The Role of ESG in the Oil and Gas Industry: A Focus on the Middle East

The Role of ESG in the Oil and Gas Industry_ A Focus on the Middle East

1. Introduction to ESG and its Relevance in the Oil and Gas Sector

In recent years, investment strategies have shifted, and capital allocation decisions now favour companies with good ESG ratings. As a result, the ESG rating system plays a key role in improving ESG practices across different sectors, including oil and gas. The industry, however, performed poorly in terms of ESG ratings owing to the scale of the environmental damage it causes, the negative social effects at different project stages, and the level of corporate governance issues. To address these challenges, oil and gas companies are integrating ESG factors into their long-term strategies, establishing ESG engagement teams, and setting up independent bodies to oversee ESG governance guidelines. The Middle East oil and gas industry, one of the most significant contributors to the global oil supply, is taking major steps to evaluate its existing ESG policies and to develop ESG-related practices with the help of national and international ESG frameworks. This chapter examines the role of ESG in the oil and gas industry with a specific focus on the Middle East.

Environmental, social, and corporate governance (ESG) are a set of standards for a company’s operations that investors use to screen potential investments. ESG ratings are a measure of the role companies play on the environmental scale, social scale, and governance scale. An increasing number of asset owners and managers use ESG ratings when making capital allocation decisions. The oil and gas sector, a significant component of global equity indices, is affected by the growing importance of ESG. According to the International Energy Agency, oil will remain the largest contributor to the energy mix, accounting for 28% of total primary energy demand in 2040. As a result, most oil companies in the Middle East are strategically placed on the global equity indices with substantial weightings.

2. ESG Practices and their Impact on Environmental Sustainability in the Middle East Oil and Gas Industry

Currently, the role of ESG in the oil and gas industry is not thoroughly investigated. This study then examines the effect of ESG on environmental sustainability in the Middle East oil and gas industry. Environmental management, monitoring greenhouse gas emissions and energy usage are a few examples of activities that can contribute to environmental sustainability, and which are embedded into the ESG concept. The study then presents those oil and gas companies that exhibit the best overall ESG performance and those companies with the best environmental performance in the region. The Middle East has many specialized national, joint venture and private companies. Several international large-cap non-Middle Eastern companies are also present in the region. Data was collected from ESG public reports and financial databases, for the study companies. Based on the collected data, results show that the oil and gas industry exhibit very good overall ESG and environmental performances. Additionally, international, private and joint venture companies perform better than national companies, in terms of the overall ESG and environmental performances.

The Middle East oil and gas industry is one of the largest in the world. Many international oil and gas companies operating in the region have implemented high-standard ESG policies, in order to contribute to the overall regional development. Local companies also implement a number of ESG initiatives, to enhance their performance and prepare for a post-oil dependent economy. The study then highlights the most important ESG best practices that either regional or international oil and gas companies operating in the Middle East apply. The Middle East and the rest of the world will benefit from a sustainable oil-dependent economy. It is important, however, to have a clear understanding as to how ESG can support this industry.

3. Social Responsibility and Community Engagement: ESG Initiatives in the Middle East Oil and Gas Sector

With the inherent importance of the sector, it is notable that the number of studies discussing CSR and/or stakeholder engagement in the oil and gas industry is increasing; yet few empirical studies exist. The vast majority of studies on CSR within the oil and gas industry are qualitative in nature and focus either on the global flagship oil and gas multinational corporations (MNCs), or on the application of the voluntary principles on security and human rights regarding physical asset protection. Moreover, most qualitative studies in the Middle East focus solely on the nature and role of traditional CSR; hardly any studies investigate the current focus and role of ESG in the region, despite its importance. Given the significance of the oil and gas sector in the economies of the Middle East, and of both MNCs and national oil companies (NOCs) in the oil and gas industry, an exploration of the contemporary focus of ESG in the Middle East oil and gas sector, and its role, is well merited. This forms the research task of this chapter. We will focus on the initiatives and practices present in the regional oil and gas industry. To the best of our knowledge, this is the first empirical study that focuses on the role and initiatives of ESG within the Middle East oil and gas sector.

