*Article* **Developing Corporate Sustainability Assessment Methods for Oil and Gas Companies**

**Tatyana Ponomarenko, Oksana Marinina \*, Marina Nevskaya and Kristina Kuryakova**

Faculty of Economics, Saint Petersburg Mining University, 199106 Saint Petersburg, Russia; stv@spmi.ru (T.P.); nevskaya\_ma04@spmi.ru (M.N.); kristinkuryakova@gmail.com (K.K.) **\*** Correspondence: moa95@yandex.ru

**Abstract:** As it is predicted that there will be a decrease in production at the oil and gas facilities that are currently operating, it becomes necessary to start developing new oil and gas fields. This results in changes to the state's policy regarding the participation of private companies in the development and implementation of oil and gas offshore exploration and production new projects. Access to unique fields can be provided to the most socially responsible companies. The purpose of this study is to present the author's methodology for assessing the dynamics of corporate sustainability. The methodology is based on the assessment of individual, well-founded indicators of sustainable development of companies. The proposed methodology takes into account factors in areas such as occupational health and safety, environmental protection and economic efficiency and identifies two performance indicators. The first indicator is an aggregated index for three groups of factors to assess company ratings relative to the performance of the best company. The second indicator is an assessment of the dynamics within the company relative to the previous values of indicators of corporate social responsibility. The research results obtained using the proposed methodology show that oil and gas companies differ significantly in terms of corporate sustainability. The developed methodology for assessing corporate sustainability is of practical importance and can be used by companies in the analysis and planning of operating and investment activities that ensure the achievement of goals of corporate social responsibility.

**Keywords:** corporate sustainability; corporate social responsibility; economic results; environmental responsibility; social welfare; oil and gas fields

#### **1. Introduction**

At present, corporate social responsibility (CSR), a sustainable development (SD) assessment, is a rather difficult procedure for a number of reasons. Theoretical and methodological approaches to measuring corporate indicators for assessing sustainability (CS) and CSR are being actively developed, but this is happening in a somewhat haphazard way. There are several reasons for this. First, SD is predominately studied at the global and national levels, with CS concepts being hardly developed. Second, the relationship between CS and CSR has not been studied thoroughly enough. Third, there is a variety of CS assessment indicators, which is a result of various concepts underlying research methodologies and the fact that there is no single definition of CS. It follows that the methodology for assessing SD effectiveness requires further research and development (Ponomarenko et al. 2020; Szewra ´nski and Kazak 2020).

Corporate sustainability assessment methods differ in the number and composition of indicators, the degree of aggregation, the method of calculating the resulting value, weighting factors and assessing the degree of the company's progress in corporate sustainability. Official methods are universal and can be applied to all companies regardless of their specifics. However, some researchers have proposed methods that take into account the specifics of the industry but they are hardly used in practice and have not been officially recognized. The peculiarity of corporate sustainability assessment methods lies in the

**Citation:** Ponomarenko, Tatyana, Oksana Marinina, Marina Nevskaya, and Kristina Kuryakova. 2021. Developing Corporate Sustainability Assessment Methods for Oil and Gas Companies. *Economies* 9: 58. https://doi.org/10.3390/ economies9020058

Academic Editor: Angeliki N. Menegaki

Received: 8 March 2021 Accepted: 6 April 2021 Published: 14 April 2021

**Publisher's Note:** MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations.

**Copyright:** © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

fact that the algorithm is usually unknown for selecting the criteria, weighting factors and calculation rules and the reliability of the procedure should be verified by disclosing information on the approach to collecting and verifying information relevant for research.

The purpose of this study is to develop a methodology for assessing corporate sustainability and changes in the field of sustainable development and benchmark oil and gas companies using social and environmental indicators in order to reveal potential participants in the joint development of oil and gas fields.

The article provides an analysis and systematization of corporate sustainability assessment methods aimed at identifying the limitations and possibilities of using the methodology for assessing the level of CSR in oil and gas companies. A new methodology is proposed for assessing corporate sustainability in order to analyze the level of and changes in corporate sustainability taking into account target indicators. The results are given and conclusions are made on testing the methodology using a case study of oil and gas companies. The article discusses the limitations of the methodology for assessing the level of CSR and reflects on how it can be developed in the future.

The structure of the article includes:

Section 1 ("Corporate sustainability: definition and assessment methods"), which discusses some interpretations of corporate sustainability in comparison with corporate social responsibility and sustainable development, as well as characteristics of the most popular methods for assessing corporate sustainability.

Section 2 ("Materials and Methods"), which presents the details of the methodology that was developed by the authors, including the set of methods for assessing, the selection of indicators and the development of integral indicators for assessing corporate sustainability. The technique, which was chosen as the main one for the further development of the author's technique, is analyzed. The choice of mining companies as a base for testing the method is substantiated.

Section 3 ("Results"), which contains the details of the methodology that was developed by the authors, including the selection of indicators and the development of integral indicators for assessing corporate sustainability at present and over time; analytical and graphical results of assessing corporate sustainability in six Russian oil and gas companies.

Section 4 ("Discussion") includes a study of the place that the proposed methodology takes in the classification of methods for assessing corporate sustainability based on various criteria and identifies the limitations of the methodology.

Section 5 ("Conclusion") contains the key findings of the study.

#### *1.1. Definitions of Corporate Sustainability, Corporate Social Responsibility and Sustainable Development*

Despite a geometric growth of works on this issue, there has not been a common definition of CS for 30 years of the concept development. Many researchers confuse the concepts of corporate social responsibility (CSR) and corporate sustainability (CS), while others replace corporate sustainability by environmental sustainability; thus, corporate sustainability is the most uncertain among the related categories. It results from the logical course of the concept development: from environmental and social sustainability to CS based on a threefold approach. The weakest theoretical points of CS are non-formalized relations between various CS spheres and an unaccounted-for long-term nature of CS. In the existing systems of indicators, the proportion of each sphere has no rational backing and a long-term nature of CS is practically not counted. Apart from that, the fact that oil and gas companies use public-owned valuable mineral resources and have a special environmental impact (soil, air, water, biodiversity) complicates creation of a valid system of indicators.

