Hungarian oil and gas firm MOL has bucked the trend for ever-longer sustainability reports with a slimline, 15-minute read. Garnet Roach talks to Mikkel Skougaard, the company’s senior expert in ESG reporting, to find out more
MOL's Mikkel Skougaard likes to joke that the only people who used to read the sustainability report from cover to cover were him and the auditor. Now, though, anyone who has 15 minutes to spare can find out everything they need to know about the Hungarian oil and gas firm’s sustainability credentials.
Last year the Budapest-headquartered company took a risk, bucking the trend for increasingly lengthy sustainability reports to produce a 10-page, 15-minute read for the investment community.
‘We know that going from 70 pages to 10 looks odd: Why don’t you have a 200-pager like your competitor does?’ says Skougaard. ‘But we also knew that the people who really care about ESG integration, who understand ESG integration, would understand our decision. The way analysts of MOL Group understand the key financial metrics is the same way they feel about non-financial metrics, so ultimately we knew we were doing the right thing.’
But what spurred this break with tradition? ‘We always had the feeling that nobody really read the sustainability report from one end to the other,’ Skougaard explains, adding that – more importantly – the company has been monitoring two diverging trends around ESG.
‘Although at an early stage, there’s an increasing sophistication around how to integrate ESG into investment decisions,’ he notes. ‘There’s also an increasing ability to differentiate between noise and signal in material and non-material information.
'The other trend we’re seeing is that sustainability reports are getting longer and longer – often they’re even longer than the annual report – and they're full of pictures, infographics, colors and graphs. So at a time when everybody is struggling with the integration of ESG, providing them with a 200-page report maybe isn’t the best route. It becomes impractical.’
Fertile soil for greenwashing The trend for colorful, picture-heavy sustainability reports stems from the early days of CSR, explains Skougaard, who joined MOL with a background in governance at BlackRock.
‘When CSR reporting began, it was very much about trying to change the perception of global corporations, so the typical CSR report was often about how much the firm was doing for people in disadvantaged areas or how it was planting a couple of trees,’ he says. ‘And this approach has persisted.’
Skougaard says he expected the fashion for flashy sustainability reports to fade as the capital markets gained greater ESG sophistication – but the introduction of the UN Sustainable Development Goals (SDGs) essentially gave this trend a new lease of life.
‘The SDGs are a great thing to strive for and have slowly been incorporated into sustainability reporting,’ Skougaard notes. ‘But in my personal opinion, they provide really fertile soil for greenwashing. Basically any company can tick the boxes.’
But if you narrow down a report and purely stick to the facts, Skougaard reckons there’s simply no room for greenwashing. ‘You can’t paint a picture other than what the data tells you, and this is what we have done,’ he says. ‘We stick to fact-based reporting.’
Mikkel Skougaard, MOL
How he sees it is that ‘if you’re a financial analyst, you’re interested in the financial reports and accounts, but you wouldn’t be interested in a sustainability report full of pictures. If you’re interested in the pictures, then you’re not going to be so interested in financial reports and accounts.’ So MOL took the risk and cut the report.
Now in its second year, the 10-page, streamlined report features one page of key indicators deemed most relevant for MOL, followed by nine pages of explanations. Skougaard is keen to stress that despite the much shorter report, no information has been lost: a new digital data library is available online for investors, analysts or other stakeholders if they want a deeper dive.
‘You don’t explain all your financial data, and you don’t need to explain all your non-financial data,’ he says. ‘If you want more, it’s all there, broken down by division or sub-division.’
Making the cut But how do you go about making such a drastic change to an increasingly important report? To begin with, MOL has a materiality matrix that guides the report, explains Skougaard. The company built the matrix three years ago and is in the process of reviewing it now, as things have changed in the last two to three years.
MOL also switched to the Sustainability Accounting Standards Board (SASB) framework and that has a bearing on what makes the cut. ‘When we conducted the gap analysis, we saw that [SASB’s] understanding of material issues is not that far from ours,’ Skougaard says. ‘It showed us we were going in the right direction.’
Making the move to the new format, Skougaard – MOL’s one-man sustainability reporting show – says there were two key requirements: to have it reviewed by an external auditor and to have it remain part of the annual report. ‘We wanted to keep it integrated because we believe the capital markets should treat non-financial data the same way as financial data,’ he says.
He also stresses that MOL was able to take this risk because of its profile as a company: ‘We could afford to do this because we are not a global household name with a huge customer following, and we are a mid-cap. I understand that some of the big oil companies or some of the bigger household names cannot do this because they cater to, or are followed by, a much wider stakeholder base than ours.’
