By: JEREMY OSTERBERGER, President and COO, BIC Alliance

ESG initiatives, once front and center in the corporate world, are now being de-emphasized.

Management consulting company PwC’s “2024 Annual Corporate Directors Survey” revealed interesting insights on corporate sentiment regarding ESG. When asked if ESG issues are “regularly a part” of their board agendas, only 47% of surveyed directors indicated that they agree, compared to 52% in 2023 and 55% in 2022. PwC also asked directors to indicate statements about ESG that they agree with, and only 22% agreed with the statement, “ESG makes a difference to my company’s bottom line.”

In recent months, major U.S. banks, including JPMorgan, Bank of America and Wells Fargo, backed out of the Net-Zero Banking Alliance, per reports from Reuters. As for the O&G industry, in October 2024, Reuters broke the news that bp had “abandoned a target to cut O&G output by 2030 as CEO Murray Auchincloss scales back the firm’s energy transition strategy to regain investor confidence.” A November 2024 New York Times article explained that “investors are rewarding oil giants like ExxonMobil that did not embrace wind and solar.”

Add the new administration’s commitment to fossil fuel production and its likelihood of battling ESG requirements to the de-emphasis of ESG in the corporate world, and you get an environment where O&G companies might not feel as pressured to aggressively pursue ESG as they might have in the past. Moreover, they might face fewer guardrails when pursuing M&A opportunities. For instance, whereas investors might have previously demanded that potential M&A deals meet certain ESG criteria, given the current sentiment, they could drop those demands. A bank that might have heavily weighed ESG criteria as part of its lending practices a few years ago might now give ESG less weight in the lending equation. Against the backdrop of a less regulatory environment, O&G companies have a positive outlook for the next four years.

Given that companies typically aim to buy and sell within a three-to-seven-year window, the current regulatory outlook is particularly attractive for dealmaking. In this new environment, M&A activity in the O&G industry could very well increase, benefiting companies focused on traditional energy.

Additionally, the four years ahead will reveal to what extent O&G companies genuinely want to pursue ESG initiatives versus feeling compelled to do so. Some leaders might decide that ESG is in the DNA of their organizations and will pursue it regardless of any de-emphasis in corporate and political spheres. Others might get excited about the current de-emphasis on ESG — and, in turn, scale back their ESG initiatives and shift their M&A strategies. However, they should exercise caution. There are still potential headwinds.

Multinational companies must take into account the political and regulatory landscape of all the areas they operate in. While the U.S. is poised to embrace traditional energy in the next four years, that won’t necessarily be the case elsewhere, such as in the EU. Moreover, the political and regulatory landscape can quickly change in the U.S. In 2029, a new administration could very well take a less favorable approach to traditional energy, putting O&G companies that veered away from ESG in a difficult position.

Flexibility and adaptability will be paramount for O&G companies as they navigate the challenges and opportunities of the next four years and beyond. Leaders should evaluate their strategies and assess current and emerging risks as they navigate M&A opportunities. They should continuously keep a pulse on the political and regulatory landscape, as well as market conditions. With more knowledge comes more confidence. According to EY research, for CEOs, more confidence translates to a greater likelihood of getting involved with M&As.

O&G leaders might decide to drastically cut back on their ESG initiatives in favor of traditional energy, slightly reduce their ESG efforts or keep their current balance. Regardless of the direction they take, they shouldn’t become too comfortable with the status quo.

For more information, call Jeremy Osterberger at (281) 538-9996.