The ESG Advocate 011 - Lessons from Enron's CSR report 👀
I admit it. I read CSR reports for fun. As an English graduate, I find it fascinating to read the report and see how companies tie their efforts and data to impact.
I shared this bizarre aspect of myself with a customer, and we reviewed their CSR report together. It was an interesting exercise because I found that they were doing much more than they shared in their report!
Then, something Lee Ann Hagel wrote about Texas and investor voting decisions gave me an idea.
Did Enron, once the 7th largest company in the US while headquartered in Texas, have a CSR Report?
Sure enough, it did, and we can read it thanks to the Wayback Machine!
What lessons might it hold? Book some time first, you're going to need it.
Let's get to it!
A little primer on Enron 📉
On November 8, 2001, Enron stated that its income had been artificially inflated by $586M since 1997. This scandal is what most people remember.
This blatant Corporate Governance issue resulted in a federal investigation and, combined with other large accounting scandals, inspired the Sarbanes-Oxley Act (2002).
Earlier in 2001, Enron released their 2nd Corporate Responsibility Annual Report. This was 3 years before the UN Global Compact coined "ESG" in Who Cares Wins (coincidentally, none of Enron's top 10 investors contributed to that paper).
While the accounting scandal rocked the world, what I remember is something different.
I joined PG&E National Energy Group as the 32nd person hired in IT in late 1999. It was my second job out of college and my first at a national company. Over time, the company had 3 main lines of business: Energy Transmission, Gas Transmission, and, critical to the story, Energy Trading.
While I was largely focused on technology, I was surrounded by news about the California rolling power outages and rumors of untoward behavior on the energy trading floor. As it turns out, traders were manipulating the California energy markets and driving these outages.
By September 2002, things had come to a head with a front-page WSJ story about the market manipulation. Here is their explanation:
The story is a complicated one, but essentially boils down to this: Government created a complex market ripe for manipulation. Growing demand and tight supplies let energy sellers dictate -- and in some cases manipulate -- prices, unchecked by half-hearted and overmatched regulators. Each time policy makers tweaked the rules, energy sellers devised new ways to exploit the system.
Needless to say, it takes two parties to trade. On the other end of the Enron trade was a PG&E National Energy Group trader. By July 2003, we declared bankruptcy, too. I remember the CIO walking into a meeting and declaring it was time to start looking for another job.
While Enron is an example of unethical corporate behavior (Governance), the broader energy trading industry and those coordinated efforts impacted both the Environment (through outrageous energy costs at the expense of natural capital) and Social issues (rolling blackouts impacting citizens and services, plus several thousand people lost their jobs).
So, what was in their CSR report before the scandal came to light?
Enron's CSR Report (2000) 🍂
As I mentioned, the Wayback Machine has Enron's CSR report from 2001, which covers the reporting year 2000. This is before ESG (2004), SASB (2011), and the UN SDGs (2015), right around the time CDP (2000) and the GHG Protocol (2001) were going, but slightly after GRI (1997).
Glossy Cover Page
The cover page does not disappoint. It's green, it has leaves, and there is a tree trunk along the bottom.
This cover could be from any mid-tier ESG-ranked company in 2022. Besides the fall leaves signifying a consideration of nature, all of the ESG trigger words are there:
corporate values, social responsibility, diversity, community relations, transparency, ethics, environmental health & safety, human rights
Transparency and ethics were the ones that caught my attention immediately, and I suspect that you are snickering a little bit at this point. Still, in 2000 this report was an important way to communicate how well Enron understood its relationship with the world. As we'll see, it also obfuscated the brewing scandal.
Lesson 1: A splashy cover can't hide your problems.
The Introduction: Accolades and CEO Letter 👏
Accolades
It is always great to receive accolades for your work, but when it comes to ESG, accolades are less reflective of risk and don't necessarily show that you understand your business. They also don't necessarily show that others understand your business. Still, they are interesting tidbits for some stakeholders, like prospective employees. Since accolades aren't based on standards, getting attention from anywhere is easy.
Fortune magazine spotlighted Enron with the four awards above. In hindsight, the company's rise was meteoric but still showcases how meaningless awards are when you have severe internal issues.