Theoretical and methodological approaches to measuring corporate indicators used in CS assessment are being actively developed but they do not form a system. This is due to a number of circumstances. First, in various studies on the issue, the relationship between CS and CSR has not been analyzed thoroughly enough. Second, there is a variety of CS assessment indicators, which results from the fact that there is no universally accepted definition of CS and the concept itself is analyzed from different points of view.

Over the past three decades, a lot of attention has been paid by academic circles to different CS aspects.

Development of the stakeholder approach, according to the theory of E. Freeman (Freeman 1984), is based on an expanding interest range of stakeholders and their obligations to the society (Smol et al. 2020; Tulaeva et al. 2019; Novikova 2020).

An institutional approach to CSR, development of the concepts of corporate citizenship, corporate susceptibility and corporate activity as a result of expanding spheres of influence and functions of large businesses (Montiel and Delgado-Ceballos 2014; Freeman 1984).

From 1987 (Brundtland reports) until the middle of 1990 the research of CS was aimed at identifying and formulating signs of CS; later (until mid-2000) strategic management research was focused on finding tools and strategies of CS and maximizing the level of CS. Then, the concept of CS became comprehensive and combined all three spheres. The theoretical background of CS includes: a stakeholder and institutional theory, a resourceoriented concept, a new theory of "sustaincentrism". A stakeholder theory explains CS drivers by satisfied respective interests of stakeholders; an institutional theory explains evolution and diffusion of institutions into various areas of CS; a resource approach identifies what resources a company needs for an effective CS strategy; while the new CS theory formulates a detailed definition of CS and focuses on a shift from anthropocentric to a "sustainable centric" approach (Drucker 1984; Berman et al. 1999; Margolis and Walsh 2003; Johnson 2003; Halme and Laurila 2009; Blagov 2011; Nedosekin et al. 2019).

In this article, we treat corporate sustainability as a successful establishment of a company in three traditional spheres of sustainable development (economic, social and environmental), taking into account long-term relations of these spheres and a comprehensive concept of CS. When determining CS of a mining company, we should take into account whether the corporate economic quantitative and qualitative profile complies with environmental and social requirements, how the company responses to relevant challenges in the long term. Thus, the idea of socially responsible business is becoming mandatory in modern conditions.

A review of literature on the issue of sustainable development at the micro level (corporate sustainability) shows that there has been a significant interest in this issue for decades, which led to the emergence and development of various ideas and views. At the same time, the variety of studies in this area stems from the fact that there is no universally accepted definition of the basic concept of sustainable development at the micro level (i.e., corporate sustainability), with this term being used along with similar ones, such as corporate social responsibility, sustainable development and others.

By systemizing the approaches to defining the concept of corporate sustainability presented in current foreign literature on the topic (Endovickij et al. 2017), the following types were identified:

(1) corporate sustainability in relation to and in connection with corporate social responsibility (CSR):


(2) a monofocal definition of corporate sustainability:


(3) umbrella approaches to defining corporate sustainability:


A closer look at these interpretations shows that there is some confusion between corporate sustainability and CSR, but attempts are made to identify the specific features of corporate sustainability; the emphasis is placed on the activity (both strategic and operational) aimed at achieving sustainability, its long-term nature and the creation of different values at the company level. The most important task is to identify the range of issues discussed within the framework of corporate sustainability, relationships between them and their significance. Two approaches can be distinguished here.

Proponents of the first approach understand by corporate sustainability the company's economic sustainability which manifests itself in its long-term economic performance (Epstein and Roy 2003), sustaining its competitive advantages, profitability, a high market capitalization, highly priced stocks and successful risk management. This approach generally corresponds with strategic management but even though it is long-term oriented, its focus is on economic performance. It is known that today's strategic and operational management takes into account the combination of goals and tools for achieving them in the economic, environmental and social spheres (Klimova et al. 2018). In the approach discussed above, environmental and social factors become boundaries and they are not equal to economic factors in terms of their importance. At the same time, quantitative research proves that there is a relationship between companies' performance indicators and the implementation of corporate sustainability practices (see, for example, (Ivashkovskaya 2009) I.V. Ivashkovskaya puts emphasis on the influence of environmental and social factors on the value of a company).

In the second approach, corporate sustainability is understood as a holistic view of the company in the context of achieving economic, environmental and social goals. This raises the issue of developing a balanced assessment system covering different types of the company's activities, including those in the economic, social and environmental spheres, giving an overall assessment and solving all management problems in the context of corporate sustainability at both the strategic and operational levels.

Analysis of scientific publications and official materials (GOST R ISO 9004 2010; GOST R ISO 20121 2014; GOST R 54598.1 2015) of organizations engaged in methodological guidance of SD showed that all methods differ in the number and set of assessment indicators, degree of their aggregation, methods for value calculation, proportion of indicators and assessment of corporate progress degree in CS. Official methods have a universal nature and can be applied to all companies without regard to their type of business. At the same time, methods of individual researchers have little practical application and are not officially recognized, although many of them are industry-specific and, therefore, show a certain progress in the scientific understanding of CS. What is distinct about CS assessing methods is that the algorithm for selecting the criteria, proportions of indicators and rules of calculations is unknown, so consistency and reliability of assessing procedures must be confirmed by explaining the approach to collection of reasonable information and a verification system.

Analysis of CSR and CS assessment methods showed that according to the target orientation and selection of key indicators or the main indicator (index), they can be divided into the following groups: (1) methods focused on collection of environmental information; (2) methods focused on assessment of social welfare, calculation of social indicators and indicators of social efficiency; (3) methods based on a comprehensive assessment of CSR; (4) methods of assessing corporate sustainability with a comprehensive assessment of corporate activities in environmental, social and economic areas (Table 1).

**Table 1.** The development of CSR concepts. Source: compiled by the authors. (Ponomarenko et al. 2020; Szewra ´nski and Kazak 2020; Smol et al. 2020; Tulaeva et al. 2019; Novikova 2020; Montiel and Delgado-Ceballos 2014; Freeman 1984; Drucker 1984; Berman et al. 1999; Margolis and Walsh 2003; Johnson 2003; Halme and Laurila 2009; Blagov 2011; Nedosekin et al. 2019; Endovickij et al. 2017; Epstein and Roy 2003; Klimova et al. 2018; Ivashkovskaya 2009).


