As societal awareness regarding environmental conservation grows, there arises an increasing concern regarding the sustainability practices of businesses. Key environmental issues such as global warming, climate change, resource scarcity and clean water access have garnered significant attention. Among these, climate change emerges as a paramount concern due to its severe and enduring global impacts, primarily stemming from the combustion of fossil fuels.

The accompanying Figure 1 illustrates the distribution of worldwide CO2 emissions by fuel type, emphasizing the substantial contribution of oil to the total emissions. Annually, an estimated 36 billion tonnes of CO2 are released from the combustion of fossil fuels, with oil accounting for 34%, equating to 12 billion tonnes. This process leads to the formation of CO2, acting as a greenhouse gas, thereby exacerbating the Earth's temperature and precipitating various adverse effects.

This realization prompts business leaders to reassess their operational strategies, necessitating a consideration not only of financial gains but also of the social and environmental repercussions of their endeavors. Consequently, numerous International Oil Companies (IOCs) have adopted an Environment, Social and Governance (ESG) framework, redirecting their focus towards sustainable practices and renewable energy sources.

Since the inception of the Paris Agreement in 2015 to the proposition of Sustainable Development Goals (SDGs) outlined in Agenda 2030 by the United Nations, the oil and gas (O&G) sector has recognized its pivotal role in addressing environmental and social challenges inherent in its production and consumption processes. These include issues such as geopolitical conflicts, CO2 emissions, methane emissions, local disruptions and water contamination.

Acknowledged for its capital-intensive nature, the oil and gas industry typically relies on equity and loans to meet its financial obligations. Historically, many financial institutions have offered preferential interest rates to this sector. However, a growing awareness of ESG considerations has led several banks to discontinue this practice, signaling a shift towards promoting sustainable financing practices within the industry.

Figure 1: World CO2 emissions by fuel type (Smoot, 2023)

Company Profile

Pertamina Internasional Eksplorasi dan Produksi (PIEP) was established based on the need for management of international assets focused on managing foreign oil & gas assets of PT Pertamina (Persero). For this reason, it is deemed necessary to establish a subsidiary with international coverage as a holder of overseas assets whose activities can be adjusted to the characteristics of the assets owned.

On November 18, 2013, PIEP was established in Jakarta as a company that runs businesses in the fields of oil, natural gas and other energy with international working areas. Until December 2023, PIEP had 11 (eleven) working areas spread across 3 (three) main regions, namely Africa, Asia and the Middle East, as well as several exploration assets in other regions (Figure 2).

In 2017, PT Pertamina Internasional Eksplorasi dan Produksi (PIEP) entered into a syndicated loan agreement with two Indonesian national banks and seven international banks. In an effort to fortify their financial standing, PIEP's management opted to extend the grace period on their debt. However, subsequent to the submission of the proposal to the bank syndicate in 2021, three international banks withdrew from the agreement citing their policy of exclusively lending to companies possessing a commendable ESG Risk Rating. Consequently, the interest rates on the loan escalated from LIBOR plus 1.5 percentage points to SOFR plus 2 percentage points. This escalation in interest rates is anticipated to amplify interest expenses and diminish net income. Compounding the situation, the insistence of many financial institutions on an ESG risk classification poses a significant threat to PIEP. This predicament presents a formidable challenge to PIEP's management, particularly given their lack of formal evaluation and implementation of an ESG framework. It is imperative for PIEP to promptly adopt an ESG framework to secure an optimal ESG Risk Rating, thereby enhancing its appeal to potential investors and financial institutions.

Figure 2 PIEP’s Overseas Footprint

Source: PIEP Annual Report 2021

LITERATURE REVIEW

Initial perceptions of ESG activities held that they constituted an agency problem that resulted in a decline in wealth [1]. Friedman [2] elucidates this notion when he asserts that the corporate manager, acting as the agent, ought to steer the enterprise in a manner consistent with the shareholders' objective of maximizing wealth. In other words, corporations ought to refrain from allocating their resources towards endeavors such as social and environmental good governance, as doing so would result in a reduction of shareholder value. 