Up the charts So what has feedback been like so far? For a start, MOL now knows people really are reading the report. ‘We’ve had fund managers tell us they have actually read the annual sustainability report in full and for the first time before a meeting,’ says Skougaard. ‘That took them 15 minutes of concentrated reading, but now they better understand the sustainability risk profile of MOL Group.’
Internally, it has also freed up both time and money previously spent on the longer sustainability report.
The cutting down of the report has had another consequence, too: it has made MOL even more transparent, which has translated into better ESG ratings scores ‘simply because information is easier to find’. In fact, since the revamped, slimline version of the sustainability report was published, the company hit the top spot in Bloomberg’s ESG Disclosure score for global integrated oil & gas companies. More broadly, Skougaard notes that ESG ratings are becoming increasingly important.
‘ESG is a key part of our equity story,’ he says. ‘And we are seeing that ESG ratings are starting to affect investment decisions, risk assessments and access to – and the cost of – capital.’
At the same time, an increasing number of sustainable investment products are being marketed that have been built around these indexes, he adds: ‘So being included is key for us.’
While Skougaard says the firm tries to respond to all ESG ratings questionnaires – something he acknowledges ‘can be a burden as, unlike traditional credit ratings agencies, ESG ratings agencies use different methodologies’ – he points to Bloomberg as particularly worthy.
‘Through conversations we have with the capital markets, [we know] that some [investors and analysts] subscribe to one ESG ratings agency and some subscribe to another, but the one thing they all have in common is that they have a Bloomberg terminal,’ he says. Bloomberg’s ESG Disclosure score is also a good indicator of transparency, adds Skougaard, because ‘it’s black and white: either you disclose something or you don’t.’
Ultimately, Skougaard says the fact that MOL is included in these indexes is the consequence of an effort the company undertook primarily just to be transparent.
‘The two go together: being a sustainable company and being a transparent company,’ he points out. ‘And we have done everything I think we can to be transparent when it comes to ESG – and that goes down well with all the ESG ratings companies.’
Living the ESG rhetoric It’s clear this focus on transparency and the idea that ESG data and straight financial data be treated equally is an important one both to Skougaard and more broadly at MOL. It’s a sentiment Skougaard expresses often and one that was seen in the company’s ambitious 2030 strategy, published in 2016. While such a long-term outlook might appear to be restrictive, it has so far stood the test of time – even in a Covid-19-hit world.
‘Back in 2016 when we unveiled the new strategy, it was built on the idea that we needed to adapt our business model to a low-carbon world: that we needed to remain competitive in a carbon-constrained economy,’ Skougaard explains.
‘What Covid-19 has done is basically accelerate something that was already there. It has provided more tailwind to the ship we had already set sail in.’
The firm’s focus on ESG, non-financial reporting and integration is reflected in Skougaard’s own career path at MOL, too. First joining the company in investor relations, after three years he was promoted to the sustainable development team. Now, though, he’s back under the investor relations umbrella.
‘We were seeing a lot more interest from the capital markets around ESG, so it was decided that my role should be moved out of sustainable development and placed back under the CFO and inside IR,’ Skougaard says.
‘So as of December 2019, I have been back in investor relations. And the ESG reporting, which used to be part of [health, safety and environment] is now fully back under the group CFO and, more specifically, under investor relations.’ This now means, he adds, that there is full integration of reporting within IR.
Zero to hero The response to the 10-page report has been such that MOL has been invited to speak about it at conferences, including at the SASB conference in New York last year. So what advice does Skougaard have for others looking to emulate that reporting success?
For a start, he says ‘you don’t have to go from zero to hero overnight. No one expects that.’ What the market does expect is a gradual opening up in terms of ESG information – and not only in terms of retrospective information, but also gradually offering more forward-looking ESG data.
While he says there isn’t ‘one way when it comes to ESG’, he stresses that companies should integrate ESG and non-financial information as much as possible: ‘Don’t separate ESG from your equity story’ and make use of existing reporting systems.
‘To the extent that you can, whenever it comes to ESG reporting, try to lean up against a pre-existing reporting standard, whether it’s SASB or the Task Force on Climate-related Financial Disclosures,’ he advises. ‘These are highly appreciated by the investor community. Remember that you don’t have to reinvent the wheel in terms of your reporting – there’s already a structure out there that you can use.’
Reinventing the ESG reporting wheel might not be essential, but doing so has certainly been a success for MOL.