The methodology proposed by the authors for assessing corporate sustainability in mining companies was developed taking into account the essence, principles and methods of stakeholder theory, corporate social performance and corporate citizenship. The principles of stakeholder theory that was used includes resource mobilization, creating competitive advantages and creating stakeholders' well-being. According to the principles of corporate social performance, three aspects of interaction are assessed—economic, environmental and social—along with "inputs" (resource consumption) and "outputs" (impact). The concept of corporate citizenship takes into account the link between the regional and national levels of sustainable development, which was reflected in the choice of indicators that can be aggregated starting from the corporate level.

#### *1.2. Methods Focused on Collection of Environmental Information and Calculation of Environmental Indicators*

Such methods exist due to the fact that for several decades the environmental approach to SD assessment had dominated, with its close relations to the stakeholder theory, popular and clear definition of many environmental indicators. However, such methods are only aimed at the environmental side of activities of the companies (Larsena et al. 2018). An example of this is Carbon Disclosure Project (CDP) (CDP 2015), an independent nonprofit organization that maintains the world's largest climate change database. CDP is the author of disclosure guidelines, as well as several environmental ratings (Carbon Disclosure Leaders Index—CDLI and Carbon Performance Leaders Index—CPLI). The

world's largest companies measure and publish climate change and gas emission data using a CDP survey-based method in order to set emission-reducing goals as part of their CS strategies. International principles for assessing social consequences and results (IAIA, International Association for Impact Assessment).

Of course, the issue of greenhouse gas emissions is one of the key environmental problems, it is very grave for companies in the mineral, oil and gas industry and allows us to assess the company's contribution to reduction of hydrocarbon emissions at a global level; however, this method does not allow consideration of the SD of companies in social and economic aspects.

#### *1.3. Methods Focused on Assessment of Social Welfare, Calculation of Social Indicators and Indicators of Social Efficiency*

Such methods are focused solely on social results that can be assessed by such parameters as demography, health and income, poverty level, educational level, migration, etc. "A high aggregation of social parameters makes them universal and allows adapting them to a particular country, collecting and summarizing a large array of statistical information" (Kanaeva 2018). One of the challenges for using such methods is a constant complication of social indicators (index). For example, introduction of such indicators as "degree of vulnerability", "social insecurity", "level of material and social inequality" and "level of public resilience to weather and climate anomalies" require a new justification of criteria, methods for their calculation and possible modification. Apart from that, existing systems of social indicators used at the global level sometimes cannot objectively assess social results at national levels, since they do not take into account geographical and climatic features of the countries and related national, traditional and cultural characteristics of natural resources consumption, need for social benefits, etc.

Methods focused on assessment of public welfare, calculation of social indicators and indicators of social efficiency include (Prokopov and Feoktistova 2008):


#### *1.4. Methods Based on a Comprehensive Assessment of CSR*


The disadvantage of this method in assessing CSR is that it cannot take into account qualitative results to the full extent.


#### *1.5. Methods for Assessing Corporate Sustainability with a Comprehensive Assessment of Corporate Activities in Environmental, Social and Economic Areas*

The fourth group combines in-company methods of assessing corporate sustainability and comprehensive assessment of corporate activities in all areas of SD: environmental, social and economic. Assessment of CS indicators means assessment of economic results, impact on society (CSR) and impact on the environment.

The most common rating methods are as follows:


Despite high popularity of SAM and DJSI methods, they have a drawback: information can be distorted as a result of self-assessment of companies (RepRisk Provides ESG 2014; Rahdari and Rostamy 2015);


Among national methods, the following are worth noting:


#### **2. Methodology**

The purpose of the study was to develop a method for assessment of corporate sustainability (CS) based on accumulated assessment tools.

For this purpose, more than 100 CSR and CS methods were analysed (Table 2)**.** For analysis purposes the following methodologies were selected:


The methodology of express assessment of CSR methodology Barzakova D.I. was chosen as the basis for the development of the methodology for assessing corporate governance. In the method of Barzakov D.I., the author proposes assessment indicators harmonized with the provisions of the global standard Global Reporting Initiative G4 (GRI G4) and combined into three groups: interaction with personnel, interaction with the local community and environmental protection. The final indicator is determined based on the point assessment of the dynamics of growth/decline of the GRI G4 indicators. The methodology allows for diagnostics and comparative analysis of companies in the field of CSR.

In our methodology, in addition to indicators from the Global Reporting Initiative G4 standard, economic indicators from the company's profit and loss statement have been added to focus more on the company's sustainability and not just corporate social responsibility. The proposed methodology takes into account three groups of indicators in the areas: labor protection, environmental protection and economic efficiency. Three indicators were selected in each group to create a balanced system of indicators.

Thorough consideration was given to the specific features of oil and gas companies.

Among the social indicators, three indicators were chosen that reflect social impact and the impact of the company on its employees (data on occupational injuries, Deloitte surveys), the local community (company reports) and the population at the regional and national levels, as they all form a single ecosystem. All the indicators correspond with the stakeholder approach.

Among the environmental indicators, three indicators were chosen that characterize the consumption of key natural resources and the impact on the environment) (Cherepovitsyn et al. 2018; Lipina et al. 2018; Ilinova et al. 2020), including energy consumption (as well as CO2 emissions), water consumption (which is high in oil and gas companies) and waste (Vasilev et al. 2019; Ivanova 2020; Kirsanova et al. 2020). In the economic area, such indicators were chosen as cost-to-revenue ratio as a key indicator of economic performance, revenue as an indicator of the cumulative effect and oil and gas reserve life as a key factor connected with resources (Carayannis et al. 2021; Litvinenko et al. 2020; Rudakov et al. 2021).

**Table 2.** Classification of CS methods, ratings, indices. Source: (Wong et al. 2019; ESG 2019; ESG Factors in Investment, MIRBIS 2019; Rate the Raters 2020; Corporate 2018; RepRisk Provides ESG 2014; International Integrated Reporting Council 'IIRC' 2021; Leadership GRI SRS 2013; Global 2014; LBG Model 2017; Borzakov 2016; Sklyar and Zverkovich 2007; Pence and Furs 2008; Saprykina 2012; Endovitsky et al. 2014; Ponomarenko et al. 2020) compiled by the authors.


The effectiveness of CS is assessed by two final indicators. The first indicator is an aggregated index for three groups of factors to assess the ratings of companies relative to the performance of the best company. The second indicator is an assessment of the dynamics within the company relative to the previous values of the indicators of corporate social responsibility.

