Oil industry's increasing focus on CSR
Petroleum Economist, February 2010 - Are oil companies acting responsibly yet? Professor Jedrzej George Frynas from Middlesex University Business School writes
GIVEN HALF a chance, oil executives like to publicise their social and environmental credentials. BP calls itself Beyond Petroleum; ExxonMobil advertises the environmentally friendly aspects of natural gas. Some people may react with cynicism, yet companies have made progress. But where has progress been made? And where have they fallen short? Are some companies better than others?
Companies and countries define corporate social responsibility (CSR) in different ways. Some oil executives prefer other names, such as sustainable development. But essentially CSR is about recognising that companies have a responsibility for their effect on society and the natural environment, often beyond that of legal compliance.
The oil and gas sector has been among the industries that have championed CSR, partly because of the negative effects of day-to-day operations, such as oil spills, and the resulting protests by civil-society groups and indigenous people.
For energy companies, CSR not only means averting possible criticism, but also reaping business benefits. Shell's former chief executive, Jeroen van der Veer, described it as a "genuine source of differentiation from our competitors". Whatever the motives of oil executives, CSR is here to stay.
The story so far
In 1995, Shell faced criticism over the planned sinking of the Brent Spar platform in the North Sea and over its activities in Nigeria. In 1996, BP faced criticism over alleged complicity in human-rights abuses in Colombia. These experiences and the realisation of the rising importance of social and environmental issues led Shell and BP to re-think their involvement in society. Shell and BP are now considered among the most responsible oil companies.
Other oil companies have gradually followed suit. ExxonMobil, for example, has moved from a position of not even acknowledging the existence of global warming towards discussing the merits of a carbon cap-and-trade system versus a carbon tax. Since the mid-1990s, oil companies have joined various international initiatives aimed at improving sustainable development, including the Global Reporting Initiative (1997), UN Global Compact (1999), Voluntary Principles on Security and Human Rights (2000), Extractive Industries Transparency Initiative (EITI - 2003) and Combat Climate Change 3C Initiative (2007).
CSR has not only grown among European and US companies; Brazil's Petrobras and South Africa's Sasol also have sophisticated CSR programmes (see Table 1). Fifteen of the world's 20 biggest oil companies publish extensive CSR reports, including Chinese companies Sinopec and China National Offshore Operating Corporation. However, approaches to CSR vary. While Shell observes strict human-rights policies, for example, Sinopec continues to operate in Myanmar (Burma) and Sudan, where oil companies have been implicated in serious human-rights abuses.
The spread of CSR has inevitably been uneven. National oil companies (NOCs) have generally made less progress than international oil companies. The social and environmental records of state-owned oil companies are under less scrutiny from civil-society groups and the media, so they are under less pressure to adopt CSR principles.
However, a few NOCs have made considerable efforts towards embedding CSR within their business, including Norway's Statoil and Petrobras. Unlike most NOCs, which tend to be domestically focused, Statoil and Petrobras depend on their international reputations and international markets. Titus Fossgard-Moser, Shell's senior integration advisor, upstream Americas, says non-Western companies adopt Western-style CSR tools to gain "international credibility", or because it is simply "part of the trend and expectations". Experience shows companies are more likely to adopt CSR, the more they internationalise.
CSR and the environment
The most encouraging evidence on environmental improvements is provided by a historical comparison of oil spills from oil tankers at sea. Since the 1970s, the number of large oil spills (above 700 tonnes) caused by oil tankers and other vessels has decreased from 25.2 spills a year in 1970-79 to 3.4 spills a year in 2000-08 (see Figure 1). The volume of oil spills has also decreased significantly over the last three decades. These improvements may not have happened without government pressures, for example, to introduce double-hull tankers (PE 3/09 p22). But these are impressive improvements, nonetheless.
Some companies have reduced their own greenhouse-gas (GHG) emissions. In 1997, for example, BP set itself a target of cutting emissions from its own facilities by 10% from 1990 levels by 2010. After introducing an internal cap-and-trade scheme in 2000, it reached the goal in 2001. However, progress has not been even across the industry. In 2002-06, BP's GHG emissions declined by another 22%. In the same period, Petrobras' emissions increased by 66%, despite that company's oil and natural gas production increasing by a smaller percentage.
CSR can generate significant financial benefits through environmental improvements. For example, BP estimated that it saved $0.65bn by cutting down on the venting and flaring of natural gas in 2000, following the introduction of its cap-and-trade scheme.
Once CSR is introduced, company staff often discover a convergence of environmental and business interests. The introduction of better quality materials or equipment to reduce the likelihood of environmental damage also reduces the costly, long-term need for maintenance.
Some non-governmental organisations say the oil and gas sector can never become sustainable because the consumption of oil and gas products is inherently harmful to the environment and causes climate change. Nonetheless, companies have great potential for lessening their environmental impact.
CSR and local communities
Oil and gas operations involve numerous interactions between companies and local communities. This has resulted in demands on oil companies to invest in the development of their local communities. State-owned companies such as Venezuela's PdV, Saudi Aramco and Russia's Gazprom spend billions of dollars on community investments.