Brown, Helland and Smith [3] and Kruger [4] find that managers engaging in corporate philanthropy benefit themselves at the expense of shareholders. Similarly, agency costs are incurred when managers invest in social activities to promote their personal reputation [5] and can lose focus on core managerial responsibilities [6]. Overall, based on the agency view, ESG practices are generally not in the interest of shareholders.

Agency Theory 

Agency theory, initially formulated by Jensen and Meckling [6], elucidates the dynamics within corporate governance structures, particularly concerning conflicts of interest between principals and agents. The theory delineates that principals delegate decision-making authority to agents, typically managers, whose interests may not always align with those of the principals, leading to potential agency problems.

Fundamental to agency theory is the recognition that agents, motivated by self-interest, may not consistently act in the best interests of principals. This may result in behaviors such as opportunism, where agents exploit opportunities for personal gain at the expense of principals or shirking, where agents fail to exert optimal effort.

To manage the principal-agent relationship effectively, agency theory advocates for mechanisms such as contracts, performance-based incentives, monitoring and governance mechanisms. These mechanisms aim to align the interests of principals and agents, thereby mitigating agency conflicts.

However, implementing these mechanisms entails costs and potential conflicts of interest among stakeholders. Thus, a persistent challenge in managing the principal-agent relationship is striking a balance between minimizing costs and risks while advancing the interests of both principals and agents.

Agency theory has found widespread application across various disciplines, including economics, finance, management and corporate governance, providing a valuable framework for comprehending and managing the intricate relationship between principals and agents within organizations.

Moreover, agency theory suggests that agents, such as managers, may prioritize corporate social performance and environmental concerns over financial considerations, particularly since these activities no longer directly impact a company's revenue. This is consistent with the foundational principles of agency theory, as agents may engage in philanthropic endeavors to enhance their public image and reputation.

Drawing on Jensen and Meckling agency theory, involvement in Environmental, Social and Governance (ESG) activities introduces new agency predicaments between managers and shareholders. Shareholders may perceive ESG spending as contrary to their best interests, potentially diminishing overall profits. Agency issues concerning ESG activities can manifest in various ways, including resource misallocation, opportunity costs and strategic manipulation to mask poor financial performance.

The literature also suggests that companies with ample liquidity and no financial constraints may be particularly susceptible to agency issues concerning ESG activities. High liquidity, signaled by substantial capital expenditure and free cash flows, can exacerbate agency costs, as managers may exploit these resources for personal advantages.

Environmental, Social and Governance (ESG)

The term ESG finds application in management [7-8], financial [9-10] and qualitative [11] contexts, leading to challenges in crafting a precise definition. It is commonly described as a set of pertinent activities that an organization should incorporate into its strategy and execute [12]. According to the ESG concept, responsible business is characterized by the adoption of appropriate environmental practices, socially responsible employee conduct and the implementation of sound corporate governance practices [13].

The environmental (E) dimension assesses a company's influence on the natural ecosystem, including factors such as climate change, biodiversity and emissions like greenhouse gasses. It considers the efficiency of natural resource utilization in the production process, encompassing energy, water and materials, as well as the company's impact on pollution, waste generation and deforestation [12, 14]. Establishing environmental management systems, which involve investments in research, development and innovation, including product enhancements and improvements to the environmental supply chain, is essential for companies in this dimension [15]. Compliance with legal and regulatory requirements related to environmental protection is a crucial aspect within the ESG framework [16].

The social (S) dimension encompasses the company's interactions with its employees, customers and society at large. Its objectives revolve around community development, public health considerations, ethical conduct, respect for human rights, product responsibility (quality assurance), responsible marketing practices, safeguarding data privacy and initiatives focused on personnel, including support for diversity and inclusion, career development, training and enhancements to working conditions and health and safety measures [16]. Activities within the social dimension aim to foster employee loyalty, customer and community satisfaction (building a positive image as a good neighbor) and contribute to societal well-being as a whole, often through charitable endeavors and support for employee volunteerism [12,14,16]. 