There are sustainability and ESG awards with meaning, however. For example, "CDP is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts." CDP measures companies against carbon, forestry, and water impact and even publishes a non-disclosure list (which you do not want to be on). CDP also publishes a list of 'A' companies, which might be worth celebrating.
Lesson 2: Even some accolades are greenwashing, while others are relevant.
CEO Letter
I don't remember the last time I found a CSR report that didn't have the CEO kick it off with some aspirational statement. Enron's report was no different.
Their vision is clearly stated:
Enron has become a top global company, prompting us to shift our vision from being the World's Leading Energy Company to becoming the World's Leading Company
What's more fascinating is how close CEO Kenneth Lay comes to ESG across the three following statements. First, this blurb could be from any modern CSR report, especially with the callout to issues (sustainability) and challenges (risk).
In October 2000, we established a corporate responsibility task force, comprised of senior management and business unit representatives, to further explore social and environmental issues, challenges, and priorities.
Second, this statement hits on ESG as a key risk management concern, including the need to consider stakeholders, not just shareholders.
In 2001, we will continue to develop a systematic approach toward corporate responsibility, refine our implementation strategy, formalize stakeholder engagement, and strengthen our risk management practices.
Before finally closing with this:
We believe that fulfilling these commitments translates into added value for our business
I usually skip CEO letters to get to the real impact. I found it worth calling out here because Lay ties these issues together with value to the business. Look, not everything with ESG is a win-win. Certainly, sustainability can be concessionary. Enron believed attention to these issues was good for the business. At least, that's what we were led to believe.
Lesson 3: ESG need not exist to understand how ESG issues relate to risk and business value.
Executive Summary 🧑💼
This opening section recaps a little bit of their first sustainability report the previous year and candidly states this:
In addition, we changed the EHS performance reporting methodology to better reflect Enron’s transitory assets and diverse market strategy. Because of this change in methodology, the 1999 performance data had to be realigned.
Today's accountants are wildly afraid of this kind of ESG restatement. Yet, this is inevitable as companies look to make sense of ever-growing and more accurate activity data. This transparency is a testament to the cover page and shows improvement in understanding a particular material area. Improved reporting here is worth applauding.
Next, we're hit with a carbon disclosure. At the time, US companies were supposed to record and report emissions under this Title 40 regulation. I'm not very clear on this, but a cursory glance doesn't mention disclosing emissions to the public. Still, Enron collected, audited, and reported it.
In addition, we completed our first greenhouse gas emissions inventory to establish our baseline, verifying it through a respected third party consultant. Our 1999 CO2 inventory was 22.1 million tons.
It's impossible to tell how far they went to calculate these numbers, where they set boundaries, and what was included. Today, companies cite adherence to TCFD, and we assume they know what they're doing.
This section also lists how they have formalized an ESG-like program. Here's a shortened version.
Task force
Board oversight (likely not real per this investigation)
ESG/purpose in talent acquisition
Engaging employees on the topic
Disseminating what appears to be material information on an intranet
Engaging managers on 'risks and opportunities'
Established an internet page for external stakeholders
Engaged in advocacy with NGOs
Come on, ARE YOU KIDDING ME? This communicates a clear, coordinated company-wide effort to mobilize around ESG internally and externally.
Then comes a stunning admission, something rarely seen in CSR reports.
Despite significant capital improvements and enhanced operational procedures subsequent to taking over operations from the government, the Transredes pipeline in Bolivia, in which Enron holds an indirect twenty-five percent stake, had an unfortunate spill incident that resulted in over 29,000 barrels of oil being spilled.
They admit they messed up. A whole page of the report covers this error and their efforts to fix it (page 17). It includes this nugget among the five steps they are taking:
a commitment to sustainable development
The above references sustainable development 14 years before the UN SDGs.
