NSTA issues open letter to licensees on ESG disclosure and reporting

A recent area of focus for the North Sea Transition Authority (“NSTA” – formerly the Oil & Gas Authority) has been corporate governance and a drive to high standards of compliance and governance within the industry. The NSTA’s most recent step in this regard has been to issue an open letter (the “Letter”) to all licensees on Environmental, Social and Governance (“ESG”) disclosure and reporting. The letter urges all licensees to focus on ESG disclosure and reporting in order to demonstrate that the UKCS is an attractive investment proposition and maintain investor confidence.

Background

Among the changes introduced in the NSTA Strategy (which came into force on 11 February 2021) was a new “Corporate Governance” Supporting Obligation, which requires that offshore licensees to “apply good and proper governance at all times” and comply with any governance principles and practices as the NSTA may direct.[1]

In January 2022, the NSTA also published new Governance Guidance (the “Guidance”), which supports the new “Corporate Governance” Supporting Obligation. The Guidance details the circumstances when the NSTA will consider the adequacy of a licensee’s governance framework and the factors that will be considered during that process. The Guidance states that Relevant Boards should establish and embed a culture of greenhouse gas reductions in licensee operations. In this regard, the licensee’s performance should be measured, reported and tracked against UK Government targets and industry standards.

The NSTA believes this will meet investor requirements, as climate-related information will be incorporated in operators and licensee’s financial reports, in addition to key metrics.

The Letter

The Letter aims to remind licensees of the importance of ESG disclosure and reporting, and highlights the resources available to support licensees in this process. Annex 2 of the Letter provides a list of external sources of information on climate-related reporting which the NSTA suggests may assist companies.

The NSTA states in the Letter its view that attracting debt and equity investment requires high-quality, authentic ESG reporting, but recognises that this places a burden on licensees. Therefore, the NSTA explains it has been working with the industry to evolve ESG requirements and standardise the approach to ESG reporting. The NSTA hopes this work will continue and will reduce the burden on licensees.

For this purpose, the NSTA ESG Taskforce (previously known as the OGA ESG Taskforce) (the “Taskforce”) was established in September 2020 to support licensees and enhance ESG disclosure and reporting. The Taskforce’s central objective is to act as a link between industry, the NSTA, and the investment community. The Taskforce aims to assist in maintaining investor confidence and access to capital. The Taskforce also works with relevant trade bodies and other regulators to highlight the significance of ESG disclosure and enhance the quality of reported data. Annex 1 of the Letter provides the current recommendations of the NSTA ESG Taskforce, which includes a minimum standard of reporting and outlines overarching expectations on operators and licensees.

The Letter states that given the number of new financial reporting policy initiatives announced in 2021 (including the UK Government’s Net Zero Strategy), the Taskforce has extended its remit and is considering whether further recommendations for optimal ESG reporting are required.

Finally, the Letter reminds licensees of the NSTA’s new Guidance and recommends that all companies become familiar with it. In the Letter, the NSTA also offers all licensees the opportunity for a 1:1 conversation to discuss ESG practice and disclosure.

Comment

ESG disclosure and reporting has become an important consideration for all companies, not just for the oil and gas industry. In recent years, many investors have placed an increasing significance on ESG issues as banks and financial institutions are themselves required by their regulators to measure, report and improve on their own ESG performance and as ESG issues become more important to retail investors.

While some operators and licensees, by virtue of their size or securities exchange listing, are already subject to regulatory requirements to report in this area, others are not, so the NSTA Taskforce recommendations create a basic set of reporting parameters for those who may be unsure about where to start. If widely taken up, they also have the potential to enable investors to compare operators active in the UKCS on a like for like basis in terms of ESG performance.

The Letter to licensees demonstrates the NSTA’s growing commitment to ESG disclosure and reporting. However, this is a fast-moving area in terms of both regulation and voluntary standards.

In light of developing regulation, guidance and societal expectations, the NSTA and its Taskforce will need to continually review how industry reports on ESG and we can expect further recommendations for the industry over time.

Judith Aldersey-Williams is a member of the NSTA ESG Taskforce.

The letter is available here.

Our previous Law-Now on the NSTA’s Governance Guidance is available here.

[1] The OGA Strategy (nstauthority.co.uk) , paragraph 3