Energy Analytics

Environmental, Social and Governance – Do Markets Really Care?

byEnverus

Lenders have and continue to price credit risk within the E&P industry by assessing the proportion of a borrower’s cash flow and collateral to its net debt. However, in recent years many lending institutions began adopting policies to incorporate environmental, social and governance (ESG) factors into their investment decisions to assess risks unquantified by traditional metrics. Until very recently it’s been difficult to observe the impact of ESG scores or rankings on the market prices of securities, but our analysis below suggests this may no longer be true.

To identify if there is a relationship between recent E&P bond yields and our proprietary ESG scores, we created two figures. Figure 1 compares E&P bond yields to our estimates of 2021 net debt to EBITDA (earnings before interest, taxes, depreciation and amortization). We expect and observe a positive correlation with bond yields and net debt to EBITDA, which means the more capital a company borrows the higher the interest it must pay on incremental debt, all else equal. Figure 2 plots the residuals of this function against our ESG scores, where a higher ESG score suggests the borrower carries less ESG related investment risk. The observed negative correlation between the residuals and ESG score implies market participants are now rewarding strong ESG performers with a lower cost of debt capital after normalizing for leverage.

Some may argue that correlation does not imply causation. Based on the level of interest and uptake in ESG related information from our clients, we believe it’s becoming an increasingly important part of the investment process and will likely continue to impact investor behavior in the future.

Need To Know | Bond yields are a good proxy for how expensive it is for a company to access debt capital. The ratio of net debt to EBITDA measures how much debt a company carries relative to how much cash flow it generates.

FIGURE 1 | E&P Bond Yields Versus Net Debt to EBITDA

FIGURE 2 | E&P Bond Yield Residual Versus Enverus ESG Score


Click below to learn about our Enverus ESG™ Analytics solution.

 

Learn More

 

Picture of Enverus

Enverus

Energy’s most trusted SaaS platform — creating intelligent connections that uncover insights and opportunities to deliver extraordinary outcomes.

Subscribe to the Enverus Blog

A weekly update on the latest “no-fluff” insight and analysis of the energy industry.

Related Content

energy-transition
Energy Transition
ByKevin Kang

The anticipated end of a two-year reprieve on solar panel tariffs from China coincided with unexpected tariffs on other energy transition-related sectors.

brno-enverus
Operators
ByBryn Davies

Our twelve-member team embarked on the memorable Vltava Relay challenge, covering 360km in 35 hours, with 300 other competing teams.

nuclear-worker
Energy Transition
ByCarson Kearl

This past week two companies in the advanced reactor space went public. Oklo Inc. (NYSE: OKLO) and Nano Nuclear (NASDAQ: NNE) had mixed opening days, with OKLO seeing nearly a 50% price drop from open and NNE trading up well...

Enverus Press Release - Tapping Alberta’s overlooked lithium brines
Energy Transition Intelligence
ByMatthew Keillor, Editor, Enverus Intelligence

Equinor is acquiring 45% stakes in two of Standard Lithium’s direct lithium extraction (DLE) projects in the Smackover Formation in Southwest Arkansas and East Texas, less than a month after closing the book on its U.S. onshore shale operatorship.

Enverus Press Release: Beyond the horizon: US solar and storage solutions are on the rise
Power and Renewables
ByMarie Amice

Learn how Enverus Contiguous Acreage enhancement simplifies parcel discovery, making negotiations easier and projects more viable.

kid-solar-gallery
Power and Renewables
ByColton Wright

Harnessing Sunlight and Soil As the early morning light filters through the countryside, you find yourself on a quiet rural road. You’re sipping coffee and humming your favorite tune. You’re on your way to see loved ones, explore a national...

emissions-wind-women-working
Power and Renewables
ByBryan DiRenzo

In the United States, the anticipated load growth and the retirement of aging plants to meet state mandates are creating a compelling narrative for the expansion of battery storage infrastructure.

Enverus Press Release - Load impact imminent: Data center growth at the mercy of power supply constraints
Energy Transition
ByJeffery Jen

On March 25, 2024, the EPA released its final rulemaking on the update to 40 CFR Part 60 implementing its New Source Performance Standards for New, Modified and Reconstructed Fossil Fuel-Fired Electricity Generating Units.

accurate-grid-forecastin
Energy Transition Intelligence
ByMatthew Keillor, Editor, Enverus Intelligence

In March 2021, the Biden administration set a goal of deploying 30 GW of offshore wind capacity in the U.S. by 2030. These efforts have faced significant growing pains.

Let’s get started!

We’ll follow up right away to show you a quick product tour.

Let’s get started!

We’ll follow up right away to show you a quick product tour.

Sign up for our Blog

Register Today

Sign Up

Power Your Insights

Connect with an Expert

Access Product Tour

Speak to an Expert