Achieving energy transition and better ESG governance from an SOE perspective

Climate change is now recognized as a major global issue. With the signing of the Paris Agreement and the establishment of zero-carbon targets worldwide, the concept of sustainable development has been divided into three dimensions: environmental, social and governance (ESG).

Originating in Europe and the US, ESG investment has gained global traction and its influence continues to expand, leading to increased requirements for ESG information disclosure by listed companies from regulators, investors and the public. Due to differences in national conditions and uneven development, however, the focus of ESG issues varies across different countries and regions.

Additionally, the standards adopted by ESG ratings agencies lack transparency, and their principles and methods for collecting corporate information are not unified, making it challenging for companies to choose an ESG disclosure framework that best reflects their industry’s characteristics and current development status.

Given the global nature of energy production, supply and pricing, coupled with the high carbon emissions of the traditional oil and gas industry, this sector has garnered widespread attention in the context of climate change. Major multinational oil and gas companies, such as PetroChina, have set ambitious energy transition and carbon-reduction targets.

PetroChina, one of the earliest oil and gas companies to disclose non-financial information, has been publishing ESG-related reports for 18 consecutive years. As China’s largest oil and gas producer and supplier, and one of the world’s largest oil and gas companies, PetroChina is pursuing a green and low-carbon transition strategy tailored to its own development. This strategy involves a three-step transition path of Clean Energy Substitution (2021-2025), Strategic Succession (2026-2035) and Green Transition (2036-2050), aiming to evolve into an integrated energy company encompassing oil, gas, geothermal, electricity and hydrogen energy.

As a leading player in the global energy market, PetroChina’s actions and strategies significantly influence the industry’s overall direction toward sustainability. By sharing its progress and challenges, the company can contribute to the global dialogue on ESG practices, influence industry standards and inspire other companies to adopt similar initiatives. To that end, and in light of the global trends in climate change, energy transition and increasingly professional ESG information disclosure requirements, we believe the following three areas are essential for achieving the energy transition and improving ESG governance in China.

1. ESG should transition from simple ex post information disclosure to comprehensive ex ante governance

Many ESG concepts have long been internalized in modern corporate governance. To enhance ESG performance, it is essential to establish a top-down ESG governance system and systematically embed ESG elements into various aspects of management. This approach helps listed companies better identify and manage ESG risks.

A top-down ESG governance system requires listed companies to:

• Clarify the responsibilities of the board of directors in ESG governance
• Enhance ESG mindset at the board and management level
• Strengthen ESG supervision
• Fully identify and evaluate ESG risks, opportunities and relevant issues
• Guide the entire company to form a unified ESG value
• Implement ESG principles in business management
• Co-ordinate ESG information disclosure.

2. Prioritize and enhance communication with stakeholders

Actively and responsively fulfilling information disclosure obligations required by regulators is the first step in effective communication with stakeholders. Identifying and categorizing stakeholders and engaging in targeted communication through various channels is also essential. Regular contact should be maintained with institutional investors, ratings agencies and international organizations, as they often represent multiple stakeholders with specific concerns. Gathering their feedback and actively responding to their inquiries is vital.

Additionally, conducting regular internal training programs can enhance the quality and effectiveness of communication. Lastly, for internationally listed companies, it is important to address potential communication misunderstandings due to cultural differences by using clear and accessible language.

3. Promoting the localization of the ESG ratings system in China is essential

Compared with developed countries like those in Europe and North America, ESG development in China is still in its early stages, and the international influence of emerging domestic ratings agencies is relatively limited. But the overseas ESG ratings system cannot be fully applied to China’s market and, often, the ratings do not align with the actual situation of the companies.

Therefore, it is crucial to build a localized ratings system suitable for China to attract more overseas investors to its capital market. China’s regulators, listed companies and institutional investors are collaborating to promote unified ESG information disclosure guidelines and improve the quantifiability and comparability of disclosure indicators. Additionally, it is necessary to increase support for the development of local ratings agencies so their ratings can become a significant reference for overseas investors.

In the context of the global energy transition and the pressing issue of climate change, the oil and gas industry is confronted with the dual challenges of achieving green and low-carbon transformation while ensuring comprehensive ESG information disclosure. By systematically integrating ESG principles and enhancing communication with stakeholders, companies can significantly improve the transparency and credibility of their disclosures. We call on all industry participants to actively share successful experiences and best practices. By doing so, we can collectively drive the green and low-carbon transformation of the industry and unlock the long-term value and opportunities associated with sustainable development.

Wei Fang is president of CNPC Europe and North America and Xing Chong is deputy director of IR at PetroChina