The corporate governance dimension (G) encompasses the existing management systems, incorporating a corporate social responsibility strategy, ESG reporting and transparency. It includes measures to safeguard shareholder rights, such as protection against corporate takeovers and emphasizes a well-functioning board of directors, featuring experienced, diverse and independent members. Motivated by a well-designed executive compensation policy, the governance dimension also involves audit procedures, compliance protocols and ethical principles, such as a code of conduct and the avoidance of illegal practices like fraud and bribery [12,14,15].

ESG governance relies on an integrated set of processes, structures and systems to assist the board of directors in guiding the company [17]. Assumptions within corporate governance influence management quality [18], consequently impacting capital allocation efficiency and the ability to sustain and grow capital over the long term [19].

In any organization, managers play a pivotal role as decision-makers. From an ESG perspective, their responsibility involves identifying and reconciling the diverse and often conflicting interests of the company's key stakeholders [20-22]. These interests must be integrated into the corporate culture, management strategy, business model, actions taken and reporting [23]. Managers operate under institutional pressures from social and cultural environments, including legislators, regulators, customers, local communities and environmental organizations, which influence their strategic decisions [24-25].

ESG Risk Rating

ESG risk rating involves the quantitative or qualitative evaluation of a company's performance in environmental, social and governance (ESG) dimensions, as well as the associated risks. This assessment tool is utilized by investors, rating agencies and research providers to gauge companies' sustainability and responsible business practices.

The ESG Risk Ratings specifically analyze the degree to which a company's economic stability is susceptible to ESG (Environmental, Social and Governance) factors, essentially measuring the level of unaddressed ESG risks faced by the company.

Investors can leverage ESG risk ratings to incorporate ESG factors into their analysis and decision-making processes. These ratings offer insights into a company's ESG profile and potential risks, enabling investors to align their investments with sustainability goals, ethical values and long-term financial objectives.

It's essential to acknowledge that ESG risk ratings come with their own set of limitations. These challenges include issues related to data availability and quality, a lack of standardization and comparability across industries and the possibility of greenwashing or misrepresentation of ESG performance. Despite these hurdles, ESG risk ratings play a pivotal role in fostering sustainable investment practices and motivating companies to enhance their ESG performance and disclosure.

The methodologies for ESG risk ratings can differ among various rating agencies and research providers. These entities might employ proprietary models, distinct data sources and specific criteria to evaluate ESG risks and assign scores or ratings to companies. Such ratings serve as valuable tools for investors, aiding them in making well-informed decisions regarding capital allocation, guided by considerations of ESG performance and risk exposure. There are 8 (eight) global known ESG Risk Rating provider which are MSCI, RepRisk, Sustainalytics, KLD (MSCI Stats), Asset4 (Revinitiv), Vigeo-Eiris (Moody’s), RobecoSAM (S&P Global) and Bloomberg (Proprietary scores)

Some rating companies mainly use publicly available data to determine ESG scores and create these without consulting the specific company. Such as Bloomberg’s proprietary ESG scoring, launched in late 2020. The Author chose to use Sustainalytics methodology due to Indonesia Exchange having launched IDX ESG Leaders that use Sustainalytics as its official methodology. The author believes that utilizing the same ESG methodology as the listed companies provides a suitable benchmark.

Based on the Sustainalytics methodology for sub industry oil & gas Exploration, there are 11 (eleven) material issues that need to be addressed by oil & gas companies:

Environment Aspects

• Emission, Effluents and Waste

• Carbon Products and Services

• Carbon Own Operations

• Resource Use

• Land Use and Biodiversity

Social Aspects

• Occupational Health & Safety

• Community Relations

• Human Capital

Governance Aspects

• Bribery and Corruption

• Corporate Governance

• Business Ethics

ESG Risk Rating by Sustainalytics is divided into 5 (five) category which are discussed below.

Negligible

This category is the best version of a company that can manage their ESG Risk Exposure. The quantitative number for this category is from 0 (zero) to 10 (ten).

Low

For a company that has a result of quantitative number 10 (ten) to twenty can be categorized as low.

