Managing Sustainable Development Risks
Engagement and transparent reporting and disclosure of how we minimize and mitigate risks associated with our operations is a key concern of our stakeholders and a top business priority. Our governance structure provides board and management oversight of our risk processes and mitigation plans. We utilize an integrated management system approach to identify, assess, characterize and manage sustainable development (SD) risks that is aligned with how we make business decisions to ensure the consistent global identification and assessment of risks. This system links directly to the enterprise risk management (ERM) process, which includes an annual risk review by executive leadership and the board of directors. These elements help us manage and mitigate risk, as well as track our SD performance.
Management System Approach to Sustainable Development Risk
SD Risk Management Process
Our SD risk management process is a mandatory, auditable process that guides sustainability-related risk management and integrates a risk register into operating plans. As part of that process, exploration, production and major projects are examined against the physical, social and political settings of our operations. Local concerns may influence the potential importance of these environmental and stakeholder matters including long-term risks and cumulative impacts. Examples of these concerns are water management and land-use agreements with indigenous peoples. Risks are identified and described by a diverse group of subject matter experts in each business unit (BU) and project.
Each risk is then plotted on a matrix that evaluates both its likelihood and consequence. In evaluating the consequence level, we consider potential environmental and social risks, such as socio-cultural and economic impacts to stakeholders, environmental impact, and reputational and financial implications. Time horizons considered are short-term (zero to five years), mid-term (five to 10 years) and long-term (10-25 years). Priority risks are included in the corporate SD Risk Register. As part of the process, we examine the interdependence of risks and work to identify emerging risks such as regulatory requirements and greenhouse (GHG) pricing regimes.
The SD risk management process ensures that an action plan is developed to track mitigation activities for each risk included in the corporate SD Risk Register. These plans include details about our commitments, related responsibilities, resources and milestones. As part of regular updates to the register, the action plans and their effectiveness are evaluated, and decisions are made to continue mitigation measures, add new measures, or simply monitor the risk for further developments. Our SD Risk Register and action plans are used to track performance and guide goal setting.
Action plans for prioritized risks are typically managed at the BU level, along with the ongoing management of SD performance and engagement designed to minimize or avoid other social and environmental aspects of our business. Overarching risk management actions, such as GHG target setting, prioritization of global emissions-abatement projects and disclosure and reporting, are managed at the corporate level.
Enterprise Risk Management
Sustainability risks are integrated into strategy through the SD risk management process into the corporate Enterprise Risk Management (ERM) system. Risks from the corporate SD Risk Register are mapped to relevant enterprise risks including market, reputational, operational and political risks. Owners of these enterprise risks, who are ELT members or senior managers, are briefed on the risks and our mitigation activities. Enterprise risks are then presented to the Audit and Finance Committee (AFC) of the board. The AFC receives annual updates on how enterprise risk is being addressed, mitigated and managed across the company.
Additional Assessment and Management Processes
SD requirements are also integrated into other key business-planning processes for the company.
New Country Entry and Due Diligence
Before starting a venture in a new country, we take several steps to assess the potential sustainability and business risks. A new-venture project team must ensure that the identified risks and constraints are understood, documented and addressed for the project to obtain approval. Once an opportunity is identified and a request for approval is drafted, a new country entry risk report is prepared. A preliminary due diligence assessment is conducted to identify significant risks, including social and environmental concerns, and define how they will be managed.
The new country entry request is then reviewed by the business and function leadership, the CEO. In some cases, such as areas at high risk of political instability, consultation with the board of directors would take place. If we are entering into a joint venture, we use these assessments during negotiations with potential co-venturers to outline the risks identified, clearly state our expectations on environmental and social-issue performance and discuss how the venture will manage these concerns.
The majority of ConocoPhillips’ oil and natural gas reserves and production are within Organization of Economic Cooperation and Development (OECD) nations. Some of the world’s most resource-rich areas, however, are in countries that pose risks associated with political instability, inadequate rule of law or corruption. Consequently, ConocoPhillips has adopted comprehensive risk management tools to evaluate and manage these types of risks. Before entering a new country — or for other new developments, when warranted by the geopolitical environment — the company assesses the political risk of a potential investment.
