We have long recognised OMV as an attractive company since the inception of our flagship Strategy. However in these early days the business faced significant ESG risks, prompting us to work with our stewardship team to ensure that they were being mitigated effectively.
OMV Group is an Austrian oil and gas company working in the petrochemicals industry. Identifying its strong fundamentals, we have held it in the Hermes Global Equity Core Strategy since 2008. But early on in this period, our stewardship services team Hermes EOS noted a number of social and environmental risks that the company was exposed to, which had the potential to significantly impact its performance.
In 2010, OMV featured in Hermes EOS’s Controversial Company Report as a business with medium-severity risks. The main concern was the legacy of its involvement in a Lundin Mining-led consortium operating in Sudan between 1997 and 2003. Arguments over access to oil escalated into conflict as the Sudanese Government and its forces fought for control of resources-rich lands. The companies involved were accused of complicity in human-rights violations, and urged by the European Coalition on Oil in Sudan (ECOS) to compensate those displaced by the war.
In addition to these social risks, environmental considerations were also critical – particularly OMV’s energy-efficiency and emission-reduction strategies. Equally important was its management of the legal and regulatory environment, including lobbying and communication with policymakers and key stakeholders. Our ESG Dashboard, which combines findings from our engagement team and specialist external researchers, highlighted these risks, allowing us to analyse them and encouraging Hermes EOS to initiate a dialogue with OMV’s senior executives.
In 2010, Hermes EOS held meetings with OMV’s management team to discuss how the firm operates in developing countries and manages its social impacts. The team tested the company on its alleged involvement in violations of human rights in Sudan, and examined how its environmental policies fitted into its overall corporate strategy.
Corporate governance was another key concern, especially in relation to south-eastern Europe, where OMV has significant exposure through the planned Nabucco gas pipeline from Turkey to Austria. Hermes EOS urged the company’s CEO to allay shareholders’ fears about country risk by explaining more clearly the opportunities that OMV sees there. The company’s ownership structure and agreement between the two controlling shareholders, the Austrian government and the International Petroleum Investment Company, an Abu Dhabi sovereign-wealth fund, was also discussed. Hermes EOS challenged the CEO on the political influence of the two main shareholders, and also enquired about the business opportunities that the Abu Dhabi shareholder may open up.
The team also encouraged OMV to be more transparent: to publicise examples of the social assessments it makes before starting projects, reveal how it cuts carbon intensity and to set itself tougher emissions targets. Some of its previous measures to control carbon emissions have included keeping the venting and flaring of gas to a minimum, and allocating funds to improve malfunctioning equipment in one of its Pakistan gas plants that had caused an increase in methane emissions. It had also begun upgrading the sealing valves in its gas pipes, which it said would reduce methane emissions by up to 80%.
Since these meetings, we have closely monitored OMV’s progress on mitigating ESG risks.
The company has been the subject of more than one anti-corruption investigation, most recently for alleged price-fixing in 2011 and 2012 in Romania and Bulgaria. This is a prominent risk in central Europe, with anti-competitive practices regarding the sale, transmission and supply of fuels resulting in frequent inspections of energy providers by authorities.
OMV operates in countries where human rights violations and bribery are commonplace, but it has demonstrated strong risk-mitigation policies in these areas. It conducts regular risk assessments in countries where it operates, and requires business partners to sign up to its code of conduct, which includes provisions on human rights. External auditors keep a close check on OMV’s supply chains and ensure that it is compliant with human-rights laws. The group says it follows UN guidelines on respecting indigenous peoples’ rights and security arrangements involving armed forces.
OMV has also made good progress on its environmental policy. Every six weeks, an executive team meets to discuss sustainability programmes as part of its ‘Resourcefulness’ initiative, which focuses on social responsibility, environmental management and producing renewable energy to help meet future energy needs. The group’s main focus in this area has been to reduce greenhouse gas emissions and cut water consumption, while promoting natural gas as the cleanest fossil fuel. In 2014, OMV invested €108m in environmental protection measures, and the company estimates that 82,000 people worldwide benefited as a result of its sustainability initiatives, which included a women’s empowerment programme in Pakistan, and exercises aimed at protecting Norway’s coastal environment in the event of an oil spill, given its year-round drilling in the northern Barents Sea.
With robust targets on energy use and emissions, OMV is now significantly more transparent about how it plans to meet them. In the CDP Climate Change 2015 survey, it received an A performance rating, indicating that it is managing its carbon footprint through targets and programmes to reduce emissions in both its direct operations and supply chain. OMV also scored 98 out of 100 for disclosure, which acknowledges the quality of information it provides about its carbon footprint, climate-change strategy and risk management processes and outcomes.
Such progress has resulted in our QESG Score for OMV, which gauges its current level of ESG risk and the trend, improving from 67 in 2011 to 87 by the end of June this year – a favourable ranking compared to peers.
OMV has outperformed the MSCI World Energy Index, which has underperformed the broader market, since we have held it. We continue to like the company for its strong fundamentals and mitigation of ESG risks. The key risk to the business is that the oil price remains subdued, threatening its dividend, however production volumes remain consistent despite the difficult environment for the commodity.
Past performance is not a reliable indicator of future results and targets are not guaranteed. This article does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.
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