Medium

Quantitative numbers of 20 (twenty) to 30 (thirty) are categorized as medium risk. Pertamina (Persero) in 2021 has a value of 28,1 and is categorized as a medium risk oil & gas company.

High

From 30 (thirty) to 40 (forty) is categorized as high risk. Pertamina Hulu Energi in 2022 has value 31,2 and is recognized as a high-risk oil & gas company. 

Severe

40 (forty) and above is categorized as severe risk. Lots of oil & gas companies are categorized as high-risk companies such as Exxonmobil with a value of 41.7, Petrochina with value of 54.4 and so forth.

The research used two-dimensional architecture with the first dimension, exposure, reflecting the extent to which a company is exposed to material ESG risks at the overall and the individual Material ESG Issue level and the second one, Management, reflecting how well a company is managing its exposure.

Exposure

Exposure can be considered as a set of ESG-related factors that pose potential economic risks for companies. Another way to think of exposure is as a company’s sensitivity or vulnerability to ESG risks. Material ESG issues and their exposure scores are assessed at the sub industry level and then refined at the company level.

To initiate the evaluation, the analysis begins by assessing the exposure of companies within the same sub industry, characterized by similar products and business models, in relation to a set of potentially relevant ESG issues. Various factors, including the companies' historical events, structured external data (e.g., CO2 emissions), company reports and third-party research, are considered in this assessment.

Betas play a crucial role in tailoring the ESG Risk Ratings to each company. These betas indicate the extent to which a company's exposure to a material ESG issue differs from the average exposure within its sub industry. To determine a company's exposure score for a specific ESG issue, the sub industry exposure score is multiplied by the company's issue beta.

The beta for a company vis-à-vis an ESG issue is calculated in a three-stage process (Figure.3). At the core of the Sustainalytics model are specific indicators known as "Beta Indicators," tailored to each sub industry and Material ESG Issue (MEI). The outcomes of this evaluation generate what are referred to as "Beta Signals," which are subsequently added to the sub-industry default beta value of 1, along with the Qualitative Overlay and the Correction Factor.

Figure 3: Beta concept to arrive at company specific exposure

Source: Sustainalytics

Beta indicators have been developed for four distinct thematic areas: Product and Production, Financials, Events and Geographic considerations. In a subsequent step, a qualitative overlay may be incorporated during the update of a company profile to account for company-specific factors not captured in the standard model. Finally, a technical correction factor is applied to ensure that the average beta within a sub industry remains at one.

For certain Material ESG issues, full risk management may not be feasible. The proportion of risk that can be managed compared to the portion that remains unmanageable is predetermined at the sub industry level by a Manageable Risk Factor (MRF). MRFs range from 30% to 100% and signify the proportion of exposure to a Material ESG issue that is considered, at least theoretically, manageable by the company (Figure 4).

When establishing MRFs, four primary factors come into play: the company's ability to ensure employee compliance (e.g., occupational health and safety), the influence of external actors on the company's capacity to address an issue (e.g., cybersecurity), the complexity of an issue (e.g., global supply chains) and the physical constraints on innovation or technology (e.g., airplanes and carbon emissions). MRFs are designed to yield more realistic rating outcomes and ensure comparability of ratings across companies and sub industries.

Figure 4: Beta Assessment 

Source: Sustainalytics

Management

The second dimension of the ESG Risk Ratings is Management, representing a set of company commitments, actions and outcomes that showcase how effectively a company is addressing the ESG risks it faces.

The comprehensive management score for a company is a result of various indicators, including policies, management systems, certifications and outcome-focused metrics. Outcome-focused indicators evaluate management performance either directly in quantitative terms or by assessing a company's involvement in controversies. Each Material ESG Issue (MEI)/sub industry combination is equipped with selected and weighted management, quantitative performance and event indicators. These indicators collectively provide a robust signal to assess and measure a company's effectiveness in managing a particular issue.

Management sub-indicators serve as the smallest assessment units for gauging a company's management of ESG issues. They offer a systematic and consistent method for evaluating clearly defined and standardized criteria, based on key areas of risk or best practices that differentiate between the performance of different companies. These indicators are scored on a scale of 1-100.

