June 2018

With Environmental, Social and Governance (ESG) investing now a mainstream feature for investors, issuers are making changes to show how this creates a positive impact and aligns with their strategies, writes flow’s Janet Du Chenne

If you have ever wondered how mainstream ESG investing has become among institutional investors, a quick look at the annual report of the Sovereign Wealth Fund of Norway,1 which manages US$1trn of investment assets on behalf of the Norwegian government, should provide some insights.

In the responsible investment section of the report, the fund said it undertook six risk-based divestments of companies due to high risk of contributing to tropical deforestation. It has a climate change policy which sets out expectations to all companies in its portfolio to reduce their contribution to climate change and rainforest destruction. NBIM, the fund’s manager, found there were too many problems in the sector as a whole to be worth the risk, citing specific challenges that included a lack of traceability in the palm oil supply chain and a lack of faith in palm oil certification systems. It also highlighted the expansion of some palm oil producers into parts of Africa where governance, land ownership and human rights issues are key concerns.

During the past few years, the fund has integrated these issues into its risk management and reported on them. This may result in divestments in companies where it sees long-term risks, as it could be a sign that these companies are not adequately addressing the relevant ESG risk in their business operations. The scale of these issues means that, in the same way that investors such as NBIM have incorporated ESG into their strategy and communicated this in their annual reports, more issuers are looking to integrate ESG and sustainability into
their strategic communications with those investors.

The reason for this ESG momentum is that investors believe they can have a positive impact on these issues by changing corporate behaviour. Many large institutional investors have ESG teams and they are working with corporations to ensure that strict guidelines are being followed.

This article takes a closer look at how Madrid-headquartered energy provider Repsol embeds ESG in its business strategy.

Client case study

How Repsol keeps it clean for investors

Paul Ferneyhough, Corporate Director, Finance & Investor Relations at multinational energy provider Repsol, answers questions about how the company integrates ESG into its overall strategy and how this impacts on profitability


How has Repsol integrated ESG into its overall strategy?

Repsol works to provide accessible, efficient and safe energy to meet growing energy demand without compromising future generations. Our commitment to sustainability is a cornerstone of our vision of the future as an integrated sustainable energy company.

Our commitment to sustainability is integrated into the company’s strategy2, and Repsol has the support and engagement of the board of directors and senior management. The company is focused on developing a business that is sustainable not just for tomorrow, next week or next year but for the next 50, 60, 70, 80 years. We need to emphasise the best practices that we follow so that, when it comes to our company, we are able to demonstrate a clear linkage between ESG and how we run our business on a daily basis in a way that is going to deliver differential returns and levels of income over time. The issue with ESG in the eyes of investors is not with what the company has been doing, but rather with how we have been communicating it.
Repsol operates in a manner that is totally aligned to regulatory environmental standards, industry best practices and broader expectations of stakeholders. Our aim is to leave no trace of where we have been. Before entering any new basin, the company develops an understanding of the social and environmental conditions in which the activities will take place, because we understand that we are responsible not only for the natural ecosystems, but also for the people who are impacted by our activity.
We’ve also been investing in reducing CO2 emissions in our facilities in Spain for years and our current energy efficiency programmes, which started in 2005, will result in a reduction of five million tonnes of CO2 per annum by 2020, a 25% overall reduction of our CO2 emissions.

What is new to our approach is that we emphasise our credentials in those areas so that those investors willing to invest in companies integrating ESG can clearly see how we take decisions, the way we remunerate our staff and executives, and how it fits into our overall strategic objectives.

Raspol HQ

"We are building global carbon pricing into our investment decisions"

Paul Ferneyhough, Corporate Director, Finance & Investor Relations, Repsol

How do you communicate this strategy to ESG-focused investors?

Like any sort of concept, it’s important that you describe it in terms of real actions. Repsol was one of the first oil and gas companies to commit to supporting the Kyoto Protocol.3 The company is firmly committed to the ambition of limiting the average global temperature rise below 2ºC above pre-industrial levels by the end of the century. As a signatory of the Paris Pledge for Action4 document, Repsol supports the Paris Agreement, and works towards being part of the solution to climate change. This means ensuring that our company, the way that we operate, the targets that we’re setting and the objectives we are delivering will be compliant with our participation in the achievement of the two degrees Celsius ambition.

The next aspect is that our approach to environmental sustainability is not only about the concept of investing in renewables – it’s more fundamental than that. We are looking at our business, analysing what we are good at, what makes us successful and how we can apply that as we think about where our business goes in terms of us supporting the COP215 (or 2015 United Nations Climate Change Conference) agreement. We want to invest in the areas in which we think we can be profitable and where we can provide value-added services to our clients. To illustrate that using one example in our business, Repsol has a leading position in the Iberian Peninsula for the supply of fuel, with 40% of the litres that are put into people’s cars being bought from Repsol. We know that, in the short to medium term, the electrification of mobility is going to impact light private vehicles and there’s going to be a significant decrease at some point in time in the amount of diesel and gasoline that is going to be required for cars.

How do you reflect energy provision for mobility in your investment strategy?