The company has developed internal guidelines to help employees comply with policies related to business activities in sensitive countries, and applicable government regulations in areas subject to U.S. or international sanctions.
We also perform due diligence on acquisitions, divestitures, trades, exchanges and farm-in/farm-out agreements. This process is designed to ensure that past, present and potential HSE and social risks and liabilities are clearly identified, understood and documented. This due diligence standard applies to ConocoPhillips and its global subsidiaries, and we strive to influence all affiliated companies and joint ventures to conduct due diligence before undertaking binding business transactions. Following completion of the due diligence assessment, a letter documenting that past, present and potential HSE and social risks and liabilities have been adequately identified, assessed and satisfactorily mitigated must be approved by corporate HSE.
Capital Project Development and Corporate Authorization
We assess SD risks early in the project engineering stage to better inform our investment decisions and facility design. The corporate authorization process, both operated and non-operated, requires the consideration of environmental and social risks and their mitigation before gaining approval.
For qualifying projects, our management system requires a set of deliverables for investment approval that includes:
- Climate-related Risk Assessment – Guides the project team in evaluation of climate-related risk and opportunities for emissions control in project design.
- Environmental, Social, Health Impact Assessment (ESHIA) - We assess how our activities might impact communities and ecosystems, evaluating potential impact and how issues can be avoided or mitigated. We begin our investigation with the host country’s legal requirements and supplement these as needed with our own HSE standards and sustainable development requirements.
- Stakeholder Management Plans – We proactively identify and seek out stakeholders and incorporate what we learn into our business plans and actions
HSE Management System
The HSE management system addresses operational risk and helps ensure that business activities are conducted in a safe, healthy, and environmentally and socially responsible manner, aimed at preventing incidents, injuries, occupational illnesses, pollution and damage to assets. We believe incidents are preventable and that HSE considerations must be embedded into every task and business decision. HSE management systems are assessed annually using a common tool to guide continuous improvement and ultimately achieve the highest standards of excellence. All our business units are responsible for integrating sustainability issues into day-to-day operations, project development and decision-making.
Our long-range plan (LRP) forecasts key data for our corporate strategy covering our proposed portfolio development and performance, production, costs and cash flows. We also use the LRP to forecast GHG emissions and water use to understand future environmental footprint. Environmental and social risk mitigations, such as emission reduction projects, are reflected in the LRP and our annual budget.
Our corporate strategy defines the company’s direction for exploration and development, including portfolio, capital allocation and cost structure. Our cost of supply, portfolio diversification (both geologically and geographically) and technology investments are aspects of the corporate strategy that also address SD-related risk. For example, a low cost of supply mitigates climate transition risk in lower-energy demand scenarios. A geographically diverse portfolio mitigates the risk of community opposition delaying a significant portion of our production. Investing in water treatment technology allows us to recycle produced water and decrease our reliance on local water sources. We work with company leadership through our governance structure, enterprise risk management system and carbon scenarios to ensure our strategy effectively manages SD risks.
The diagram below shows a high-level summary of SD risk management across the asset lifecycle.
Risk Management Tools for Asset Lifecycle*
* Includes SD/HSE Tools that apply across environmental and social risks. Discipline-specific processes (e.g., the Marginal Abatement Cost Curve for climate change or Security Assessment/Human Rights Training for stakeholder engagement) are not shown.
We recognize it is challenging to implement comprehensive integrated programs and we periodically assess the maturity and completeness of implementation. We also recognize that internal and external expectations and the business environment are not static. We adjust our plans and actions as needed over time. On the wide spectrum of change toward increasingly sustainable performance, we are seeking to understand the pace at which change is meaningful, lasting and appropriate for the business environment. We recognize that our system of performance management should drive increasingly beneficial economic, environmental and social performance.