The oil and gas sector has significant importance in both global and national economic scales. The industry, however, may be associated with a number of negative social and environmental externalities, such as the emission of greenhouse gases, local air pollution, industrial accidents, and negative social impacts on the local and global scales. Addressing evolving public (and stakeholder) perceptions about the industry, at both the global and country level, is the motive for responsible investment in these areas. Because of these factors, corporate social responsibility (CSR) programs and community engagement have assumed considerable importance within the agenda of oil and gas companies.

4. Governance and Ethical Business Practices: A Key Component of ESG in the Middle East Oil and Gas Industry

Ethical business practices, often described under the umbrella of “corporate social responsibility” or “commercial ethics” are at the very heart of corporate governance and director stewardship. In essence, the directors and officers of a company are predominantly responsible for its day-to-day stewardship and, as a result, will make countless business leadership decisions. The business maxim of acting in the best interests of all company stakeholders is generally considered to be an integral part of governance. Therefore, a clear association with corporate governance and ethical business practice is recognised in company business operations and compliance with legal requirements and regulations. The connection between upholding good governance and adhering to ethical business practices is associated to several governance mechanisms. Firstly, good governance promotes transparency and, as a result, the business operations of a company are exposed for all relevant stakeholders to scrutinize. Secondly, boards of directors are company-appointed systems of business leadership and are accountable for their business decisions. As a result, board and management structures are commonly used to ensure that business leaders act as ethical role models in maintaining the moral integrity of the company operation. Furthermore, there is an implicit understanding that the board and management will act in the best interests of the company’s stakeholders, with external interests being safeguarded against any abuse of internal company power structures.

In the Middle East, discussions of corporate governance, often implicitly or explicitly extra the notion of “Islamic governance”. The term corporate governance is associated with localized terminology. For example, when addressing corporate governance in the UAE, the speaker of Arabic is likely to refer to “husn al idara” which directly translates into “good governance”. The debate and practice of corporate governance in this and other Middle Eastern countries have clear associations related to the dominant minority practice of the Islamic faith and the presence of large expatriate communities originating from both the east and the west. Therefore, in addressing corporate governance in the Middle East, it is argued that greater understanding and formulation will eventuate through the localization of concepts in practice in the region. Indeed, the authors argue that future research should aim to contribute to the emerging localized approach of the governance of the corporation in the Middle East, using the Anglo-American model as a point of reference.

5. Conclusion and Future Directions: Leveraging ESG for Sustainable Development in the Middle East Oil and Gas Industry

Defined by the depth and breadth of its collective ESG projects and strategic linkages to its core business activities, the Middle East oil and gas industry could use ESG as a further differentiator to enhance its role the regional and global levels. This would help their companies grow in a more sustainable manner. Additionally, across the region, industrial clusters can collaborate and set common standards, and exchange best practices through industry bodies to increase the intensity of ESG. In conclusion, there are large-scale opportunities for the Middle East oil and gas industry to raise the bar on the role of ESG and in so doing, help the region achieve its goals of becoming more diversified and sustainable in the long term.

The oil and gas industry in the Middle East faces specific social, environmental, and governance challenges that currently are not fully addressed through the industry’s corporate social responsibility outreach or voluntary philanthropic activities. This chapter explored the enabling regulatory environment and partnership models that can help national and international oil companies in the region implement industry relevant ESG projects. We also discussed the role of the industry’s private sector in contributing to the United Nations’ sustainable development goals. During discussions, a few directions for future research and practice became evident. First, more needs to be done to assess the environmental and social impact of the existing ESG projects in the region and whether they contribute to help the industry regain its social license to operate. Second, more research is needed to clearly delineate and support desired partnership models that can accelerate progress on ESG issues in the region.

Scroll to Top

We use cookies to improve your browsing experience. By clicking "Accept Cookies", you agree to the storing of cookies on your device to enhance site navigation, analyse site usage, and assist in our marketing efforts. Click to view our Privacy Policy