Are Enterprise Risk Management Frameworks Effective for Prioritizing Sustainability Risks in the Oil and Gas Sector?

Abstract

Abstract As oil and gas companies seek to integrate management of environmental and social risks into business decision-making processes, many have looked to their Enterprise Risk Management Framework (ERM) as a tool to allow comparability of sustainability risks against traditional business risks. In theory, this approach would allow companies to identify risks ranging from climate change to community activism with appropriate perspective and to match these risks to an appropriate corresponding response. If successful, such an approach could lead to clear paths forward for integrating sustainability and social risks into Healthy, Safety and Environment (HSE) management systems as well as informing a communications strategy with shareholders, communities, regulators and other stakeholders. Our research of disclosed risk factors from 40 oil and gas companies indicates that in practice, oil and gas companies have found it difficult to find common ground for assessing and quantifying sustainability risks against traditional financial risks. The most common result is the development of a separate, parallel, ‘materiality’ process for sustainability risks (and opportunities). While these materiality processes share some common characteristics with ERM frameworks, they do not allow companies to determine whether or not sustainability risks are as significant as traditional financial risks. Moreover, materiality processes frequently inform only communications and engagement strategies for companies rather than management processes (such as operational management systems). As part of the research, we identify the three most common hurdles to the utilization of ERM frameworks for sustainability risk identification and prioritization: 1)Sustainability risks are inherently more difficult to quantify using traditional ERM criteria making comparability difficult or impossible on traditional ERM scales.2)Sustainability risks are frequently subjective - i.e. based on stakeholder perceptions - rather than the result of objective criteria such as regulatory requirements, cost or revenue potential. This means that successful integration of sustainability risks into ERM Frameworks requires access to stakeholder feedback in the ERM process.3)Time-scale of impacts. Sustainability impacts are also inherently longer-term than traditional financial impacts. Therefore ERM criteria must account for the relevance and weight of timeline to effectively compare both magnitude and probability of sustainability risks.