Watch out for these four emerging environmental, social and governance risks

A fuller appreciation of these risks can provide key insights for investors.

Jon Hale 20 March, 2018 | 5:00PM
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Incorporating environmental, social and governance analysis into an investment process can help uncover hidden risks or provide an early warning signal of risks that investors may be underappreciating. Sustainalytics' recently published report, 10 for 2018: ESG Risks on the Horizon, examines ESG-related risks that are becoming more material in 10 industries and how companies within those industries are addressing these issues. Here are a few of the findings.

Risk for oil and gas firms: The transition to low-carbon energy
While global demand for fossil fuels will continue over the short run, changing patterns of energy consumption driven in part by carbon regulation are likely to have major impacts on the profitability of oil and gas firms. Investors are pressing for greater transparency, as evidenced by majority shareholder votes last year at  Exxon Mobil (XOM) and  Occidental Petroleum (OXY) asking for climate-risk disclosures. The Taskforce for Climate-related Financial Disclosures has issued recommendations for reporting, which gives companies the opportunity to demonstrate to investors that they understand the risks and have a credible strategy for addressing them.

According to the report, oil and gas companies at greatest risk in the low-carbon energy transition are those with higher average production costs; greater involvement in carbon-intensive projects, such as oil-sands mining in Canada, Arctic drilling and certain liquefied natural gas projects; and those that have made little progress diversifying their product lineups.

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About Author

Jon Hale

Jon Hale  Jon Hale, Ph.D., CFA, is the head of sustainability research for Morningstar.

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