In 2008, Shell, BP, ExxonMobil and Chevron spent a combined $0.66bn on community investments. Initiatives range from occasional financial donations to schools/hospitals, to the construction of new schools, skills training and micro-credit schemes. Almost every company makes some investments in community health and education (see Table 2).
However, in contrast to environmental reporting, disclosure on local community investments is weak. CSR reports contain only input and no output measures: companies provide information on how much they have spent on education or philanthropic activities or how many local stakeholders participated in a project, but they provide no measures of how effectively the money was spent. It is, therefore, difficult to quantify the benefits to the local people. And there is evidence that many community projects have been badly planned and are ineffective. "CSR is a red herring in terms of development projects," says a manager at an oil major.
Part of the problem is that oil companies operate in difficult and corrupt environments. In countries such as Nigeria or Yemen, community engagement may also be seriously impeded by civil conflicts.
Community investments have deeper problems. Short-term corporate objectives and long-term development objectives sometimes do not match. Community investments are often undertaken to improve external perceptions, to keep government officials and employees happy or to gain local support for oil operations. Not surprisingly, many corporate social initiatives do not go beyond narrowly philanthropic gestures and short-term planning horizons, in contrast to the long-term needs of communities. There have been some projects with clear benefits for the community, but there have been more projects with questionable benefits.
The managerial and engineering background of oil company staff can also be a problem. Oil executives are highly capable of dealing with technical and managerial tasks and this orientation is reflected in their approaches to CSR. Oil companies can perform CSR tasks to a high standard when they are technical in nature. For instance, BP's target to reduce carbon dioxide emissions was backed by appropriate performance-related bonuses, and staff worked hard and enjoyed the technical challenge of suggesting changes to the company's plant and equipment.
Also, treating community investments from a technical and managerial perspective may lead firms to speed up discussions with local communities in order to achieve an immediate goal (such as a written list of local demands) rather than patiently to build relations with the community and spend long periods discussing the causes of problems.
CSR and the economy
Oil companies realise that their main contribution to host societies is through providing jobs, investment and paying tax. For example, in 2008, ExxonMobil paid $116bn in taxes and royalties to governments and almost $286bn to contractors and suppliers, but just $225m on community investments.
However, many oil-producing countries have suffered from economic underdevelopment, political mismanagement and military conflict - the resource curse. Large inflows of oil revenues lead to currency appreciation, which makes it more difficult to export agricultural and manufacturing goods. Host governments reap so many taxes from oil companies that they have few incentives to pursue pro-growth economic policies and improve the quality of government agencies.
CSR does little to address these bigger issues, even though they are directly related to the way the sector operates. Peter Utting, deputy director of the UN Research Institute for Social Development, says: "CSR generally attempts to curb specific types of malpractice and improve selected aspects of social performance without questioning various contradictory policies and practices."
Seventeen oil companies formally support the UK government's Extractive Industry's Transparency Initiative (EITI). The EITI was launched in 2003 to improve the transparency of revenues paid by oil, gas and mining companies to host governments. This, in turn, is supposed to limit corruption related to such revenues. Host countries must involve civil society and independent auditors, which helps to properly oversee the implementation of the EITI in a given country.
EITI's main limitation is its focus on revenues, not government spending. There is no scientific basis for the assumption that revenue transparency by itself leads to better social or economic outcomes. Azerbaijan is one of only two countries that have so far complied with EITI criteria (the other is Liberia). The State Oil Fund, supported by the EITI, is considered the most transparent government body in Azerbaijan. But, "accountability is lost once the funds are transferred for use into the state budget," according to a report by the Economist Intelligence Unit.
A flaw in the EITI is that is does not encourage firms to take a stance on governance and corruption. But if they do not address these issues at a political level, any good work they do is likely to be undermined by government failures and the bad environment in which they operate.
Prospects
Non-governmental organisations (NGOs) often criticise CSR programmes. After all, even CSR leaders such as BP are not perfect. BP's safety and environmental record in the US in recent years has been poor, following the lethal explosion at its Texas City oil refinery and oil spills in Alaska (PE 11/09 p10). But companies have certainly made visible progress since Petroleum Economist assessed CSR practices five years ago (PE 8/05 p18).
Barnaby Briggs, head of Shell International's social performance management unit, says pressure on oil companies to develop oilfields quickly can lead to decisions that are expedient in the short term, but not over the long term. But this carries a business risk as well as an environmental one. "Clearly CSR or sustainable development thinking on its own is not enough. But it is important to Shell, and we are building it into the way things get done at the operational, day-to-day level. If we are successful, we will build successful businesses."
Corporate reporting on the environment is steadily improving and new environmentally friendly technologies are being developed. Tangible improvements can be made by companies, provided the appropriate incentive systems are in place.
In contrast, CSR is less effective at addressing the effect of oil operations on local communities. Christian Aid says: "CSR is simply not sufficient to guarantee good business practice." It belongs to a network of NGOs arguing for legally binding obligations for business. But NGOs seem to ignore the many historical failures of formal regulatory approaches to social and environmental issues, especially in developing countries, where many oil companies operate. If governments did their work properly, there would be little need for CSR.
Firms will continue to be pressured to engage with social and environmental issues and may also benefit from the business opportunities that CSR offers. The focus on CSR, therefore, is likely to grow, including by state-owned companies.