For the oil & gas producers’ sub-industry, there are 11 Material ESG Issues that management addresses. The assessment for these 11 MEIs involves 46 Management Indicators derived from 132 Management Sub-Indicators.

ESG Risk Rating Calculation

The final ESG Risk Ratings scores serve as an indicator of unmanaged risk, encompassing material ESG risk that a company has not effectively addressed. This includes two categories of risk: unmanageable risk, which cannot be mitigated through company initiatives and the management gap. The management gap signifies risks that could potentially be managed by a company but are not adequately addressed according to the assessment.

The ESG Risk Ratings scoring system for a company can be conceptualized in three sequential stages. The initial step involves determining exposure. The subsequent stage revolves around evaluating management and the extent to which risk is effectively mitigated. The final stage focuses on computing unmanaged risk. This structural framework is applicable to both individual material ESG issues and the overall ESG Risk Ratings of the company (Figure 5).

Figure 5: Scoring Structure of ESG Risk Rating

Source: Sustainalytics ESG Risk Ratings - Methodology Abstract Version 2.1

Result of Exposure Assessment

Table 1 shows the Exposure Value of PIEP is High at 80,0, primarily due to its nature of business in the oil and gas industry, a sector known for its significant environmental impact and various high risks. The risks mentioned include those inherent in the industry itself, such as operational and safety risks, as well as financial risks. 

The oil and gas industry is known for its potential to heavily impact the environment. This could include risks such as oil spills, pollution and other environmental hazards. 

Furthermore, PIEP operates in countries that are considered high-risk, namely Iraq, Gabon and Venezuela. High-risk countries may pose additional challenges and uncertainties, such as geopolitical instability, regulatory uncertainties and potential security concerns.

Table 1: Calculation of ESG Risk Rating

Result of Management Assessment

Management score of PIEP is 59,4% considerably strong. PIEP has demonstrated a strong commitment to anti-corruption through the attainment of ISO 37001:2016 certification for its Anti-Bribery Management System. 

The implementation of Corporate Governance (GCG) within the company is grounded in strong integrity, ensuring the effective execution of governance principles across all organizational elements and business activities for consistent and ongoing operations. The company is dedicated to upholding GCG implementation commitment through various initiatives aimed at enhancing quality, including the formulation of new policies to align with the company's needs and market conditions, as well as compliance with existing regulations. 

Additionally, the company showcases its commitment to regulatory compliance by proactively incorporating environmentally friendly initiatives into operational improvements and addressing social aspects of community responsibility.

Concerning environmental aspects, the sustainability report lacks sufficiently robust information. There is an absence of adequate details regarding targets and initiatives aimed at reducing carbon emissions, thereby hindering the effectiveness of management efforts to achieve optimal results.

ESG initiatives, particularly those related to the environment, are not explicitly mentioned in the annual report, sustainability report or information available on the website. This deficiency in information represents one of the early-stage weaknesses in PIEP's management that can be identified.

Result of ESG Risk Rating

ESG Risk Rating score of PIEP is 42,2 as per December 2023 which in category Severe Risk. There are 176 oil & gas producer company that positioned at Severe Risk as per Dec 2023. From 272 oil & gas companies that have been assessed by Sustainalytics, more than 60% of the population categorized as severe risk. 

This result shows that the earlier hypothesis is relevant, where an oil & gas company that has been assessed using Sustainalytics method can produce severe risk. Severe risk derived from the primary nature of businesses that monetize oil & gas which emit large amounts of carbon due to oil & gas itself consists of hydrocarbons.

The ESG Risk Rating value also shows that there is still a lot of room for improvement in ESG Risk Management. Moreover, disclosing this value is intended to furnish principals with information regarding the company's ability to handle ESG risks effectively and set expectations for reducing asymmetric information.

From 11 MEI, there are top three highest ESG Risk Rating which are discussed below.

Carbon – Product and Service

Score of Carbon – Product and Service is 8,3 or contribute 20% to overall ESG Risk Rating. There are 3 main Material Indicators in this MEI, which are Sustainable product and services, ESG Reporting Standard and Renewable Energy Programs.

