The introduction into the NSTA Strategy in 2021 of obligations in relation to “corporate governance” raised questions as to the approach that the North Sea Transition Authority (“NSTA”) would take in that area, in light of the many existing corporate codes that licensees operating in the UKCS already comply with. It has become apparent that one key area of focus for the NSTA in this regard is Environmental, Social and Governance (“ESG”) reporting and disclosure and working with the industry to develop best practices. That was first reflected in an open letter to industry which the NSTA issued in March 2022. In a further recent open letter, which can be found here, the NSTA has urged all licensees to improve their ESG reporting to promote trust and demonstrate the UKCS is an attractive investment proposition.
Background
The NSTA Strategy (which came into force on 11 February 2021) introduced a new “Corporate Governance” Supporting Obligation which requires that offshore licensees “apply good and proper governance at all times, including complying with any governance principles and practices as the NSTA may direct from time to time.”[1]
The NSTA’s recent open letter to licensees follows on from various other measures the NSTA has taken in the last two years to improve ESG reporting.
January 2022
The NSTA published its Governance Guidance (“Guidance”)[2] following an 8-week consultation. The Guidance explains the NSTA’s expectations with regards to licensees’ governance arrangements and states that licensees’ activities will be under review to keep them accountable for ensuring that they adequately adhere to the Guidance.
The Guidance specifically sets out (amongst other things) an expectation that a culture of reducing greenhouse gas emissions is established and embedded in licensees’ operations; and that licensees’ performance is measured against the UK Government’s environmental targets.
March 2022
The NSTA issued an open letter to licensees, which aimed to remind licensees of the importance of ESG disclosure and reporting. It also highlighted the role of the NSTA ESG Taskforce (the “Taskforce”) and requested that licensees familiarise themselves with the Taskforce's recommendations in relation to ESG disclosure and the Guidance published in January 2022.
The NSTA also offered all licensees the opportunity for a 1:1 conversation to discuss ESG practice and disclosure.
December 2022
The NSTA published its inaugural ESG Disclosure Report, with observations from the NSTA on the industry’s progress on ESG disclosure. The ESG Disclosure Report builds on the Taskforce’s March 2022 recommendations (which had been referred to in the NSTA’s open letter to all licensees in March 2022).
The Report contained the following key findings:
- ESG reporting is on a positive trajectory.
- The ‘E’ of ESG remains easier to quantify and is the continued focus (with less focus on the ‘S’ and ‘G’).
- Data is scattered and difficult to obtain (as often several reports can be issued by one company). The Report concluded that this could be addressed through the use of standardised templates within a centralised data centre.
NSTA Open Letter – February 2024
In its most recent open letter, the NSTA has stated that it considers the quality of ESG disclosure to be important and that robust, consistent and transparent ESG reporting will create value for industry and investors.
The letter outlines the NSTA’s expectations for collaboration and transparency in ESG reporting, in particular in line with the NSTA Strategy and the Stewardship Expectations requirements regarding collaboration. In particular, the NSTA expects collaboration and transparency between joint venture partners to ensure that ESG data is shared between partners in a coherent and timely manner (where practicable).
The letter identifies feedback from the industry and Taskforce, including some of the challenges that the industry has reported over the course of 2023 with regards to inconsistent and non-standard ESG data sharing. The concerns highlighted in the letter include:
- the absence of a clear contractual requirement to report and disclose ESG data;
- poor communication and understanding of the ESG data sharing requirements;
- the data that is shared lacks quality and completeness; and
- inconsistent and non-standard processes for sharing and presenting data.
In addressing these concerns, the NSTA sets out steps by which it considers these issues can be resolved. For example, joint venture partners should consider creating action plans, regular ESG data focussed meetings and improving communication to improve understanding and consistency of ESG reporting principles and methodology. The NSTA also suggested further consideration of the benefits of having a standardised approach to sharing data and creating a data methodology describing how data is measured and reported, to drive consistency and transparency of the ESG data being gathered and reported.
The letter concludes by acknowledging that not all data is able to be standardised, however it appears that the NSTA will now expect industry to take steps to address the issues that have been identified, and will be actively monitoring progress, so as to “drive the right outcomes for the sector as a whole”.
Comment
ESG disclosure and reporting has become an important consideration for all companies, not just those in the oil and gas industry. The NSTA’s second open letter to licensees demonstrates the NSTA’s increasing commitment to ESG disclosure and reporting and that it is continually reviewing how the industry reports on ESG.
In its letter, the NSTA makes clear its view that proactive communication, transparency and collaboration between joint venture partners will help address the issues that have been identified. It is notable that none of the NSTA’s described actions directly address the identified concern regarding an absence of clear contractual requirements in this area. The NSTA cannot directly amend the terms of contractual arrangements between JV partners. However, this may be an indication that, if the NSTA does not consider that adequate progress is being made by joint venture partners, it may be that it seeks to develop more formal guidance or further regulation in this area.
Article prepared with assistance from Soha Ahmed, trainee solicitor in our Energy Disputes team.
[1] The OGA Strategy (nstauthority.co.uk), paragraph 3.
[2] OGA Governance Guidance (nstauthority.co.uk)
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