ESG in the extractive industries: compliance, benefits, challenges, ISSB standards, penalties and the EITI Standard

A company spills oil in a river community. It pays a fine, loses its licence to a competitor and sees its shares fall, and its bank asks for a climate plan before the next loan. Another company in the same industry spends on a clean-up fund, a community trust and an audited emissions report, and gets cheaper funding.

Environmental, social and governance (ESG) matters are no longer a side issue for oil, gas and mining companies. They decide licences, finance, reputation and, through the deductions and levies you have just studied, tax.

This topic covers the background to ESG, the regulators, the need for ESG, the compliance duties in the environmental, social and governance areas, the benefits and challenges of sustainable practices and how to meet them, the best practices, the history of ESG, the sustainability reporting standards of the International Sustainability Standards Board (ISSB), penalties for non-compliance and the standards of the Extractive Industries Transparency Initiative (EITI).

It is the last topic of the syllabus. The previous topic covered mining tax, royalties and the NEITI Act.

Key terms in plain English

Syllabus check

This topic is in syllabus area F (taxation of incomes of extractive industries, 20% of marks). It covers:

• the background to and need for ESG, its relevance and compliance duties;
• benefits, challenges, best practices, history and penalties;
• the standards of the Extractive Industries Transparency Initiative.

CAMA 2020 and ESG

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

Background and the need for ESG

ESG has grown because of concern about climate change, pollution and depletion of resources; labour abuse, human rights and displacement of communities; and corporate scandals that showed the cost of poor governance. The need for ESG rests on five points:

1. Risk management: identifying and managing environmental, social and governance risks.
2. Long-term sustainability: resilience and survival over time.
3. Stakeholder expectations: investors, customers, employees and communities expect responsible behaviour.
4. Regulatory requirements: governments are making ESG laws, so compliance is essential.
5. Reputation and brand value: good practice builds them, poor practice damages them and costs money.

Regulators: the National Environmental Standards and Regulations Enforcement Agency (NESREA) enforces environmental regulations; the Nigerian Upstream Petroleum Regulatory Commission and the Nigerian Midstream and Downstream Petroleum Regulatory Authority regulate the oil and gas industry (the Department of Petroleum Resources is the old regulator they replaced); and NEITI promotes transparency and accountability.

Relevance: the three areas of compliance

Challenges and opportunities in the extractive industry

• Challenges: environmental degradation (pollution and habitat loss); social conflict over land and benefit sharing; corruption; lack of transparency; weak enforcement; unclear and changing regulation.
• Opportunities: sustainable development; economic growth; jobs and local economies; better governance and accountability from strong ESG practice.

Benefits and challenges of sustainable practices for companies

How to meet the challenges:

• a clear sustainability strategy tied to business goals
• engagement with stakeholders
• investment in technology
• partnership with suppliers, peers and non-governmental organisations
• regular monitoring and reporting

Banking and oil and gas companies report most; larger, more profitable companies and those audited by the largest audit firms are more likely to adopt sustainability reporting.

Benefits of ESG compliance

• Improved reputation and trust, and more goodwill and brand value.
• More investment and funding.
• Less risk, and fewer costly fines and penalties from regulators.
• Sustainable development and better well-being for communities.
• Better financial performance over the long term.
• A smaller environmental footprint, social responsibility and good governance.

Best practices

• Adopt international standards such as the EITI Standard, the International Finance Corporation Performance Standards and the United Nations Guiding Principles on Business and Human Rights.
• Engage stakeholders regularly.
• Build capacity in companies and government agencies.
• Publish regular reports on ESG performance and disclose operations, finances and sustainability initiatives.

History of ESG

IFRS S1 requires an entity to disclose information on its sustainability-related risks and opportunities that is useful to users of general purpose reports and material to its cash flows, access to finance and long-term viability. IFRS S2 requires disclosure of climate-related risks and opportunities, for decisions on resource allocation and access to capital.

Because oil, gas and mining companies have a large effect on the environment and climate, stakeholders expect them to follow these standards.

In Nigeria. The Financial Reporting Council adopted the standards in 2023 and published a roadmap:

• voluntary adoption from 2024 to 2027
• mandatory reporting for public interest entities from 1 January 2028
• small and medium entities from 2030

Entities are asked to give the Council a board resolution to adopt the standards, a gap analysis against S1 and S2 and an implementation plan.

The Climate Change Act 2021, signed on 18 November 2021, sets a net zero emissions target between 2050 and 2070, requires carbon budgets and an action plan under the National Council on Climate Change, and requires entities with at least 50 employees to designate a climate change or environmental sustainability officer who reports each year on emission reduction.

Penalties for non-compliance

The EITI Standard

The Extractive Industries Transparency Initiative Standard is the global benchmark for transparency and accountability in oil, gas and mining. Its parts are:

• Principles: the shared commitments of all stakeholders to transparency, accountability and good governance.
• Disclosure requirements along the value chain: revenue collection; revenue allocation to government bodies and projects; contracts, licences and beneficial ownership; production; social and economic spending, including quasi-fiscal spending; state-owned enterprises; commodity trading; and an open data policy.
• Governance and oversight: clear roles for multi-stakeholder groups, boards and secretariats.
• Validation: regular assessment of whether countries meet the requirements.

The 2023 Standard adds attention to the energy transition, corruption risks, gender equity and inclusion, and stronger revenue collection and management.

Where ESG meets tax

Worked examples

1. (a) Environmental: spill response and pollution control.
2. (b) Social: community engagement and livelihood restoration.
3. (c) Governance: corruption prevention and board oversight.

1. It is a public interest entity, so reporting is mandatory from 1 January 2028.
2. Until 2027, adoption is voluntary, but it should file a board resolution, a gap analysis and an implementation plan.
3. Small and medium entities follow from 2030.

1. The Climate Change Act requires entities with at least 50 employees to designate a climate change or environmental sustainability officer.
2. The officer reports yearly on progress in cutting emissions to the National Council’s secretariat.

1. The trust contribution of ₦120m is deductible and outside the cost price ratio.
2. The decommissioning contribution of ₦200m is deductible because the escrow condition is met.
3. The ₦40m flare fee is a penalty and is not deductible.

How to score full marks

• Name the three pillars and give two or three specific points under each.
• Link a point to the industry: spills, community land, board oversight.
• Give dates for reporting: 2023 adoption, voluntary to 2027, mandatory 2028.
• Use four headings for penalties: financial, legal, reputational and operational.
• State the tax treatment of an ESG cost when the question asks for it.

Common mistakes in the exam

• Writing the Department of Petroleum Resources as the current regulator.
• Mixing up IFRS S1 and S2.
• Giving 2030 as the mandatory date for public interest entities.
• Listing only environmental points.
• Calling the host community contribution non-deductible.
• Leaving out the challenges when the question asks for challenges and opportunities.

Quick revision

• ESG: environmental, social, governance; regulators NESREA, NUPRC, NMDPRA, NEITI.
• IFRS S1 general; IFRS S2 climate; mandatory for public interest entities from 2028; small and medium from 2030.
• Climate Change Act 2021: net zero 2050 to 2070; climate officer for 50 or more employees.
• Penalties: financial, legal, reputational, operational.
• EITI 2023 Standard: revenues, contracts, beneficial owners, production, spending.
• CAMA 2020: ss. 54, 119, 305, 308, 377(1), 378.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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