North American Oil & Gas Pipelines

NOV-DEC 2018

North American Oil & Gas Pipelines covers the news shaping the business of oil and gas pipeline construction and maintenance in North America, including pipeline installation methods, integrity management innovations and managerial strategies.

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30 North American Oil & Gas Pipelines | NOVEMBER/DECEMBER 2 018 enous to investment risk calculations. Within the past few years, the percep- tion of risk has now shifted to include these issues as they can now be fi- nancially tied to a company's bottom line, something that is of interest to C-Suite management and to inves- tors. Institutional investors ranging from banks, pensions, sovereign wealth funds, endowments and mu- tual funds, all recognize these finan- cial implications. Thus, they are more frequently including ESG risk factors in their assessments. This strategy is pervasive in recent years because its ability to capture financial value has been empirically proven time and again. World- renowned academic institutions, top global investment banks and consulting firms have all individually conducted studies that reiterate the financial and market value of ESG. The reason is because the concept of socially responsible investing has transitioned from an exclusionary approach to portfolio development to a "best in class" or "ESG-tilted" approach. Historically, exclusionary strategies led investors to screen out companies as investments if they were perceived controversial. However, this dramatically reduced what is known as the investment universe — by eliminating certain industries or companies all together, investors would be limited in their options for diversifying their portfolios to mitigate risk and to capitalize on returns. Now, during this ESG paradigm shift, investors no longer have to choose between doing well financially and doing what's socially responsible. They are shifting capital towards companies that show positive ESG performance relative to industry peers or by avoiding or limiting companies that do not meet certain ESG thresholds. This strategy allows investors to have more options for portfolio buildout and diversification, which can be linked to reduced volatility and enhanced risk-adjusted returns. Studies also show that increasing ESG performance can lower the cost of capital of companies, improving their valuation. Today, companies and investors are now actively working together in this space, fostering more transparent, open and productive dialogue about ESG risk management. The debate is no longer centered on if a company should incorporate ESG in risk management; rather, companies are simply trying to determine how they interact in this space. Investors, Pipeline Companies Converge in ESG Oil and gas, by the nature of its operations, garners tremendous fo- cus on environmental and social issues. Yet, the industry is not go- ing anywhere for the foreseeable fu- ture; it's a foundational driver of the U.S. economy. The question becomes how companies manage their holistic risk profiles. In the past, these subjects were most likely addressed in a CSR report or via a brief policy statement posted on a webpage. Now, a more proactive approach is taken. Companies are initiating productive dialogues with their shareholders around long-term risk factors including natural and environmental capital, social capital and governance oversight. Within the past few years, the topic of climate change and its impact on the growth and valuation of oil and gas companies has made headline after headline in major media outlets. The 2015 Paris Climate Agreement effectively launched the movement for investors to consider climate risk associated with oil and gas operations. The assertion is that if the world is to avoid catastrophic climate change, international players

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