaner or more sustainable energy commodities.

Energy commodities marketing and trading companies can also explore mechanisms for the recycling of waste products (such as coal ash, wood waste, sand, slag and sludge) that are generated from the production, buying and selling of energy commodities.

Next Steps: Transporting and Storing Energy Commodities

Energy commodities marketing and trading companies not only have to buy and sell commodities, but they have to transport them and store them as well. Energy commodities marketing and trading companies can look to diversify how it transports its energy commodities and increase the use of transportation modes that are powered by renewable or sustainable fuels.

In addition, they can assess if their current transportation methods adhere to sustainability best practices for the industry. Third-party shippers can be benchmarked on their fleet efficiency and emissions controls, relevant management processes—including maritime safety, environment, vessel quality assurance and emergency management, participation in anti-corruption efforts such as the Maritime Anti-Corruption Network (MACN).

An energy commodity marketing and trading firm that owns its fleet can implement a policy and procedure to govern the efficiency of the company's transportation fleet, setting out emissions levels and controls for the fleet.

Energy commodities marketing and trading companies can also store their energy commodities in storage facilities that are committed to the environment. For example, a storage facility that has a proven track record of compliance with environmental regulations.

Next Steps: Consuming Energy Commodities

Some energy commodities marketing and trading companies buy commodities for consumption by processing plants, refineries and/or power generation facilities that they own or operate. Energy commodities marketing and trading companies should research mechanisms to: (i) operate the assets with cleaner energy commodities and/or (ii) reduce waste produced from such assets and/or operations. Energy commodities marketing and trading companies should also explore investing in assets that consume and/or produce cleaner energy products.

ESG: Corporate Level

Like many other companies, energy commodities marketing and trading companies need to start implementing measures to reduce their carbon footprint, increase the diversity of their workforces and service providers, include more women and people of color in management roles and increase their transparency in the community as to their impact on the community and the environment.

Next Steps: Carbon Footprint Reduction

Commodities marketing and trading companies could take the following steps, at the corporate level, to reduce their carbon footprint:

• Buy power for offices/office buildings from renewable energy sources.
• Improve fleet efficiencies (see above).
• Implement video conferencing to reduce work-related travel.
• Install high-efficiency LED lighting and automatic lighting controls, as well as monitor and computer solutions that reduce energy use.
• Ensure new corporate buildings and facilities are built to LEED Platinum specifications.
• Renovate owned building to LEED Platinum and prioritize leasing LEED certified office space.
• Develop bicycle commuting programs.
• Implement additional energy efficiencies measures across facilities and locations owned or operated by the firm.

Next Steps: Diversity and Equity of Workforce and Service Providers

Energy commodities marketing and trading companies could take the following steps, at the corporate level, to increase diversity of their workforce:

• Recruit for open positions using methods that are accessible by a diverse pool of applicants.
• Implement internal training programs in the sciences and technology in order to transition a more diverse workforce into these traditionally non-diverse areas.

Energy commodities marketing and trading company could take the following steps, at the corporate level, to increase diversity of their service providers:

• Commit to only hiring service providers that have a certain percentage of diverse management.
• Commit to only using working service teams that have a certain percentage of diversity.
• Commit to only hiring service providers that have internal policies and procedures that establish a plan to increase the diversity of their workforce and/or management.

Energy commodities marketing and trading companies can also implement the following to ensure pay equity for all persons, regardless of gender, race or ethnicity, performing the same job:

• Implement salary bands for the same category of jobs.
• Conduct regulator pay audits to analyze and determine whether, or not, the company has salary gaps attributable to gender, race or ethnicity and implement a plan to remedy any gaps.
• Develop clear matrices as to what is and what is not "good performance" to ensure bonuses and pay raises are not unconsciously biased.
• Ensure that regular training is available for all personnel.
• Review hiring and promotion policies and procedures to identify any unconscious bias and structural barriers and implement a plan to remedy such situations.

Next Steps: Include More Women and People of Color in Management

Energy commodities marketing and trading companies could implement an internal training and promotion plan, at the corporate level, in order to advance women and people of color into management roles.

Next Steps: Increase Community Engagement

Energy commodities marketing and trading companies could take the following steps, at a corporate level, to increase social responsibility and commitment to the community:

• Implement pro bono programs (also called skills-based volunteering).
• Set up a program by which the company will match any donations of money and time given by its employees.
• Budget for a certain amount of charitable donations to local community-focused nonprofit organizations.
• Commit to hiring employees from the community at a living wage.