Methodology: analysis of CS assessment methods; systematization of assessment methods for mining companies in order to identify limitations and opportunities for application of CS assessment methods in mining companies; development of a method for CS assessment in order to determine the achieved level and dynamics of CS indicators in terms of the target industry indicators; assessment and analysis of CS results using data from oil companies.

We selected oil and gas companies, on the one hand, due to an important role of the oil and gas industry for the Russian economy in general and for the regions of operation, in particular, plus the ability to use high-quality secondary sources of available and accessible information and, on the other hand, because of a significant environmental impact of such companies. An important factor for selection of oil and gas companies is the fact that, for example, in Gazprom PJSC, the number of employees makes up almost half of the total number of employees in the mining sector. We formed a database using the reports of oil and gas companies published on the Russian Union of Industrialists and Entrepreneurs website, in particular, reports on sustainable development. We assessed CS taking data from six largest Russian oil and gas companies: PJSC NK Rosneft, PJSC Gazprom, PJSC NOVATEK, PJSC Tatneft, PJSC Lukoil and PJSC Surgutneftegas, over 5 years (National Register 2020).

In order to comprehensively assess the CS level of oil and gas companies and the degree of progress towards the target industry indicators, we developed and applied a method to assess the achieved level and dynamics of changes in CS indicators. The choice of oil and gas companies for the study was based on the availability of sustainability reports that needed to be used to collect source data. These oil and gas companies are among the biggest ones in Russia. Three of them are controlled by the government and another three are private.

#### **3. Results**

Based on an analysis of CS concepts, existing methods, recommendations given in the GRI G4 standard and disclosure requirements concerning non-financial information, a set of indicators reflecting the specific features of oil and gas companies was selected as the initial data for developing a methodology for CS assessment.

The choice of indicators stems from the fact that it is essential to meet two requirements: to assess impact in three spheres (economy, ecology and environment) and to characterize the long-term development of a company (by analyzing revenue, profitability and natural resource assets).

The indicators are grouped by three areas (environmental, social and economic) and divided into two groups based on the desired trends (ESG 2019; Rate the Raters 2020; Corporate 2018; Borzakov 2016; Ponomarenko et al. 2020):


Information for developing a system of CS (Corporate Sustainability) assessment indicators was obtained from several sources: CSR (Corporate Social Responsibility) and SD (Sustainable Development) reports, annual corporate reports and annual financial reports.

Indicators (*R<sup>t</sup> i* ), their desired trends and information sources are shown in Table 3. **Table 3.** Set of CS assessment indicators. Source: compiled by the authors.


#### *3.1. Calculating the Aggregate CS Index*

Aggregation is carried out based on equal weights and assessments are given in points to ensure that parameters which differ in units of measurement can be compared. The aggregate CS index is meant for ranking companies in relation to the best one in the industry. To find the aggregate CS index, it is necessary to replace quantitative indicators (*R<sup>t</sup> i* ) with points.

Scores (*P<sup>t</sup> <sup>i</sup>* ) of indicators (*R<sup>t</sup> i* ) are determined proportionally to the maximum value of *i*-indicator of CS assessment in *t*-year. The maximum value of the indicator corresponds to the maximum score of 10 points.

Assessment of the achieved CS level is determined by summing up the scores of CS assessment indicators (*AP<sup>t</sup> i* ):

$$AP\_i^t = \sum P\_i^t \tag{1}$$

where *P<sup>t</sup> <sup>i</sup>* —is the score of *i*-indicator of CS assessment in *t*-year.

Points (*P<sup>t</sup> <sup>i</sup>* ) are assigned to the indicators (*R<sup>t</sup> i* ) in proportion to the maximum (minimum) value of the *i*-th indicator of the top company in the industry. The maximum or minimum value (depending on the desired trend) corresponds to the maximum score, which is 10 points.

#### *3.2. Assessment of Changes in Companies' CS Indicators*

The assessment of changes in CS is based on information on the companies' CS indicators covering a period of three years. Taking each company's indicators separately, change (*PC<sup>t</sup> <sup>i</sup>*) (deviation) (+/−) relative to the previous period is found.

$$P\mathbb{C}\_{i}^{t} = AP\_{i}^{t+1} - AP\_{i}^{t} \tag{2}$$

where *AP<sup>t</sup> <sup>i</sup>* is the value of the score of i-indicator of CS assessment in *t*-year.

The absolute change is then converted to relative change, which will be presented in percentage. In order to analyze indicators in dynamics, we calculated the Percentage change (*PC<sup>t</sup> <sup>i</sup>*) for each indicator, which has a certain number of scores (from 1 to 10) by the scale (see Table 4). The rating of sustainable development indicators, given their dynamics, is determined by summing up the scores (∑ *E<sup>t</sup> i* ) of each indicator in a year.

**Table 4.** Score scale. Source: compiled by the authors.


The methodology for assessing CSR is presented in Figure 1.

**Figure 1.** Methodology for assessing corporate social responsibility. Source: compiled by the authors.

To see how this method is applied, we shall consider creation of a system of economic indicators for the three largest Russian oil and gas companies: PJSC NK Rosneft, PJSC Gazprom, PJSC NOVATEK, PJSC Tatneft, PJSC Lukoil, PJSC Surgutneftegas over 5 years. The final indicators of CSR assessment are shown in the Figures 2 and 3. Intermediate calculation indicators are presented in the Appendix A (Tables A1–A3).

**Figure 2.** Assessment of the rate of change CS (economic, environmental and social indicators) oil and gas companies on the dynamics of change of indicators.

**Figure 3.** Assessment of the level of CSR (economic, environmental and social indicators) oil and gas companies on the absolute value of the indicators.

When being tested, the methodology showed significant deviations in SD indicators, which means that additional analysis of the results at a qualitative level is required.

According to the final indicator of social corporate sustainability, the company can be ranked in the following order:


All calculations and graphs show that for the companies the dynamics of changes in indicators (rate of change) is differently directed. Within the study period, Gazprom PJSC has had a tendency for increasing indicators; however, the indicator values themselves were minimal compared to other companies. In terms of the achieved CS level among the analyzed companies, the leading position belongs to Lukoil PJSC, with the average score of 38 points. This allows us to conclude that this Lukoil PJSC is the most sustainable (after Gazprom PJSC), because the absolute value of the indicator plays a more important role than the dynamics of its change, since it reflects the actual status of the company by a certain indicator and allows comparing companies with each other.