Management couldn’t provide any evidence that PIEP sufficient to address 3 material indicators. Main product of PIEP is oil & gas which is not a sustainable product. PIEP’s company ESG Reporting is also weak. There’s no sufficient information that was disclosed in the Sustainability Report. There is no renewable program detected from any source that has been developed by PIEP. 

Carbon – Own Operation

Score of Carbon – Own Operation is 6,1 or contributing 15% to ESG Risk Rating. This value primarily stems from insufficient information pertaining to the following:

• Disclosure is insufficient to calculate the company's carbon intensity trend over the last 3 years 

• Disclosure on carbon emissions is insufficient to determine performance relative to peers

Emission, Effluents and Waste

Score of Emission, Effluents and Waste is 5,4 or contributing 13% to ESG Risk Rating. The management value couldn’t reach optimal point in addressing this MEI exposure due to the absence of information regarding:

• Commitment to reduce non-GHG air emissions

• Initiatives to reduce non-GHG air emissions 

• Targets to reduce non-GHG air emissions 

• Deadlines to reduce non-GHG air emissions

• Board level responsibility for climate-related transition risk

• Climate-related responsibilities to management level positions or committees 

• Organizational responsibility for climate-related transition risk

• Management embeds and integrates transition risk into wider business processes and procedures 

• Recognition and description of climate change related transition risks including downside risks and opportunities identified by the organization over the short, medium and long term 

• Description of the impact of climate change related transition risks including downside risks and opportunities on business strategy and financial planning 

• Description of the impact of climate change related transition risks including downside risks and opportunities on business strategy and financial planning Description of the resilience of the strategy, taking into account different climate scenarios - qualitatively relating to previously disclosed transition risks and opportunities

• Recognition of the physical risks related to climate change Managerial or board level responsibility for climate change risks Integration of physical climate change into regular risk assessments and business strategy 

• Detailed reporting on physical climate change risk drivers Initiatives to manage or adapt to physical climate change risks 

• Demonstration of how initiatives put in place close the emissions gap between current performance and the targeted emissions reduction

• Objectives or targets related to effluent management

Comparison to Industry

If compared to the industry of oil & gas producers, PIEP would be in the position of 114 out of 315 in industry groups or 14995 out of 15942 in global companies.

Based on the author's research, most of the oil & gas producer industry is in high and severe risk, while there are 4 entities in negligible risk, none of low risk and 22 entities in medium risk. Pertamina (Persero) and Pertamina Hulu Energi as parent company of PIEP is in medium risk with scores of 20,7 and 21,5 respectively. 

Referring to the table provided, ExxonMobil, BP, Chevron and Shell exhibit ESG Risk Rating values exceeding 30, indicating high or severe risk. In terms of exposure, all oil & gas companies share a high level of exposure. On the management front, these companies demonstrate strong efforts. This suggests that PIEP aligns with the exposure and management categories observed in these four companies. This indicates that oil & gas companies inherently have a high ESG risk rating due to the industry's very high exposure. 

To ensure the company's sustainability, several prominent oil & gas companies have introduced new strategies to mitigate environmental risks. 

ExxonMobil and BP are actively investing in Carbon Capture and Storage (CCS) and Carbon Capture Utilization and Storage (CCUS) initiatives aimed at lowering carbon emissions. Pertamina (Persero) has entered into a collaboration agreement with ExxonMobil to assess the implementation of CCUS in operational areas located in South Sumatra, East Kalimantan and West Java. British Petroleum (BP), operating the Tangguh Gas Field in Bintuni, Papua, is presently engaged in the Train 3 field project, concurrently constructing Carbon Capture Utilization Storage (CCUS) facilities.

Exxonmobil and BP are executing a strategy to mitigate the inherent carbon emissions exposure associated with oil & gas activities. The aim is to optimize the Company's ESG Risk Rating value.

