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ESG Factors and their Impact on NPV

  • 10 Pages
  • Published On: 20-12-2023
Introduction

Businesses facilitate operations on the basis of their sustenance based needs and requirements. In this connection, the triple bottom line approach might be considered as an important element that drives the initiatives of the businesses while identifying the sustenance based activities of the towards growth. ESG (Environmental and Social Governance) factors are specifically considered by the businesses with the purpose of ensuring their relevance and sustenance in the context of reducing the environmental concerns and the social challenges with improved CSR setting (Weston and Nnadi 2021). On the other hand, the economic sustenance of the businesses is equally important elements that must be considered by the leaders with the purpose of maintaining the continuity of operations while addressing the strategic change needs. In this connection, the discussion would identify the factors of ESG and the manner in which the same has an impact on the NPV of British Petroleum (BP).

British Petroleum

The concerned business, BP, is a British multinational oil and gas organization which is headquartered in London and is considered one of the major oil and gas businesses around the world. It has been observed as per a report published in the year 2019 that the organization holds a workforce of around 70,100 from UK itself while producing 3.7 million barrels per day of oil equivalents. The organization holds proven reserves of 19.945 billion barrels of oil equivalents. The organization’s inclination towards empowering the renewable source of energy has resulted to diversification of their propositions from oil and gas propositions to biofuels, wind power, smart grid and solar technology. The significant holdings that are facilitated by the business are 19.75% stake in Rosneft, BP-operated Macondo Prospect and Azerbaijan and BTC Pipeline. The significant holdings have been empowering the continuous growth and development of the business in the global markets while ensuring a continuity of revenue streams through different sources. Again, the inclusion of diverse range of shareholders ranging from FMR Co., Inc to the Vanguard Group has supported their investment prospects and growth through creativity and innovation in the business processes.

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ESG factors that are being experienced by the organization

The ESG factors mostly drive the sustenance and growth of an organization in the global markets. It has been observed that the management and governance of the social and environmental concerns while controlling the activities of an organization bears significant outcome towards ensuring the continuity of operations and relevance in the global markets. In this connection, the section would enumerate different ESG factors that might be summed up from the case study of British Petroleum for determining their sustenance related aspects.

The concerned organization has been operating in Azerbaijan since the year 1992 and partnered with the Government of Azerbaijan while working on several projects of economic significance to the venture. The business has undertaken a capital expenditure of around $72 billion on projects like ACG, BTC, Shah Deniz and SCP in Azerbaijan. The increased capital expenses on the different oil and gas projects in Azerbaijan have significantly supported the increase in revenue of the Azerbaijan nation. On the other hand, it has been observed that the organization devised workplaces in Azerbaijan while providing job opportunities for the people in Azerbaijan. Azmi et al. (2021) opined that businesses take on the role of improving the social status of the people in the operating regions through the creation of job opportunities while improving the degree of community engagement in the different areas of operations. In this connection, BP devised a strategic goal towards addressing the social needs through the creation of job opportunities for the people in Azerbaijan while contributing towards the development of the social standards and economic situation in the regions.

Moreover, it has been observed that the organization provided an extensive amount of revenue streams for the state of v Azerbaijan while improving the economic situation of the same. The increased revenue stream in a region improves the economic situation while the job opportunities work towards improving the social status of the people, impacting on their livelihood and wellbeing. Therefore, BP extensively contributed towards the development and growth of the Azerbaijan economy while developing job opportunities for the people which supported the business in ensuring the fulfillment of their social responsibility.

On the other hand, it has been observed that BP devised most modern oil and gas processing plants and efficient construction and fabrication facilities in Azerbaijan while running their projects. The implementation of the modernized and effective infrastructure in Azerbaijan has contributed towards the mutual economic growth of the organization and the state of Azerbaijan. Li et al. (2018) stated that the development of sound infrastructures in an economy supports the overall growth of a business along with the economic progression of the region. In this connection, it has been observed that the Development of the modernized plants and machineries in Azerbaijan has significantly empowered the capability of BP in improving their capability of attracting better revenue streams through continuity of flawless operations. The strategic intent has also supported the business in addressing the economic growth related concerns at the state of Azerbaijan.

The organization launched a new “net zero” strategy in the year 2020 with the purpose of reducing the use of non- renewable energy use and exploitation or abuse of the resources. The business focuses towards developing a net zero business venture by the year 2050 while making a 10 fold increased expenses on low carbon, a 20 fold net renewable generating capacity and a 40% reduction in the oil and gas production. The net zero strategy of the organization reflects its motif of addressing the environmental concerns through reducing their dependence on the non- renewable sources of energy by reusing and recycling the available resources. Cort and Esty (2020) stated that the development of capabilities on eco- friendly technologies is one of the most important CSR activity of a business. The identification of the environmental concerns and calibration on the operations of the business supports in improving the scope for growth and development along with sustenance in the international markets. In this connection, it has been observed that BP has developed well developed strategies, which the firm announced in 2020, while empowering the degree of economic growth sustenance and resilience.

