Interest groups are applying pressure to investors and urging boycotts and divestment of companies in the fossil fuel business. They are warning other businesses, from marketing to insurance, to engage with this industry only at their peril. At the same time, the popularity among investors of companies that have been awarded high marks for their commitment to environmental sustainability, social justice and woke governance (ESG) is leading to initiatives that are disconnected from core corporate mission. Energy companies, caught in a reputational bind, may well be raising hopes of a verdant world beyond what is practical today—and setting themselves up for an eventual crash with calamity that in court investors will call a “liar’s discount.”

Energy companies that chase ESG scores in an effort to ameliorate these pressures often misunderstand reputational risk and the peril they face through their aspirational statements and actions. They are expanding their base of stakeholders and often raising expectations without the operational or governance systems in place to ensure those expectations will be met. That is the definition of reputational risk.

We need not look any further for examples than BP Plc, whose declaration more than a decade ago that it was “Beyond Petroleum” was followed by the Deepwater Horizon disaster—one of the worst man-made disasters and one of the biggest corporate reputational crises in a generation. Now, BP—apparently hoping to become more attractive among environmentalists and investors in ESG funds—is promising to be carbon neutral by 2050. As part of its efforts to date, it has become one of the biggest buyers of forest carbon offset credits and has acquired a company that helps landowners sell their forests as carbon sinks.

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One might wonder whether forests were doing their part to reduce atmospheric carbon before BP acquired them, and question how an accounting formula giving BP green credits for the forests’ ongoing efforts improves the planet. But one need not question whether BP’s aspirations and actions are noble and well-intentioned to recognize the magnitude of reputational risks they pose. The board and leadership of the company need to be asking some detailed questions:

  • Do we have a governance (the G in ESG) and operational plan in place that ensures these ESG goals are incorporated in everything we do—and that the board can oversee it?
  • Do we have an enterprise risk management process in place that can gather intelligence throughout the organization, department by department, country by country, on who the company’s stakeholders are, what they expect and whether there is a plan in place for meeting or changing those expectations—and mitigating the damage if not?
  • Are we risking disappointing financial stakeholders who are focused on our core business in an effort to satisfy social and political stakeholders whose expectations we may never be able to satisfy?

    Compare BP’s statements and actions to those of Exxon Mobil Corp., whose pledges have been more modest and measured—cutting emissions from its oil and gas production 15%-20%, all under their control, by 2025 and ending routine flaring of methane from its oil-and-gas operations by the end of 2030. The company seems to be taking an approach that focuses on its central mission while promising what it can reasonably hope to accomplish on the environment front. Perhaps they are bearing in mind the old adage that it is better to under promise and over deliver.

    Striving for environmental purity may be noble, but it can be materially damaging when companies and their leadership set lofty goals they cannot attain. These reputational issues are playing out in both courts of public opinion and courts of law, where derivative lawsuits naming board members and citing reputational issues are now being upheld. In fact, federal securities lawsuit filings alleging reputation harm are up 60% over last year in the third year of a rising trend.

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