The fourth step is worth a look.
the implementation of an indigenous people’s plan designed to prevent or mitigate possible negative impacts to social, economic, and cultural resources in the pipeline project area
This is something that a lot of companies miss. It isn't just about the tactical environmental issue at hand but a myriad of considerations, including aspects of social justice and even biodiversity. In hindsight, this was just greenwashing in the pursuit of reputational protection. From an ESG perspective, the risks around the Transredes should have initiated a pullback or shift, but by 2002, it hadn't. An Enron spokesperson declared, "It's business as usual."🤦
The actual impact of this event cannot be understated, despite Enron's $50M commitment to the cleanup efforts. The most recent update I could find (from 2015) was riddled with uncertainty, and I have no idea if that $50M was ever delivered. Eventually, Enron's executives were sued for fraud by Bolivia.
Lesson 4: How companies react to crises speaks volumes about their understanding of risk (ESG) and the values they espouse.
Lastly, this section wraps with short-term goals across the S and G.
Something you don't see too often is short-term goals like this. ESG runs counter to short-term reporting cycles due to the complex issues at hand and most companies have ambitious goals aligned to long-term, complex operational reductions or shifting culture. I'd wager that this is one area completely different from today. In fact, issues with ESG and short-termism was called out in Who Cares Wins:
Intangible aspects related to ESG issues play an increasingly important role in value creation but that analysts’ short-term focus hinders them in recognizing this trend.
Who We Are 🌐
This section is short and focused on employee demographics, sort of. I would expect DEI data here, but it comes later. Instead, this section is focused on how far-reaching Enron was.
Collectively, Enron employees speak seventy-one languages.
Great, but apparently, this diverse workforce wasn't leveraged to its full potential.
All there is to say about this section is that the leaf in the background of each circle is REALLY confusing.
Lesson 5: Diversity, Equity, and Inclusion are important to the business and stakeholders, but you will probably get it wrong. Try anyway.
Financial Highlights 📊
CSR reports don't typically contain a financial statement, but regulatory draft proposals from the SEC and ISSB push for sustainability information alongside financials. This is an interesting reverse precursor to that. Its purpose here appears to be to remind stakeholders that these issues are not separate from the bottom line, even if the correlation isn't beyond its mere existence.
What follows in this section is largely worth skipping. It informs on purpose and policies, like EHS, Code of Ethics, Audits, and more, but without clear examples of any real impact.
Overall, this section is a big bust.
Lesson 6: Don't showcase policies. Show how your policies have an impact.
Climate Change 🔥
Lately, the public mindset has shifted around climate change. In 2001 though, Enron came up with an interesting way to straddle the uncertainty.
We are not climate scientists, and as such, do not endorse any specific scientific viewpoint. However, we believe that the lack of scientific certainty on climate change does not justify inaction. Businesses and other institutions can and should take concrete steps now to reduce emissions by investing in new, more efficient products, practices, technologies and administrative systems.
Unsurprisingly, this section is full of platitudes, a hallmark of climate content in CSR reports. However, for the time, it has some interesting notes.
First, they call for "market-based approaches as a cost-effective means to reduce emissions." It is unlikely that carbon offset markets are what they meant here, but it sounds very close.
Next, they mention their advocacy across governments and as "an active participant in business organizations such as the Pew Center on Global Climate Change, of which we are a founding member, and the Business Council for Sustainable Energy." Advocacy is a crucial method to advance sustainability, not to mention aligned to SDG 17.
They also hit on material reduction issues. Enron was an energy company, so it covered three material areas: Efficient, Lower-Emissions Power Generation, Delivering Natural Gas and Low-Emissions Energy, and Energy Efficiency.
Lesson 7: We are well past uncertainty with climate change. Don't be afraid to take a real stand.
Also, understand your material climate risk!
EHS Performance 📊
Enron had a lot of business lines, including some units where EHS issues were more material (obviously, it is less so on a trading floor than in energy operations). The first page of this section is accolades and awards, which do not necessarily reflect reality.
The second and third pages contain material data. Let's start with the first two: Global Number of Manhours Worked and Global Vehicle Miles driven. While this operational data is related to EHS, this type of data would also inform emissions calculations today.
There are several charts in this area for the two reporting periods. Still, the range of material data is quite interesting, including accident/incident rates, disclosures on emissions, waste, and more. Overall, there are 18 total charts with data!
While disclosures are great and help you understand where to improve, there isn't enough data here to make any inference.
Let's take a side step and compare it to other reports.
