July 2022

ESG will not save oil and gas companies — customer focus will

Industry CEOs should be prioritizing customer value above all else.
Vikas Mittal / Rice University
Vikas Mittal, Professor of Marketing, Rice University
Vikas Mittal, Professor of Marketing, Rice University

ESG investing—investing based on a company’s environmental, social and governance credentials—is the current rage among CEOs of oil and gas companies. 

After the activist fund, Engine No. 1, brought about the ouster of three ExxonMobil board members, many oil and gas companies are eager to burnish their ESG credentials.1 CEOs of many oil and gas companies have convinced themselves that ESG credentialing will make their companies responsible societal members and provide better financial outcomes to their shareholders.2 

Occidental has set a net zero emissions target by 2050, Shell has adopted a sustainability strategy, and ExxonMobil has announced a sustainability framework that includes a $3 billion investment in carbon capture and storage.3 In addition Apache (APA Corporation) has implemented a wide-ranging ESG effort that includes water management and preservation, Fig. 1. Suppliers like Schlumberger have appointed sustainability officers, while others, such as TechnipFMC, have set up entire companies that will be “breaking boundaries together to engineer a sustainable future.” 

Unfortunately, ESG neither delivers financially nor does it deliver socially.4 Financially, a 2019 study of 20,000 mutual funds in the Morningstar sustainability ratings index found that returns of funds rated the highest for ESG did not outperform the lowest-rated funds.5 Socially, companies in ESG portfolios had worse compliance records for labor and environmental rules and did not improve compliance with labor or environmental regulations.6 


Banks, private equity firms, hedge funds and other institutional investors in the oil and gas sector have jumped on the ESG bandwagon. Because a lack of ESG credentialing may trigger a higher cost of capital, a cottage industry of consultants now helps window-dress oil and gas investments for ESG credentialing. Here’s an example of how it works. 

An engineering, procurement and construction company with more than $2 billion in annual sales wanted to become ESG-compliant. A study of its client base showed that the company was underperforming on resolving customer complaints and providing customers with timely project status updates. Hiring and training additional project managers and investing in an issue-tracking software would have addressed these issues. Instead, the company redeployed existing project managers into a sustainability group with an annual budget of $12 million. 

Fig. 1. Apache is an example of an operator that has made a major water management effort. Image: APA Corporation.
Fig. 1. Apache is an example of an operator that has made a major water management effort. Image: APA Corporation.

The nominally lower cost of capital raised from ESG credentialing siphoned resources from project management and complaint resolution. Several dissatisfied customers switched to other vendors. Worse, the remaining customers were unwilling to pay a higher price for an ESG-credentialed vendor. It lost more in sales than the savings in cost of capital. 

My research with several oil and gas companies’ customer bases shows customer value is driven by core satisfaction drivers like ongoing service and support, product/service quality, sales and bidding process, and pricing and billing. Focusing the limited time, attention and effort of middle managers and front-line employees on core satisfaction drivers—and not ESG gimmicks—improves customer satisfaction. Higher customer satisfaction improves rebid, repurchase, recommendations, and pricing power. All these increase sales, margins and stock returns.7 

More than 40-years of research has shown that satisfied customers are the largest and most reliable source of cash flow for companies. The oil and gas sector is no exception. To succeed, CEOs of oil and gas companies need to go back to the basics—excel at satisfying customers, generate cash flow from satisfied customers, and invest it in the best possible way to benefit stakeholders. 

If not ESG, then what? Companies like Amazon, Apple, Procter and Gamble, Danaher and Tesla embrace the fundamental business axiom: customer focus equals cash flow. They derive success from a strong customer focus. They don’t merely meet customer needs. They excel. Customer excellence provides the differentiation that fuels superior financial performance. Superior financial performance provides the cushion to manage other stakeholder interests, which may or may not include ESG. 

ESG can be a consequence, not a precondition, for a company’s success. By accepting the primacy of customer value, successful CEOs need not exercise the false choice between customer value or ESG. They prioritize customer value above all else. 

CEOs of oil and gas companies, who see ESG as the silver bullet, risk missing all the targets—customer value, shareholder return, and demonstrable improvements in social performance—even as they check the ESG compliance boxes. A strategy of robbing customers of the value they expect and deserve to serve an ESG agenda is unlikely to succeed. 

Excellence in delivering customer value must precede the quest for jumping on the ESG bandwagon. Hopefully, CEOs of oil and gas companies can get back to the urgent business of sharpening their customer focus.  


  1. Source: “Calling Out ‘Emperor’ Larry Fink,” The Wall Street Journal, Feb 17, 2022: https://www.wsj.com/articles/calling-out-emperor-larry-fink-charlie-munger-financial-markets-berkshire-hathaway-11645136040 
  2. Source: https://theimpactinvestor.com/esg-rating-agencies/ 
  3. Source: https://www.womblebonddickinson.com/us/insights/articles-and-briefings/esg-how-it-applies-oil-gas-industry-and-why-it-matters 
  4. See: “An inconvenient truth about ESG investing,” Harvard Business Review, by Sanjay Bhagat, March 2022. https://hbr.org/2022/03/an-inconvenient-truth-about-esg-investing 
  5. See: “Do investors value sustainability? A natural experiment examining rankings and fund flows,” The Journal of Finance, August, 2019. See: https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12841 
  6. See: “Do ESG funds make stakeholder-friendly investments,” Review of Accounting Studies, by Aneesh Raghunandan and Shivaram Rajgopal, May 2022. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3826357 
  7. See: “Customer satisfaction, loyalty behaviors, and firm financial performance: What 40 years of research tells us,” Working Paper, Rice University, 2022. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4103893 
About the Authors
Vikas Mittal
Rice University
Vikas Mittal is the J. Hugh Liedtke Professor of Marketing at the Jones Graduate School of Business, Rice University, Houston, Texas. He has published over 100 articles on customer-based strategy. His work appears in Forbes, Harvard Business Review, Houston Chronicle, Houston Business Journal, and MIT-Sloan Management Review. His research and teaching have been recognized with multiple awards at the Jones School.
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