Predictive power of ESG: Safety and spills

This analysis is by Bloomberg Intelligence Director of ESG Research Eric Kane and Bloomberg Intelligence Senior Associate Analyst Melanie Rua. It appeared first on the Bloomberg Terminal.

Average Tier 1 PSE Rates vs. Amount of Spills

Spills can lead to significant costs for oil and gas companies, including fines and widening of credit spreads, and our research illustrates that safety incidents often portend a greater amount spilled the following year. We examined the relationship between Tier 1 process safety events (PSEs) and next-year results to find the metric can signal heightened risk for investors.

Should investors look at PSEs for spill amounts?

Performance on Tier 1 PSE rates — a key safety metric among oil and gas companies — may be telling of forthcoming spill amount risk, our analysis shows. Companies with lower Tier 1 PSE rates were more likely to have a smaller amount of spills the following fiscal year.

Among the companies with higher 2021 Tier 1 PSE rates, Hess reported a spill amount in 2022 that was 117x greater than the peer median and a 154% increase from the year prior. In 2022, the company paid $23 million in environmental costs for remediation.

Limited disclosure made the analysis challenging, with just 12% of the 217 oil and gas companies in our peer set reporting both metrics in 2023.

Safety disclosures lacking, raising accountability concerns

Process safety events (PSEs) in the oil and gas industry can have serious consequences, like structural failure or major incidents, and proper disclosure can help identify potential vulnerabilities in a system.

Of the 217 oil and gas companies we analyzed, just 35% provided disclosure on the Tier 1 PSE rate from 2021-23. Some companies, like ExxonMobil, consider geographic location, criminal activity and the political climate when assessing process safety.

Though only 18% of the companies provide data for all three years, we anticipate more disclosure to come, as 2023 reports for at least 30 companies haven’t yet been released.

Executive pay tied to spills yields lower spill volumes

Only five of the 41 companies disclosing a Tier 1 PSE rate in 2023 link executive compensation to spills. By including spill related metrics in executive-compensation plans, companies aim to align C-suite interests with corporate environmental goals and promote proactive spill-risk reduction and incident management.

On average, the companies that tied executive bonuses to spills reported a lower amount of incidents consecutively from 2019-23. Though seven companies include Tier 1 PSE rates in their executive-compensation plans, Beach Energy stands alone in having both spills and Tier 1 PSE rate tied to its executive pay.

Number of Company-Reported Tier 1 PSE Rates

Worker safety, regulatory action and spills widen spreads

Oil spills widened Enbridge, Repsol and Suncor’s credit spreads the most for the oil and gas industry, while worker strikes at companies including TotalEnergies, Shell and Exxon had the highest number of occurrences dating back to 2016.

In all, eight different ESG-related issues resulted in spread widening among oil and gas companies including oil spills, strikes, worker safety, labor negotiations, regulatory action, climate spending for decarbonization, shareholder activism and environmental group protests.

Oil spills had the highest average spread widening, at 32 bps, while worker-safety issues resulted in the second-highest average spread widening, at more than 20 bps, and resulted in one CEO stepping down after repeated issues.

Executive Pay Tied to Spills, Tier 1 PSE Rates

Oil & Gas Companies Average Spread Move by Topic

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