Incidents, even vehicle accidents, are reported typically. Emissions are almost always reported, but companies struggle with the dual complex and simple nature of the GHG Protocol. I haven't seen some of these negative metrics be so open, though, like fines paid and reportable spills. Waste is hit or miss unless you make a product with some kind of packaging.
Today, companies are gathering data like this in Excel. I have no idea how Enron collected this data, but it sure looks like the effort was there. It makes me wonder just how hard the SEC's new proposed climate rule is if Enron gathered data like this in 2000.
Lesson 8: Show stakeholders, including shareholders, that you understand your business and its risk through disclosures. Take it further and track change and action.
Environmental Stewardship 🐊
This section kicks off with something companies even today still struggle with, the impact of operations on biodiversity. It mentions "a two-year energy and biodiversity initiative with four other companies and five conservation organizations."
Side note: I'd be remiss if I didn't call out that there is a Task Force on Nature-related Financial Disclosures (TNFD). Also, with today's technology, it might not be as hard to investigate this as you might think.
After, Enron writes about sustainability projects and environmental mitigation related to the Florida Gas Transmission (FGT) pipeline project with this primer. It's interesting but more philanthropic than material, except for the brief description of testing, which I would expect to be standard.
Every weld on the pipeline was thoroughly inspected, and the pipeline was filled with water and tested at levels far exceeding potential operating pressures before natural gas was ever introduced into the pipeline.
Today, FGT is owned by two companies, Energy Transfer and Kinder Morgan. While both have ESG reports (from 2020 and 2021, respectively), neither report mentions this 2020 FGT leak or appears to have much information on FGT. Pipelines like this represent critical infrastructure and have material issues, as we saw with the 2021 Colonial Pipeline hack.
In other words, the impact of this pipeline on the environment and its risks have been lost to time.
Lesson 9: If you hold up examples of sustainability projects, consider the ongoing stakeholder impact. Stakeholders may care about the environmental impact, and shareholders will look for ongoing risks and crises.
Sustainability 🆕
Ironically, an overlooked part of ESG comes through in the Sustainability section: Opportunity.
We look at issues of sustainability and corporate responsibility not just as sources of risk, but a source of opportunity.
Enron describes several divisions and investments in this section to address these issues at scale and capture revenue.
Investing
Enron Investment Partners was an investment vehicle focused on "providing equity capital to this underserved market." Today, some investors do this through an investment vehicle, like Morgan Stanley's Next Level Fund (I'm on the LP Advisory Committee).
I would expect more data and marketing around the impact if this were in a report today.
Energy Solutions
Enron goes on to describe specific divisions that are focused on driving sustainability as an opportunity. This includes an Emissions Management Service and Energy Services. These solutions are focused on compliance and reductions/management, respectively.
Polaroid describes the value of Energy Services here:
Polaroid's focus is the imaging business, not the energy business. As the leader in the energy services industry, Enron will do a better, more economical job of managing Polaroid's facilities so that we can focus on continuing our strong growth.
Lesson 10: One company's or stakeholder's ESG issues can be another company's opportunity.
Social Responsibility 🌈
In 2000, I'd say Enron communicated a pretty good understanding of the S in ESG.
...our businesses and projects will strive to engage those affected by our business to better understand how our decisions affect issues such as economic development, indigenous populations, human rights, and workforce development and diversity. This also means that we will manage and minimize the impacts of our operations; work to invest in our communities; promote diversity within the workplace; strive to attract the best and brightest talent; and identify ways to translate social trends and issues into business opportunities.
This covers the its impact on the world and the impact of the world on the company well.
Human Rights and Indigenous Rights
For Human Rights, they are telling a pretty good story: advocacy, supplier guidelines (think modern supplier engagement), and even a planned integration of this issue into risk management, which is core ESG. Human rights issues can be highly disruptive across the supply chain and present a massive reputational risk for all involved.
The Indigenous Rights section is concise and quickly moves into an example with its operations at the Dabhol Power Company in India. However, despite the apparent thoughtful approach outlined, the project had severe governance issues, unsurprisingly being accused of "corporate profiteering over public good."
Lesson 10: Propping up one category of ESG at the expense of others will not work.
