Reputational and Physical Risk Assessments
In its October 2021 guidance, the Task Force on Climate-Related Financial Disclosures (TCFD) recommends that companies provide investors and other stakeholders with an understanding of how an organization’s climate related risks are identified, assessed and managed and whether those processes are integrated into an existing risk management process. As recommended, we have categorized these risks into two categories, as follows:
- Transition risks, which are associated with the rate of change in policy actions, technologies or market conditions aimed at emissions reductions, energy efficiencies, subsidies or taxes, along with potential sources of reputational risk, associated with climate related objectives
- Physical risks due to increased severity of storms, droughts and flooding, for both new projects and existing operations, which includes assessing how climate change may impact water availability and water stress in the areas we operate using the World Resources Institute’s (WRI’s) Aqueduct Tool
For detailed descriptions of our carbon asset risk assessment and water availability and water stress assessment , and a table detailing our risk mitigation strategies by TCFD risk type , please refer to our 2022 Sustainability Report.
Detail on our approach to monitoring reputational and physical risks, including results of our most recent assessments from 2022, is provided below.
In 2019, we initiated a phased program of climate related physical risk assessments to inform our wider enterprise risk management (ERM) process on potential climate impacts. These assessments consider the potential impact to the facilities and infrastructure we operate, as well as how these may be affected by predicted future climate change scenarios. The geospatial output from these assessments allows us to overlay climate variables such as extreme heat stress, extreme cold, rainfall, water stress, fire, storm intensity and coastal flooding projections and create heat maps showing the changes from the baseline values for our current and planned operations. We have adopted a flexible approach to these assessments that will enable us to reevaluate climate impacts as the science evolves and as our operations change and adapt.
We completed the first assessment on our Gulf of Mexico operations in 2020, the second on our Bakken operations in 2021 and the third assessment on our North Malay Basin operations in 2022. Findings from each of the assessments were as follows:
- Potential risks associated with worker heat stress and flooding of coastal logistics infrastructure related to our assets in the Gulf of Mexico were identified. However, these risks are not unique to Hess and would also apply broadly to the oil and gas industry and other industrial sectors and would necessitate mitigation at a state and national level.
- For our Bakken operations, a potential increase in extreme heat stress, decrease in extreme cold, mild increase in rainfall and negligible change in extreme drought were identified compared with the baseline. Furthermore, the Bakken assessment projected water stress to be at a medium risk in the future compared with the baseline generated using the WRI Aqueduct tool.
- A potential increase in extreme heat stress, increasing ocean temperatures at all depths, subtle intensification in the maximum cyclone windspeed and increase in coastal flood inundation due to rising sea levels were identified for our North Malay Basin operations.
While our initial program of physical risk assessments for our current portfolio of operated assets is complete, we will continue to monitor the potential impacts identified to determine what mitigations and adaptations may be required. We plan to take similar phased approach for our nonoperated assets by conducting assessments to evaluate the potential impact of climate variables on our nonoperated facilities and infrastructure.
The TCFD identifies climate change as a potential source of reputational risk or opportunity for companies. The TCFD further categorizes reputational risks and opportunities posed by climate change into three distinct categories:
- Shifts in consumer preferences
- Stigmatization of a sector
- Increased stakeholder concern or negative stakeholder feedback
In 2022, Hess undertook an exercise to measure the potential impacts of changes in our corporate reputation, driven by climate change risks and opportunities, on Hess’ market valuation. Our analysis was based on three reputational risk assessments, as follows:
- Institutional Investor Assessment: An assessment was conducted to identify any climate related changes in Hess’ institutional investor holdings. Despite the recent increase in climate commitments by institutional investors, the analysis did not find a strong correlation between institutional shareholdings and corporate climate commitments by Hess and our peers.
- Sentiment Analysis: A sentiment analysis was performed using a climate related media search using Talkwalker, a consumer intelligence acceleration platform, to assess if climate related news and media exert influence on Hess’ corporate reputation. The results of this analysis suggest that Hess has a more positive climate related reputation compared to our peers.
- Financial Impact Assessment: The financial impact assessment considered whether positive ESG ratings are associated with better financial performance. The methodology involved creating a database of financial metrics and environment social and governance (ESG)/climate ratings for Hess and our peers, and assessing the relationship between these two sets of metrics using regression and cluster analysis. Financial metrics included Beta (a measure of volatility), price to earnings ratio, market capitalization, and credit rating, and ESG/climate ratings included those from CDP, MSCI, Sustainalytics and the Transition Pathway Initiative. The analysis suggests that the selected financial metrics did not show a correlation between more positive climate/ESG ratings and more favorable financial metrics.
We also continue to monitor Hess’ ESG risk exposure ratings published by RepRisk. RepRisk – a global data science company focused on due diligence of material environmental, social and governance (ESG) risks – produces a quantitative summary of the ESG risk exposure of a company, including climate related risks. RepRisk’s assessment of the ESG risk exposure of a company is based on the company’s activities observed by media, stakeholders and third party sources and excludes information provided by the company itself. A company’s RepRisk ESG exposure is based on a combination of company specific ESG risk and country sector ESG risk determined by where the company operates. A company’s RepRisk rating (ranging from AAA to D) and RepRisk Index (ranging from 0 to 100) is a proprietary risk metric, which captures and quantifies a company’s risk exposure related to ESG issues. As of March 2023, Hess’ RepRisk Index of 20 classifies our company as having low risk exposure and Hess’ RepRisk rating of BBB presents our company as having moderate ESG risk exposure, which is comparable to our peers.