#### **4. Discussion**

As you can see, the leading position in terms of static values is occupied by PJSC Gazprom with a margin of about 28% from its closest competitors (Rosneft and LUKOIL) (in terms of points). The maximum number of scores the company had for the social component, which can be correlated with the scale of implemented social programs and joint activities with the state.

In terms of dynamics, the most effective activity was performed by PJSC NOVATEK, followed by PJSC Rosneft. To ask why Gazprom does not show a leading position here, it should be understood that showing the highest values among all the considered companies, GAZPROM just may not have reserves for noticeable leaps in development.

In the process of evaluating and analyzing the results, we concluded that the methodology requires further work. For example, it would be good to consider the issue of weighting factors and then mechanism for mutual influence of spheres (for example, PJSC Gazprom with 29 points in social sphere has only 1.7 points for the environmental component, which means unstable development). We also aim to work with the technique of estimation in dynamics so that the obtained results can be interpreted more effectively.

The review and analysis of methods for assessing CSR and CS that, despite a great number and variety of methods, they can be classified by the following categories:


The analyzed methods for CS level assessment have several disadvantages, since they do not take into account many factors affecting oil and gas companies. For example, one of the CSR level assessment methods based on non-financial reporting reflects only dynamics of changes in indicators for a particular company. Thus, the rapid assessment only counts for the rate of change in the indicators used for that method, but it does not compare companies with each other by the achieved CSR level. This fact does not allow for making an objective conclusion regarding the CSR level of the companies.

In order to comprehensively assess the CS level of oil and gas companies and the degree of progress towards the target industry indicators (according to the "Energy Strategy of Russia for the Period until 2030"), we developed and applied a method for assessing the achieved CS level and dynamics of changes in CS indicators.

An analysis of CS assessment methods showed that only the fourth group offers a comprehensive assessment. Methods based on environmental information focus only on the environment. Methods based on social welfare deal with the impact on society. Methods based on CSR predominantly focus on social issues, with environmental ones also taken into account. CS assessment methods cover three areas of sustainable development and three groups of indicators.

Three indicators were selected in each group to create a balanced system of indicators. Thorough consideration was given to the specific features of oil and gas companies. Among the social indicators, three indicators were chosen that reflect social impact and the impact of the company on its employees (data on occupational injuries, Deloitte surveys), the local community (company reports) and the population at the regional and national levels, as they all form a single ecosystem. All the indicators correspond with the stakeholder approach.

Among the environmental indicators, three indicators were chosen that characterize the consumption of key natural resources and the impact on the environment), including energy consumption (as well as CO2 emissions), water consumption (which is high in oil and gas companies) and waste.

In the economic area, such indicators were chosen as cost-to-revenue ratio as a key indicator of economic performance, revenue as an indicator of the cumulative effect and oil and gas reserve life as a key factor connected with resources.

The choice of all these indicators makes it possible to subsequently trace the relationship between CS and SD at the national level.

A limited combination of indicators was chosen in order to give a brief assessment of the main "outputs" of the company. In this kind of assessment, a number of indicators are not taken into account.

The developed method for CS assessment and can be used by large companies in the analysis and planning of operational and investment activities that ensure achievement of CS goals and growth. Oil and gas companies can use the method for CS assessment to achieve their strategic goals and strengthen their market positions by investing in certain problem areas. In this regard, oil and gas companies are advised to monitor the CS level, effectively manage interaction with various stakeholders and involve the local community in solving environmental and social issues.

In practice, oil and gas companies can use the methodology for benchmarking between both companies and separate spheres based on the values for a particular moment. For example, scores in different CS spheres enable companies to make conclusions about their status and progress.

An interesting feature of the methodology is that it provides for analyzing changes in the company's indicators in comparison with those of other companies. This is an indirect measure of its competitiveness.

The methodology provides tools for achieving CS goals related to the global SDGs. Many companies discuss the SDGs in their reports but do not assess whether they can be achieved.

The methodology takes into account the resource and stakeholder ideologies.

The limitation of the proposed methodology lies in the fact that additional qualitative analysis is required that will characterize the causes of significant deviations in corporate sustainability indicators. The set of indicators consists of multidirectional SD indicators that are combined into an aggregate index, which makes it difficult to find the reason for such deviations. Another limitation is that companies should provide CSR reports compiled according to the GRI standards since the source data for different companies must be comparable to each other. In addition, comparisons should be made within one industry, for example, oil and gas production, mining metal ores or coal mining as different industries are characterized by different environmental indicators. A survey should be conducted among oil and gas companies to see whether this methodology proves useful in their practice.

The author's technique presented in the article is truly applicable for the mining industry in general. The special features of the methodology are that we have chosen indicators that characterize the features of the activities of mining companies from many indicators of GRI. Since, to date, many companies do not use GRI indicators in their reports, we have shown the applicability of our methodology to oil and gas companies. Large oil and gas companies report regularly. Coal, gold and copper mining companies publish reports only in fragments. To use the proposed methodology, it is necessary to have the dynamics of indicators, which already creates certain limitations in choosing companies for analysis.

#### **5. Conclusions**

1. The main shortcomings of certain CS assessment methods are their static nature; lack of relation of social–environmental results to economic indicators characterizing a dynamic development of the company; lack of feedback from the companies; lack of count for industry specifics and differences in the level of disclosure and quality of information.


#### **6. Patents**

Program of Corporate Sustainability Rating for Mining Companies: Certificate of registration of the computer program 2021611713, 03.02.2021. Application No. 2021610736 dated 28.01.2021.

**Author Contributions:** Conceptualization, T.P. and O.M.; methodology, T.P. and O.M.; software, M.N.; validation, T.P. and M.N.; formal analysis, M.N. and O.M.; investigation, T.P. and O.M.; resources, M.N.; writing—original draft preparation, T.P. and O.M.; writing—review and editing, M.N. and O.M.; visualization, O.M., K.K.; funding acquisition, T.P. and M.N. All authors have read and agreed to the published version of the manuscript.

**Funding:** This research was funded by RFBR and MCESSM, grant number № 19-510-44013\19.

**Data Availability Statement:** Data available in a publicly accessible repository. The data presented in this study are openly available in (National Register of corporate non-financial reports, 2020 https://xn--o1aabe.xn--p1ai/activity/social/registr/ (accessed on 6 April 2021)).