Mobility is not going away and will, indeed, grow. We describe Repsol as a leading supplier of energy for mobility and we want to defend that position. Then we have a business that starts to think about itself in a different way. We think about how to continue to defend our market share, how to continue to be the premium supplier of energy for mobility. Then you get into the fact that we have to consider a multi-faceted approach to the provision of energy for mobility. That is what we are already developing and that is a sustainable business. For us, sustainability means investing in the business where we can be profitable, where we have competitive advantage, where it is part of the solution for low-carbon emissions, rather than simply buying a wind farm.

This multi-energy approach means you can buy diesel and gasoline from service stations but you can also buy Autogas (liquefied petroleum gas) which is more efficient, has less tax on it and is more attractive to people, as it produces fewer emissions. Also, we are already the leading provider of electric car recharging points in Spain from our service stations. Then there is the fact that we have service stations in prime locations, and we work to ensure that we are generating the best level of revenue from those service stations. So, in addition to selling freshly baked bread, we also have an agreement with Amazon so that their customers can collect their parcels from Repsol stations, and an agreement with El Corte Ingles to install supermarkets in our service stations. We are continuing to build on the services we provide so that not only are we seen as a traditional provider of energy for mobility, but we are also leveraging the businesses we have so that they continue to be relevant in people’s lives.

Finally on this point, when we think about investments in our business and how we invest globally, how we chose where we are going to allocate our capital and where are the areas we want to focus on, we actively develop the techniques we use to analyse our decision-making to ensure that they are aligned to our commitment to a low-carbon emissions future. We very much believe in a global carbon pricing model and so, rather than waiting for the world to get there, we are already building it into how we make decisions now. So we are building global carbon pricing into our investment decisions so that those investments that are more efficient in terms of the amount of carbon they’re producing will benefit, because they will have a lower hypothetical tax in their investment calculations, and that will then allow us to target our investment to those areas that are more efficient in terms of CO2 production. We’ve built that in – this year the cost is US$25 per metric tonne (/t) – and we’re going to be stepping it up to US$40/t by 2025. This means that we have already built the idea of a global carbon price into our business, and that is currently helping us to optimise our investment towards carbon-efficient projects.


"Repsol was one of the first oil and gas companies to commit to supporting the Kyoto Protocol"


How integrated are sustainability and profitability?

Socially responsible investors – those integrating ESG within their investment decisions – represent about 14% of our total institutional shareholder base. We want to see more of these people in our investor base, because they’re generally long holders and they’re generally very supportive. Why are people interested in socially responsible investment? It’s not only because they are looking to make a return, but also because there is a demonstrable link between sustainability (ESG) and differential value creation, which is a proxy for profitability in the long term.

We believe there is no choice other than to be a company that believes our sector has a long future in front of it, that is going to be a part of a low-carbon emissions economy, part of the provision of low-cost carbon efficient energy for the globe. We see a total linkage between profitability and our focus on SRI [socially responsible investing] investments. Those concepts go hand in hand.


How does Deutsche Bank help you to target ESG investors?

We engage with Deutsche Bank on a number of fronts, on the investor relations side, on the treasury side and within our capital markets function. But the one I’d like to focus on in particular here is the ADR programme. Deutsche Bank acts as the manager for our ADR programme in the US and that programme is really important. At the moment we have a very active ADR programme trading on the OTC QX, making it our second largest equity market by volume globally.

In terms of the US, where the ADR is targeted, 20% of our institutional shareholders are based there. So for me, the ADR programme allows us to offer investment opportunities to US-based institutions who are not looking for the complexity of directly owning stock on a European bourse. It makes us an easy choice for them. The Deutsche Bank team are managing that programme for us and they provide us with insight into volume flows and into the types of investors that are interested in our business, as well as giving us access to information around what institutions are thinking about and what they are interested in. The US is a rapidly evolving market for SRI investment. They’re a little bit behind Europe in terms of their sophistication in these areas, but they’re moving forward very quickly. So our ability to offer socially responsible investors an easy platform to get exposure to a company like Repsol through our ADR programme is fundamentally important.

The company is a Trust and Agency Services client, where Deutsche Bank acts as depositary bank for Repsol’s American Depositary Receipt (ADR) programme for US investors, and the bank helps it to communicate its strategy to those investors.

The Deutsche Bank view

With more investors actively integrating ESG into their decision-making, Trust and Agency Services continues to support clients on adherence to Green Bond Principles for infrastructure investments,6 provide additional reporting on specific metrics and segregate capital and cash flows as required. For issuers, it means considering how to best incorporate ESG into their investor relations stories. We actively work with both investors and issuers to understand their ESG priorities and help them achieve their objectives.


Jose Sicilia, Global Head of Trust and Agency Services at Deutsche Bank


1 See https://bit.ly/2HbBjeu at nbim.no
See https://bit.ly/2Hbg2Bv at repsol.com
3 See http://kyotoprotocol.com

4 See http://parispledgeforaction.org

5 See https://bit.ly/1feEfIu at wikipedia.org

6 See https://bit.ly/2Hb4eDD at cbd.int


Jose Sicilia

Global Head of Trust and Agency Services | Deutsche Bank

Jose Sicilia

Paul Ferneyhough

Corporate Director, Finance and Investor Relations | Repsol

Paul Ferneyhough

You might be interested in

This website uses cookies in order to improve user experience. If you close this box or continue browsing, we will assume you agree with this. For more information about the cookies we use or to find out how you can disable cookies, click here.