When MNEs with strong environmental and governance commitments sell petroleum assets to companies with weaker commitments, climate and governance risks may increase. Governments and companies should revisit approaches to petroleum legal frameworks and update company and investor social responsibility to ensure standards do not slip when projects change hands

Westenberg, Erica

Woodroffe, Nicola

Columbia University Academic Commons

  Columbia FDI Perspectives Perspectives on topical foreign direct investment issues Editor-in-Chief: Karl P. Sauvant (Karl.Sauvant@law.columbia.edu) Managing Editor: Matthew Conte (msc2236@columbia.edu)  The Columbia FDI Perspectives are a forum for public debate. The views expressed by the authors do not reflect the opinions of CCSI or our partners and supporters.  No. 352   March 6, 2023  Governments and companies must address climate and governance risks when petroleum assets change hands by Nicola Woodroffe and Erica Westenberg*  Whether driven by climate targets, reputational risk, financial considerations, or a combination of factors, some MNEs are selling petroleum assets, sometimes as part of their decarbonization strategies. However, simply selling petroleum projects may not reduce, and may actually increase, climate impacts if assets are transferred from companies with stronger environmental and reporting commitments to those with weaker commitments. Moreover, unless handled responsibly, disengagement by reputable firms may increase certain other risks for host developing countries and their citizens, such as exacerbating weak governance, corporate capture and corruption, conflict, and human rights abuses. Governments, companies, investors, and civil society should ensure that, when petroleum projects change hands, sustainability and governance standards do not slip. This may require revisiting approaches to petroleum laws and contracts and updating our understanding of company and investor social responsibility.    Host country governments should vet the quality of would-be buyers. This is not a new concept, and many governments have built related protections into their upstream petroleum legal frameworks. Contracts granting companies the right to explore for, and extract, petroleum often include restrictions on companies’ ability to transfer their interest to another party. For example, all 28 English-language petroleum agreements on ResourceContracts.org1 signed in the past five years require prior government approval for assignments of interest.2 23 of these specify technical and financial competence of an assignee as a condition for approval, and 25 require license holders to conduct petroleum operations in line with best industry practice.  International best industry practice for petroleum operations is evolving. Current technologies can significantly reduce emissions, and almost half of methane emissions can be avoided at no net cost. Sustainability standards and public reporting on companies’ management of environmental, social and governance (ESG) impacts are also evolving. Governments should  2 use their contractual approval rights, as well as any additional legislative or regulatory rights, to require that buyers have demonstrable competence to maintain or exceed the operating, sustainability and reporting practices of the seller, taking into consideration the most recent and robust standards for best industry practice.  Seller companies should recognize that they too have important responsibilities. Sellers may soon see limits on a “clean” exit when transferring petroleum assets to less responsible parties. Increasing attention to the environmental consequences of such asset sales may mean growing reputational risks associated with irresponsible exits, along with pushback on whether such divestments should count as part of a company’s net-zero strategy. On the mining side, some legal experts have recommended that sellers conduct due diligence on buyers to assess their mission and reputation, ESG standards and adherence to international best practices, and that agreements include buyer commitments to maintain operating standards, stakeholder commitments and rehabilitation requirements. Such measures are critical for petroleum asset sales too, and sellers may build on existing approaches, such as buyer due diligence, to address anti-corruption risks. The appropriate mechanisms will depend in part on relevant laws of the applicable jurisdictions, but sellers will want to avoid the appearance of washing their hands of dirty projects to take a step forward on achieving their own net zero and ESG targets, while the host country and the planet take a step back.  Further, investors, regulators and standard-setting bodies that shape sector norms have a critical role to play in influencing company incentives and behavior. Climate disclosure and emissions reduction rules and standards must address reporting on transfers and transferred emissions. Emerging industry norms should also address broader risks associated with fossil fuel asset sales. These actors should develop standards that require sellers to conduct, and report on, due diligence on key policies and practices of buying companies, such as their environmental commitments, stakeholder engagement and measures to combat corruption internally and in engagements with high-risk partners.   Finally, civil society in host countries must hold governments and companies accountable for ensuring buyers will maintain governance and environmental standards. Civil society cannot exercise its oversight role without transparency around transfers, including the identity of sellers and buyers. The requirements of the Extractive Industries Transparency Initiative (EITI) Standard serve as a good starting point for transparency and could also be a vehicle for transparency around the types of due diligence and reporting recommended above. EITI already requires participating countries to disclose the process for transferring licenses; the technical and financial criteria used and any material deviations from such criteria; and information about transferees, including their ultimate beneficial owners. Ideally, information around transfers would be disclosed before a license is actually transferred. This will allow civil society organizations to research the reputation and performance of potential buyers and raise red flags. Indeed, disclosures and oversight before a deal is closed are key for ensuring companies and governments transfer projects responsibly.  3  * Nicola Woodroffe (nwoodroffe@resourcegovernance.org) is a Senior Legal Analyst at the Natural Resource Governance Institute; Erica Westenberg (ewestenberg@resourcegovernance.org) is the Director of Governance Programs at the Natural Resource Governance Institute. The authors wish to thank Perrine Toledano, Mariëtte van Hujstee and Lou Wells for their helpful peer reviews. 1 A free online repository of almost 3,000 oil, gas and mining contracts and related documents.  2 Assignments include changes of control in 22 of the contracts.  The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Nicola Woodroffe and Erica Westenberg, ‘Governments and companies must address climate and governance risks when petroleum assets change hands,’ Columbia FDI Perspectives, No. 352, March 6, 2023. Reprinted with permission from the Columbia Center on Sustainable Investment (http://ccsi.columbia.edu/).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at ccsi@law.columbia.edu.  For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Matthew Conte, at msc2236@columbia.edu.  The Columbia Center on Sustainable Investment (CCSI), a joint center of Columbia Law School and Columbia Climate School at Columbia University, is a leading applied research center and forum dedicated to the study, practice and discussion of sustainable international investment. Our mission is to develop and disseminate practical approaches and solutions, as well as to analyze topical policy-oriented issues, in order to maximize the impact of international investment for sustainable development. The Center undertakes its mission through interdisciplinary research, advisory projects, multi-stakeholder dialogue, educational programs, and the development of resources and tools. For more information, visit us at http://www.ccsi.columbia.edu.    Most recent Columbia FDI Perspectives  • No. 351, Marian Ingrams and Katharine Booth, “Hardening soft law: strategic use of the OECD Guidelines to achieve meaningful outcomes,” Columbia FDI Perspectives, February 20, 2023 • No. 350, Riccardo Crescenzi, Roberto Ganau and Michael Storper, “Outward FDI and home country employment,” Columbia FDI Perspectives, February 6, 2023 • No. 349, Jose Godinez and Mahmoud Khalik, “Corruption and FDI: The role of social brokers,” Columbia FDI Perspectives, January 23, 2022  • No. 348, Gary Gereffi, “How to make global supply chains more resilient,” Columbia FDI Perspectives, January 9, 2023  • No. 347, Bernard M. Hoekman and Petros C. Mavroidis, “Investment facilitation in the WTO: The case for early harvesting,” Columbia FDI Perspectives, December 26, 2022   All previous FDI Perspectives are available at https://ccsi.columbia.edu/content/columbia-fdi-perspectives.  

Governments and companies must address climate and governance risks when petroleum assets change hands

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Governments and companies must address climate and governance risks when petroleum assets change hands

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