**Acknowledgments:** Special thanks to the following people for providing valuable guidance: Cherepovitsyn A., Ilinova A. A., Savelyeva N.

**Conflicts of Interest:** The authors declare no conflict of interest the results.

#### **Appendix A**


**Table A1.** Economic, Social and Environmental Indicators of Corporate Sustainability.


#### **Table A2.** Total Company Ratings by years (Statics).

**Table A3.** Total Company Ratings by years (Dynamics).



**Table A3.** *Cont.*

#### **References**

A Guide. 2012. A Guide to Social Return on Investment. Available online: http://www.socialvalueuk.org/app/uploads/2016/03/ The%20Guide%20to%20Social%20Return%20on%20Investment%202015.pdf (accessed on 28 June 2020).

Berman, Shawn, Andrew C. Wicks, Suresh Kotha, and Thomas M. Jones. 1999. Does stakeholder orientation matter? The relationship between stakeholder management models and firm performance. *Academy of Management Journal* 42: 488–506.


ESG Rating. 2020. Available online: https://www.msci.com/esg-ratings (accessed on 28 June 2020).

	- GlobalCompetitivenessReport\_2013-14.pdf (accessed on 28 June 2020).

## *Article* **Environmental Exigencies and the E**ffi**cient Voter Rule**

#### **David A. Anderson**

Department of Economics and Finance, Centre College, 600 W. Walnut St., Danville, KY 40422, USA; anton42@adelphia.net

Received: 15 October 2020; Accepted: 12 November 2020; Published: 17 November 2020

**Abstract:** Externality problems hinder solutions to existential threats, including climate change and mass extinction. To avert environmental crises, policymakers seek mechanisms that align private incentives with societal exigencies. Successful solutions bring individuals to internalize the broad repercussions of their behavior. In some cases, privatization, Coasian bargaining, or Pigouvian taxes effectively place the weight of externalities on the relevant decision makers. Yet, the available remedies often fail to provide satisfactory outcomes, and inefficiencies persist in the markets for energy, transportation, and manufactured goods, among others. This article explains how a simple voting mechanism can achieve socially optimal decisions about many of the innumerable externality problems that remain.

**Keywords:** externalities; social cost; environmental protection; efficient voter rule

**JEL Classification:** G50

#### **1. Introduction**

Private decisions about environmental protection are fraught with externality problems, while public decisions are vulnerable to special interests and incomplete information. Trends in resource degradation and climate change continue at alarming rates despite considerable attention from economists over the past century. Coase (1960) advanced the theorem that private bargaining will achieve socially optimal resolutions to externality problems when property rights are clearly defined and transaction costs are negligible. The bargaining approach, like several others discussed below, works under some circumstances and fails under others. Progress toward efficiency on environmental fronts requires the identification of additional, complementary means of addressing externalities. This article advances voting as a straightforward approach to efficient decision-making that is useful in situations not well served by other approaches. Like Coase's solution of bargaining, voting is a familiar practice for other purposes; what is novel is substantiation that under appropriate conditions, the practice yields socially optimal resolutions to pressing policy dilemmas.

Externality problems arise when some of the effects of a decision are felt beyond, or external to, the person making the decision. In that case, the decision maker's private benefit or cost—that which is internalized by the decision maker—differs from the benefit or cost for all of society. Social efficiency is achieved when actions are carried out if and only if the benefit to society exceeds the cost to society, thereby maximizing the net gains for society. Socially inefficient decisions about environmental protection and resource conservation are expected when the private cost falls between the private benefit and the social benefit. Consider a \$100 expenditure on tree seedlings that would provide a \$50 benefit to the consumer by increasing the value of the consumer's property, and a \$200 benefit to society by providing a carbon sink and beauty for passersby to enjoy. The consumer would decide against the expenditure because \$50 < \$100, while the socially optimal decision would be to purchase the seedlings because \$100 < \$200. The consumer would make the best decision for society if the consumer internalized the \$150 benefit the purchase conferred on others. To that end, policymakers seek to align

private incentives with broader repercussions, such that decision makers weigh the social marginal benefit of each decision against the associated social marginal cost. Legislators in the United States and elsewhere currently establish environmental policies using deliberative processes whose influences can depart from that criterion for allocative efficiency (EPA 2020). On a global scale, the private disregard of external costs can fuel environmental crises including air and water pollution and climate change (Zhang and Wang 2017).

Buchanan and Tullock's (1962) seminal work shows how voting leads to outcomes in the public interest. Anderson (2011) explains how voting can elicit efficient decisions on topics ranging from community requirements for septic systems to wine consumption by a group that is splitting the check at a restaurant. The present article expands on those findings and highlights the power of a referendum—a simple up or down vote on a contemplated action—to navigate decisions about externalities and maximize the resulting net benefits for society.

The social efficiency of a referendum on environmental policy can be summarized by what we shall refer to as the efficient voter rule: A vote among fully informed parties on the provision of a uniformly distributed positive externality at a given cost per party will reveal the socially efficient outcome, regardless of the amount of the externality attributable to each party. The rule applies equivalently to the abolishment of negative externalities.

The efficient voter rule extends to externality problems beyond environmental issues. For example, the rule suggests that when the citizens of Tuscon, Arizona, voted on whether to use cameras to detect drivers who failed to obey traffic signals (Smith 2015), the outcome was socially efficient. Likewise, decisions about whether to mandate vaccines during a pandemic would be efficient if citizens paid the same price for vaccines and received equivalent benefits from broad immunity. The purpose of this article is to explain how and why the rule applies to critical environmental policy decisions.

Section 2 of this article provides a review of the related literature. Section 3 explains the theoretical foundation for the efficient voter rule. Section 4 discusses further applications of the rule. Section 5 concludes the paper.

#### **2. Literature Review**

The previous literature on externalities offers several approaches that are effective under particular circumstances. Pigou (1932) describes how taxes and subsidies can cause decision makers to internalize negative and positive externalities, respectively. Pigouvian solutions can lead to efficient decisions, the caveat being that policymakers need full information on the marginal external cost or marginal external benefit involved in order to establish the appropriate value for the tax or subsidy. Even with full information, this solution may not lead to the optimal outcome. For instance, taxes can lead to excessive deterrence when overlapping remedies, such as litigation, benevolence, regulation, or risk burdens are in place (Viscusi 1991, p. 129). Furthermore, the application of taxes or subsidies can obscure preferable alternatives, such as options to move polluters or pollution victims to new locations when the benefit of such a move exceeds the cost.