Referring to the Table 2 provided, ExxonMobil, BP, Chevron and Shell exhibit ESG Risk Rating values exceeding 30, indicating high or severe risk. In terms of exposure, all oil & gas companies share a high level of exposure. On the management front, these companies demonstrate strong efforts. This suggests that PIEP aligns with the exposure and management categories observed in these four companies. This indicates that oil & gas companies inherently have a high ESG risk rating due to the industry's very high exposure. 

To ensure the company's sustainability, several prominent oil & gas companies have introduced new strategies to mitigate environmental risks. 

ExxonMobil and BP are actively investing in Carbon Capture and Storage (CCS) and Carbon Capture Utilization and Storage (CCUS) initiatives aimed at lowering carbon emissions. Pertamina (Persero) has entered into a collaboration agreement with ExxonMobil to assess the implementation of CCUS in operational areas located in South Sumatra, East Kalimantan and West Java. British Petroleum (BP), operating the Tangguh Gas Field in Bintuni, Papua, is presently engaged in the Train 3 field project, concurrently constructing Carbon Capture Utilization Storage (CCUS) facilities.

Table 2: 8 ESG Risk Rating Top 4 Oil & Gas Companies

Source: Sustainalytics

Exxonmobil and BP are executing a strategy to mitigate the inherent carbon emissions exposure associated with oil & gas activities. The aim is to optimize the Company's ESG Risk Rating value.

Comparison to Local Oil & Gas Company 

There are 2 (two) oil & gas companies in Indonesia that have gone global which are PT Medco Energi Internasional (MEDC) and PT Energi Mega Persada (ENRG). MEDC owns oil & gas assets in Vietnam, Thailand, Malaysia, Yaman, Libya, Oman, Tanzania and Mexico. ENRG has oil & gas assets in Buzi, Mozambique. Author found it suitable to become a benchmark for PIEP.

Referring to the table 3 provided, PIEP, with an ESG Risk Rating of 41.8 (Severe Risk), falls between MEDC and ENRG. According to the findings, ENRG attained a score of 46.2, mainly due to its average management efforts. 

Table 3: 9 ESG Risk Rating MEDC and ENRG

Source: Sustainalytics

Medium risk has been gathered by Medco because they have a strong commitment to implementing ESG from 2017. From data below we can see that at first assessment, Medco got an ESG Risk Rating score amounting to 49,9 or severe risk in 2018. But over years has good impact, they can reduce ESG Risk Rating to 29,6 (Medium Risk) at 2023 (Figure 6).

Figure 6: Comparison to Industry Group

Source: Sustainalytics

Medco also has a clear vision and sets targets for sustainable business. Management expressed their thought on how important ESG is by implementing a sustainability roadmap from 2023–2027 (Figure 7).

PIEP can adopt strategies of MEDC to create a long-term Sustainability Roadmap to inform commitment of reducing carbon emission.

Figure 6.2 History of ESG Risk Rating Medco

Source: MEDC Sustainability Report 2023

Figure 7.3 Medco Sustainability Roadmap

Source: MEDC Sustainability Report 2022

Based on the ESG Risk Rating assessment conducted on PIEP, the results show that PIEP has a severe risk with a value of 42.2. This shows that the results of the study are in accordance with the author's hypothesis that the ESG Risk Rating PIEP is at severe risk. This figure positions PIEP within the global average value of oil & gas companies that have undergone assessment by Sustainalytics. 

PIEP's ESG Risk Rating is categorized as severe, primarily driven by three factors: Carbon – Product & Service, Carbon – Own Operations and Emissions, Effluents and Waste. The predominant reason for these high-risk ratings is the inherent connection between the oil & gas business operations and carbon emissions, along with insufficient disclosure regarding carbon emissions, waste management and overall ESG initiatives of PIEP.

The most immediate action PIEP can take is to engage in comprehensive reporting on ESG initiatives. Based on the ESG assessments, there are numerous areas in reporting carbon emissions and ESG initiatives that require improvement. The implementation of Key Performance Indicators (KPIs) for reducing carbon emissions, Sustainability Budget Tagging and implementation of IFRS S1 and S2 is anticipated to demonstrate the management's commitment to ESG risk control which finally can reduce ESG Risk Rating of PIEP.

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