The increasing tassel between the BP and Amnesty International in relation to the insufficiency of their human rights-compliant policies on the climate emergency has been affecting the growth of the venture. It has been observed that the organization failed to develop certain human right complaint policies in the business models which would adhere to the urgency of responding to the climate change related concerns. Henisz, Koller and Nuttall (2019) opined that the insufficiency of human rights compliant policies in an organization might affect its brand image and status in the international markets. In this connection, it has been observed through the statements of Rebecca Warren that BP has no human rights compliant policies which would affect their capability of addressing the climate change related issues that are caused out of the different areas of their operations. Therefore, the lack of sufficient amount of human rights compliant policies within the organization might affect the capability of the same in retaining efficient functions while addressing the social and environmental concerns.

The impact of the ESG factors on the NPV of the business

The NPV of a business is specifically based on the resources and the type of operations that a business undertakes while competing with the existing firms in the markets. Davis and Lescott (2019) stated that the NPV of an organization demonstrates the efficiency of functions and the sustenance of the same in the global markets. In this connection, it has been observed that the ESG factors have a great influence on the NPV of a venture while ensuring the sustenance and growth of the same in the international economies. British Petroleum (BP) partnered with the Government of Azerbaijan while operating through several gas and oil projects. The extensive range of shareholders investing on the creativity and innovativeness of the business operations has significantly supported the economic sustenance and growth. It has been observed that the business implemented modernized machineries plants and infrastructure in Azerbaijan with the purpose of improving their productivity.

Gregory, Stead and Stead (2020) opined that the increased productivity of an organization is reflected through the increased streams of revenue that is accrued by the same. In this connection, the increased technological innovations in Azerbaijan while establishing larger oil and gas resources has supported the business in improving their productivity and thereby increased the source of their revenue streams. The partnering with the EU, the state governments and the different relevant stakeholders has supported the business in distributing and finding customers in nations like Italy, Greece and Bulgaria. The increased coverage and availability of their high quality oil and gas propositions has supported the business in improving their revenue streams and profitability. The profitability and revenue earnings of the business through the dealing are quantitative in nature and are easily realized. The increase in the profitability and revenue of an organization contributes towards the NPV through the means of economic sustenance and growth in the global markets (van Heijningen 2019). Therefore, the different activities that are undertaken by the organization through the

On the other hand, it has been observed that the organization devised different job opportunities for most people in Azerbaijan through their projects which supported the business in empowering their social objectives. Acc0ording to Fatemi, Glaum and Kaiser (2018), an organization is liable towards improving the social status, wellbeing, livelihood and economy while operating in a region., While operating in the state of Azerbaijan, the business developed extensive job opportunities for the people of the state which extensively contributed towards empowering their social responsibility status. The engagement of an organization in different social activities contributes towards the improvement of the NPV (Baghchesara 2019). In this connection, the active engagement of BP in developing the social strata through facilitation of extensive job offers has significantly supported the business in developing community engagement while winning over the trust and loyalty of the people. The increased engagement of the communities and the loyalty of the people towards the organization contributes towards its NPV and growth.

Lastly, the organization has been devising different strategies in order to reduce the impact of their operations on the environment. The announcement of the “net zero” strategy in the year 2020 is one of the primary activities that is being focused by the business towards building resilience while reducing the environmental impact of their activities. Salo (2020) stated that the improved environmental responsibility based activities of businesses specifically contributes towards the brand image which is a qualitative resource for the venture while improving the net value of the venture in the global markets. Therefore, it might be stated that the development of environmental friendly policies and strategies holds an extensive contribution towards improving the NPV.

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Conclusion

Therefore, from the above discussion it might be stated that every ESG factors holds an extensive contribution towards NPV of an organization. The discussion developed a clear idea on the case of BP and the different ESG factors that has been affecting the business. Later, the discussion detailed a view on the different impact of the ESG factors on the NPV of the business.

References

Azmi, W., Hassan, M.K., Houston, R. and Karim, M.S., 2021. ESG activities and banking performance: International evidence from emerging economies. Journal of International Financial Markets, Institutions and Money, 70, p.101277.

Baghchesara, S., 2019. Evaluating ESG Related Events' Significance for Oil Companies in Relation To Stock Price Changes.

Cort, T. and Esty, D., 2020. ESG Standards: Looming Challenges and Pathways Forward. Organization & Environment, 33(4), pp.491-510.

Davis, T. and Lescott, B., 2019. ESG as a Value‐Creation Tool for Active Investors: A Profile of Inherent Group. Journal of Applied Corporate Finance, 31(2), pp.42-49.

Fatemi, A., Glaum, M. and Kaiser, S., 2018. ESG performance and firm value: The moderating role of disclosure. Global Finance Journal, 38, pp.45-64.

Gregory, R.P., Stead, J.G. and Stead, E., 2020. The global pricing of environmental, social, and governance (ESG) criteria. Journal of Sustainable Finance & Investment, pp.1-20.

Henisz, W., Koller, T. and Nuttall, R., 2019. Five ways that ESG creates value.

Li, F., Sherrerd, K. and Treussard, J., 2018. Unlocking the Performance Potential in ESG Investing.

Salo, H., 2020. Restoring confidence: ESG scandals and impact of corrective actions.

van Heijningen, K., 2019. The impact of ESG factor materiality on stock performance of firms. Erasmus Platform for Sustainable Value Creation working paper.

Weston, P. and Nnadi, M., 2021. Evaluation of strategic and financial variables of corporate sustainability and ESG policies on corporate finance performance. Journal of Sustainable Finance & Investment, pp.1-17.


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