The introduction noted Coase's (1960) finding that private bargaining can lead to efficient decisions in the face of externalities when property rights are clearly defined and transaction costs are insignificant. Anderson (2019) explains that Coasian solutions may fail in cases involving multiple victims, multiple sources, incomplete information, strategic behavior, time lags, asymmetric information, or social mores against such bargaining. Similarly, Anderlini and Felli (2006) show that common transaction costs can upset the efficiency of Coasian bargaining.

Hardin (1968) advocated private property rights to place the otherwise external costs of activities that degrade open-access land onto property owners. For similar reasons, Libecap (2009) advocates rights-based solutions such as tradable emissions permits, individual transferable quotas, and private water rights. However, all such market-based instruments rely on the ability to privatize and enforce rights to emissions or resources. It may be impossible to privatize resources such as flowing water or air. Ocean fisheries are among the resources that are difficult to monitor. And national forests are among the natural resources that provide public goods, such as oxygen and carbon sequestration, the benefits of which are not internalized even if the forests become private.

Economists have long understood that votes can reveal valuable information and guide socially efficient decisions. Wicksell (1958) advocates votes to select both public expenditures and taxes that are optimal for society. Musgrave (1959) explains that externalities thwart the efficiency of markets and advocates voting mechanisms to reveal consumers' true preferences. In his discussion of regulations and taxes that impose burdens on other countries, Piketty (1996, p. 16) describes voting as a "natural way to induce individual agents to internalize an externality". The present article shares that objective, but uses a model unlike that of other authors to explain how the virtues of voting extend to social optimality in environmental policy decisions.

#### **3. The Theoretical Model**

The efficiency of environmental policy depends on the incentives that drive decision makers. Let ρ be the price of a product that consumers could buy to reduce their carbon footprint, such as supplemental home insulation, a windmill, an electric car, or bamboo flooring. Let α represent the discounted present value of the entirely private benefit from that purchase, such as the savings on utility bills achieved with added insulation or a windmill. Let β represent the discounted present value of the benefit to society of purchasing the product.

Assuming *n* citizens share the social benefit equally, each consumer's share of the social benefit is β/*n*. It is privately optimal to purchase the product if the consumer's benefit exceeds the price:

$$
\alpha + \beta/n > \rho.
$$

It is socially optimal to purchase the product if the benefit to society exceeds the price:

$$
\alpha + \beta > \rho.
$$

The private solution differs from the socially optimal solution, in that the consumer will not purchase the good even though it provides a net gain to society, if

$$
\alpha + \beta > \rho > \alpha + \beta/n.
$$

Inefficiency arises from the product's external benefit,

$$\beta - \beta/m.$$

Under conditions that include an absence of transaction costs, the citizens experiencing the negative externalities would be willing to offer consumers Coasian bribes of up to β − β/*n* to purchase the product. However, if *n* is large, coordination and negotiation among the affected citizens create transaction costs that generally obstruct socially efficient outcomes.

Although a fully informed and benevolent government could offer a subsidy of β − β/*n* for purchases of the good, government authorities may have poor estimates of β or be influenced by ulterior motives. Privatization is unlikely to lead to social efficiency because, as discussed in Section 2, the privatization of oceans, forests, and other resources affected by carbon emissions is often unrealistic or ineffective.

An alternative solution would be to hold a referendum in which each citizen would vote on whether everyone should be required to purchase the product. A simple majority would determine the outcome. Each citizen's decision on the purchase mandate hinges on a criterion that differs from the private purchase decision because the vote determines whether everyone purchases the product. A citizen's successful vote in favor of the mandate leads to a benefit to that citizen of the private savings

plus the share of the per-capita social benefit the citizen receives from each mandated purchase times the number of purchases:

$$
\alpha + n(\beta/n) = \alpha + \beta.
$$

Hence, the benefit of voting in favor of the mandate equals the social benefit of purchasing the good, and each citizen will vote in favor if and only if that benefit exceeds the product price: α + β > ρ. In other words, citizens will make the socially optimal decision. Section 4 provides a numerical example.

The result holds even if the social benefit of purchasing the product differs across citizens. For example, suppose a purchase lowers some users' carbon footprint more than others'. That would be true in the case of electric cars if some car owners were replacing cars that polluted heavily and others were replacing cars with minimal emissions. Let *B* represent the discounted net present value of the benefits to society from a purchase by a citizen who creates high benefits, and *b* represent the discounted net present value of the benefits to society from a purchase by a citizen who creates low benefits. Let *h* be the number of citizens whose purchase creates high benefits, while a purchase by the remaining *n-h* citizens creates low benefits. The criterion for a socially optimal outcome is that each citizen votes in favor of the mandate if and only if α + β > ρ, with β representing the mean social benefit from the product.

Whether a citizen's purchase creates high or low benefits, a successful vote in favor of the mandate gives each citizen

$$\alpha + (hB)/n + \left[(n-h)b\right]/n = \alpha + \left[hB + (n-h)b\right]/n = \alpha + \bar{\beta}.$$

Thus, whether their purchase creates high or low benefits, citizens will vote in favor of the mandate if and only if the criterion for social optimality is met: α + β > ρ.

Because each citizen will vote for the socially optimal outcome, a referendum yields the best decision for society regardless of how many citizens vote. It also does not matter whether the associated externalities are positive or negative. As an example of the latter, consider the decision of whether car owners should be required to have their exhaust systems checked annually for excessive emissions. In that case α and β represent the private and social benefits of eliminating the negative externality of emissions, and the model as shown above demonstrates that a vote leads to the socially optimal outcome.

The efficient voter rule rests on the assumption that citizens are informed about the price of the product, ρ, their entirely private benefit, α, and the equally shared social benefit they receive from each user, β/*n*. The socially efficient outcome is not assured if citizens lack information on their own costs or benefits. Hidden costs or benefits will similarly derail the social efficiency of Coasian bargaining and privatization. The Pigouvian approach of taxes or subsidies may be preferable if the government holds information on the associated externalities and the citizens do not know their own costs and benefits. If neither the citizens nor the government knows the relevant values, none of these approaches can assure the appropriate decision and the path to a socially efficient outcome begins with a pursuit of information. Prohibitive information costs send the question into a realm of decision making under uncertainty that is beyond the scope of this article.