Ethics - Anti-Corruption and Bribery Policies and Training
Like many companies, Enron had a 'code of conduct'-type training, but I just can't cover it. We all know what happened. This was clear ethics-washing.
Employee Diversity
Finally, we come to the diversity data. Had I been the author, I would've moved this section to "Who We Are." There are no charts here, but the data is there.
Forty percent of employees with the title of Manager or above are minorities and women. Forty-eight percent of all employees are minorities and women. Thirteen percent of Vice Presidents are women and eight percent are minorities. Nineteen percent of senior executives (Managing Director/Senior Vice President/Executive Vice President/CXO) are women and minorities. Four out of seventeen Enron board members are women and minorities.
This data is what I expect to see in modern CSR reports but in graph format and over time. As a recap, they reported:
overall diversity
diverse managers
diversity in leadership
board diversity
Regarding employee diversity, remember that there are non-public disclosures already required in the US by the US Department of Labor's EEOC since 1966.
The EEOC has been collecting Component 1 data from EEO-1 filers on an annual basis since 1966. Component 1 EEO-1 data serves as a valuable resource for EEOC's analysis of industries and regions as well as for investigators in assessing allegation of discrimination.
I don't believe Enron would have had any issues aligning with Nasdaq's diversity disclosure.
Still, diversity data does not an equity program make. Many companies report out Employee Resource Groups that leadership support. Pay equity is one area that most companies are miles away from publicly reporting today.
Lesson 11: Seek diverse voices with expertise to create a robust DEI program that treats employees as assets, not liabilities.
Supplier Diversity
I'm surprised to see this back in 2000, but Enron had a program focused on supplier diversity. It included:
A dedicated staff member in 'the Office of Supplier Diversity'
A goal of 15% "of overall expenditures made with certified minority or women-owned business enterprises"
A mentoring program for those businesses (👍)
This predates an oft-cited study by The Hackett Group on the positive benefits of supplier diversity by about 5 years (2006) and 21 years before conservative think tanks decided to sue Starbucks for those same practices (2022).
Many companies now run a variation on this mentoring program to help their suppliers understand why these issues matter and foster disclosure. I'm a huge fan of this engagement model.
Community Relations 🏘️
This last section largely covers philanthropic efforts and giving. Every CSR report tends to have this information. Sometimes it appears embedded with the relevant topic (E, S, or G). Other times, it appears in a section like this.
I'm not going to dive into these efforts because, largely, they are immaterial. Still, there are several examples of community engagement around the area of the Dabhol Power Company, which I feel are important and could have been a little more material.
Lesson 12: Philanthropic efforts are important for employees, customers, and communities in which you operate. Material philanthropic efforts do exist and show an understanding of your business.
Enron: A cautionary tale 📖
Calling Enron a cautionary tale is a huge understatement. Its downfall harkened a new era of regulatory scrutiny. Yet, if you had read its financials and CSR report prior, you would've thought Enron was an excellent investment and managed its risks while helping save the world.
From an investment perspective, I'm not sure that Enron would have been in many true ESG-focused funds, but it may have arrived in those considering ESG alongside other factors. The 'business as usual' quote regarding Transredes should have been enough to tip off a risk-savvy investor that something was amiss with their ESG risk management. Yet, they were creating ESG opportunities.
Would Enron appear in Sustainability and Impact-focused ETFs today? Maybe, but maybe not. There is no 'adjusted for inflation' evaluation we could do here, but Enron talked a good game. I suspect that internal and external stakeholders would have held them accountable for their digressions, even amidst the well-communicated plans and disclosures.
And so, we arrive at why Enron is a cautionary tale for boards and sustainability leaders. Even with ambition, purpose, tangible projects, engagement, a thoughtful approach, good planning, and metrics disclosures, there is much work to do. Enron didn't put values or risk before profits. It also didn't thoughtfully prioritize ESG issues but considered them short-term, tactical issues to address in pursuing growth.
If nothing else, Enron's CSR report shows how spinning a good story can't hide severe ESG risks brewing behind the scenes. It is also a lasting reminder of how complex and interwoven E, S, and G issues are.
As the ESG backlash continues and new investors return towards 'pure' growth strategies, we'd all do well to look back at Enron, recognize our risks, and lean into the possibilities.