Next Steps: Increase Transparency

With regards to sustainability, diversity and social responsibility, energy commodities marketing and trading companies have an unfavorable reputation. Energy commodities marketing and trading companies should make available to the public information on its ESG initiatives, plus give a "report card" on its performance with regards to such ESG initiatives. Potential certifications and guidance for general sustainability reporting include, GRI's Sustainability Reporting Standard, Sustainability Accounting Standards Board, the United Nations Global Compact (the Communication on Progress), the International Organization for Standardization (ISO 26000, International Standard for social responsibility).

Additionally, energy commodities marketing and trading companies should make available to the public information on its charitable and social activities.

Part 2—ESG-Related Developments

Commodities marketing and trading companies need consider the impact that ESG-related developments could have on their current marketing and trading strategies. Commodities marketing and trading companies need to pay particular attention to:

• The trajectory of environmental regulations on the use of hydrocarbons in energy generation and as feedstock for refineries.
• Storm patterns and potential operational disruptions in key aspects of the energy commodity transaction chain, such as transportation and storage.
• Potential increases or decrease in costs from changing transportation routes and costs.

It is important that commodities marketing and trading companies prepare for these ESG-related developments by:

• Remaining abreast of environmental regulatory changes and implementing plans to comply with such changes with enough lead time to absorb any cost.
• Implementing an oil spill preparedness policy and procedure to effectively prepare for and manage hydrocarbon spills and accidents.
• Closely following storm patterns and analyzing such patterns for: (a) potential disruptions in transportation routes and/or mechanism, and (b) the rendering of certain types of storage facilities inoperable, again, with enough lead time to make the necessary operational changes to absorb any cost and remain operational.
• Monitoring any changes to transportation routes and/or modes of transportation (such as a regulatory requirement for certain percentage battery power transportation in the supply chain) to ensure necessary changes are made to continue cost-effective operation.

Part 3—ESG Investment and Financing

Taking these steps and paying attention to ESG-related developments, however, is only half of the task at hand for commodities marketing and trading companies.

These initiatives need to be properly administered and measured in order to have something tangible to show to prospective investors and/or lenders. There are multiple departments within the energy commodity marketing and trading company that should be involved in developing the policies and procedures to implement and track ESG initiatives. These departments include, but are not limited to, (i) the corporate governance department, (ii) the human resources department, (iii) the compliance department, (iv) the risk department and (v) the technology department. With regard to the ESG initiatives, these departments should regularly report to an ESG management committee (the ESG MC), which should be composed of a representative from each of these departments, plus senior management and management at the business level. The senior management and business managers should be given authority to approve and/or disapprove any proposed ESG plan for the company.

The ESG MC should be: (i) deputized by the company to develop the ESG plan for the energy commodities marketing and trading company, (ii) empower the departments to implement the ESG plan, and (iii) be held responsible for the actual implementation of the plan.

The ESG MC should consider that the company's lenders or financing sources would want to be involved in the development of any ESG plan that may be tied to ongoing targets in the company's debt documents. The recent development of "sustainability-linked loan principles" that has gained traction in Europe may become a standard in the industry. These loans establish a baseline for sustainability, often working with the companies to develop a standard and the company's sustainability plan. Interest rate reductions are tied to achieving a specified target (mostly on a quarterly basis) that may be reviewed by an independent expert. Since achieving a target is based on the baseline at the commencement of the facility, developing the baseline and the parameters of the target with independent verification is a cooperative process amongst all stakeholders (including the financing sources).

The Loan Market Association has established an ESG Committee that has proposed an "ESG Questionnaire," which indicates the LMA's commitment to developing standards in the primary and secondary loan markets regarding ESG principles. However, in the U.S., these standards and principles are still in development.

Conclusion

ESG is the next big phenomenon in global markets. Energy commodities marketing and trading firms need to start seriously considering how to use ESG factors to be attractive to investors, lenders and other stakeholders. There are many ways to do this and this paper outlines only a few of the ways that energy commodities marketing and trading companies need to (a) begin exploring mechanisms to address ESG factors at both an operational and corporate level; (b) pay attention to ESG-related developments that affect their business; and (c) implement mechanisms to measure and quantify ESG to have something to show to investors and financing sources.

Deanna Reitman is of counsel in the Houston office of the law firm DLA Piper in its corporate practice group. Glenn Reitman is a partner in the Houston office of the firm in its finance practice group. Sonal Mahida is the founder of Verability, an ESG consulting firm.