#### **4. Discussion**

The efficient voter rule applies to a broad set of environmental exigencies. Consider a numerical example. With single-use plastics overwhelming waste systems around the world, economies must decide whether to ban plastic shopping bags. Suppose each citizen receives \$200 worth of convenience annually from the use of plastic shopping bags. Suppose also that each citizen who does not use plastic shopping bags creates two types of benefits: \$50 worth of personal pride or "warm glow" from helping the environment, and \$500 worth of avoided environmental damage, a benefit that is spread evenly among 1000 citizens.

In this scenario, it is not socially optimal to use plastic shopping bags because each citizen's \$200 value of convenience from using the bags is less than the \$550 worth of pride and damage-avoidance to be gained by giving them up. Even so, citizens would use the bags because their \$200 private benefit would exceed their \$50.50 opportunity cost of bag use—the sum of \$50 worth of forgone pride and \$500/1000 = \$0.50 in forgone environmental benefits. An externality problem arises because each citizen fails to internalize the \$499.50 worth of environmental benefits a decision against bags would confer on the 999 other citizens.

Given the opportunity to vote on an economy-wide plastic bag ban, the citizens know that their decision could affect everyone's behavior, not just their own. The citizens would each weigh their \$200 loss of convenience from the ban against their \$50 gain in pride plus their \$0.50 share of each of 1000 citizens' environmental benefits from the ban, for a total of \$50 + 1000 × \$0.50 = \$550. Because \$200 < \$550, citizens would vote in favor of the ban, and the vote would achieve the socially optimal outcome.

To examine a case in which the proposed policy is not socially efficient, consider an alternative scenario in which each citizen's annual convenience from using plastic shopping bags is worth \$600. In that case, each citizen's \$550 annual benefit from a ban falls short of the \$600 cost of lost convenience. Given the opportunity to vote, citizens would weigh their \$600 loss from a ban against their \$550 benefit, and they would vote against the ban. Again, the vote would achieve the socially optimal outcome.

The viability of a voting solution depends on the cost of a referendum. It may be possible to add referendum items to the ballot for a scheduled election at a negligible cost. In the event that a referendum would require a special election involving substantial costs, the added expense might be prohibitive and an alternative solution may be preferable. Other approaches face similar considerations. As discussed in Section 2, Coasian bargaining can involve prohibitive transaction costs. Likewise, Pigouvian taxes and subsidies impose implementation costs and deadweight loss. When several contemplated approaches involve associated costs, a comparison of those costs will inform the choice among those options.

Note that the workings of the efficient voter rule are not reliant on a well-informed government. Authorities do not need to estimate the value of citizens' pride from not using plastic shopping bags or the value of citizens' convenience from using the bags. The government only needs to call a referendum. The citizens only need to know how bag use would affect them personally, which is a combination of the value of their lost pride, their convenience, and their share of the cost of everyone's environmental damage.

Myriad environmental policy decisions are well suited for voting solutions. Examples include a community's decision whether to welcome a natural gas pipeline to run through its soil (Anderson 2020). In 2020, California governor Gavin Newsom signed an executive order banning electric cars by the year 2035 (Sommer and Neuman 2020). The controversial decision was not made using a vote. To the extent that citizens are able to purchase the most basic electric cars for approximately the same price (e.g., Tesla plans to make a model available to everyone for \$25,000 by 2025), and that citizens face similar repercussions from pollution and climate change, a vote on a requirement that every car be electric would lead to a socially optimal outcome. The same is true for votes on mandates for solar panels, limits on deforestation, taxes on carbon, and regulations on lawn chemicals.

Votes could lead to efficient decisions about participation in environmental agreements as well. The United States withdrew from the Paris Agreement on climate change, while a majority of Americans preferred participation (Marlon et al. 2017). If an agreement would place a similar burden on citizens in terms of its influence on lifestyle, taxes, and product prices, and the agreement would provide uniformly distributed benefits by preventing climate change and offering every citizen a viable living environment, the efficient voter rule applies. Making any such decision with a mechanism that brings citizens to internalize the repercussions of their behavior serves the goal of allocative efficiency and reveals interests of the citizenry that legislators may not fully comprehend.

Modern practice demonstrates the viability of voting to reach decisions about environmental issues. In 2020, U.S. voters addressed topics including the reintroduction of gray wolves in wilderness areas and requirements that electric utilities obtain half of their energy from renewable sources (Lohan 2020). Other examples include referendums on nuclear power in Japan, Germany, Italy, Switzerland, and Sweden (Obe 2012; Cyranoski 2001). The widespread use of voting to make environmental decisions indicates that the associated costs are manageable, and the efficient voter rule speaks to the desirability of the resulting outcomes.

Voting is not the best approach for every situation. Some decisions involve costs or benefits for voters that they do not understand despite ambitious informational campaigns. Policies with inordinate benefits, externalities or abatement costs for a subset of the population are better addressed by alternative processes. For example, if a minority of voters would experience substantially higher benefits or costs from a decision than the majority of voters, the outcome could be socially inefficient. The severity of environmental problems warrants attention to an assortment of remedies that are effective in varying circumstances. The applicability of the efficient voter rule to common dilemmas makes it a noteworthy addition to existing options.

#### **5. Conclusions**

The prevalence of life-threatening externality problems demonstrates the need for new means of incentivizing socially optimal decisions. A vote among fully informed parties on the provision of a uniformly distributed positive externality (or on the abolishment of a uniformly distributed negative externality) at a given cost per party will reveal the socially efficient outcome, regardless of the amount of the externality attributable to each party. This efficient voter rule extends to a wide array of environmental policy decisions whose benefits and costs are shared similarly by community members. Some groups already make such decisions by vote, and the efficient voter rule can assure policymakers of socially efficient outcomes. For the many issues currently addressed with laissez-faire or authoritarian approaches, the efficient voter rule indicates that referendums could shepherd environmental policy toward better service of society's needs.

**Funding:** This research received no external funding.

**Conflicts of Interest:** The author declares no conflict of interest.

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