In today’s evolving financial landscape, one concept has begun to dramatically reshape how investment decisions are made, ESG. Environmental, Social, and Governance criteria are no longer optional for major investors.
They’re guiding where money flows, and more importantly, where it doesn’t. One sector feeling the pressure? Oil and gas pipelines. From Dakota Access to EACOP, pipeline projects around the world are being scrutinized and defunded due to poor ESG performance.
In this blog, we’ll explore how ESG principles are impacting the funding of pipeline projects, why investors are pulling out, and what it means for the future of fossil fuel infrastructure.
Why ESG Matters in the Pipeline Conversation?
ESG is a term that is being regularly used around to measure the impact and viability of any project in factors other than money.
Environmental Impact
All over the world we have seen that the pipelines are very infamous for various environmental risks that they possess. These pipelines are often prone to oil spills, groundwater contamination, methane leaks and many more. Over the period of time we have seen some major incidents such as the Enbridge Kalamazoo River spill in Michigan or the Mariner East pipeline leaks.
These incidents have drawn the attention of the world towards the environmental costs of creating pipelines. Not only that, the pipeline infrastructure supports the continued extraction and transport of fossil fuels, making them a direct threat to global climate goals.
Social & Indigenous Rights
Apart from the environmental concerns the pipeline project also poses many social concerns too. Many of these pipelines are laid down on the Indigenous lands, sparking legal battles, protests, and even violent crackdowns.
You surely must have heard about the Dakota Access Pipeline and the Coastal GasLink project in Canada. Both of these projects are a prime example for where the Indigenous communities have raised their concerns over land rights and environmental degradation.
Governance Challenges
Finally, around these pipeline projects we have seen that there is lack of transparency, local communities are not engaged properly and lots of governance missteps. All of these have made the pipeline as ESG redflags. Investors now don’t want to be associated with such projects that are facing public backlash, regulatory scrutiny, or litigation.
How ESG Criteria Are Defunding Pipelines?
Now that we have understood what ESG, let’s have a deeper look at the three ways through which ESG is defunding the pipelines:
1. Capital Divestment
Recently, we have seen that lots of investors are now actively selling off their assets tied to environmentally and socially harmful projects. Some of the examples include:
- Norway’s largest pension fund KLO has recently divested from the companies that were behind the Dakota Access Pipeline in 2017 over Indigenous rights violations.
- Major German asset manager Union Investment just dropped TotalEnergies from its sustainable investment funds in 2024 due to concerns around the East African Crude Oil Pipeline (EACOP).
- These were some major highlights, over 1,500 institutions that are controlling more than $40 trillion have pledged disinvestment in fossil fuels in one form or another.
These moves are more than just a symbolic representation. They actually put a dent on the pipeline projects, by increasing the cost of capital and making the future investment more riskier.
2. Shareholder Pressure & Engagement
In various cases we have seen that the investors choose to stay with the company but they push for changes internally. One great example for the same is Engine No. 1, a small activist hedge fund.
This particular fund led a successful campaign in order to elect the climate conscious board members at the ExxonMobil in 2021. They successfully pressured the oil giant to rethink their strategy.
3. ESG-Linked Financing Conditions
Apart from disinvestment, the financing institutions such as banks and NBFCs are also looking for ESG performance. We can also see the impact of ESG norms on the bond market.
As Enbridge, a major Canadian pipeline operator, issued a $1 billion sustainability-linked bond. Now if you purchase this bond your interest payments will increase if the company fails to meet the ESG target.
The Ripple Effects of ESG Defunding
Higher Cost of Capital
When the ESG focused funds pull out their fundings, the pipeline operators are left open to a whole new world of problems. They have reduced access to funding, high interest rates and their stock value also declines. All this together makes it hard for them to build or maintain the gas and oil pipelines.
Pressure to Change
Seeing this trend the Oil and gas companies are now under major pressure to change their whole model. They are being pushed to shift towards renewable energy, hydrogen transport, and carbon-neutral technologies. Some big companies are responding to this pressure while others do not.
Political Pushback
While the whole world is working towards boycotting dirty energy, there are some who are still working towards protecting it. In the US, conservative states like Texas have started to penalize the banks and investors who are currently boycotting fossil fuels. Currently, we are in a battle ground between the free-market ESG supporters and pro-fossil-fuel lawmakers.
Community Empowerment
Another, great result of all this disinvestment is that return of power to local communities and Indigenous groups. The concerns of this particular group are now being taken seriously, they are not just activists, but now seen as the stakeholders. They now hold the power to stop the billion dollar projects
The financial world is waking up. ESG is not just a buzzword anymore, it’s a powerful filter for how we build our future. Pipelines that ignore environmental risks, disrespect communities, or dodge accountability are finding themselves on the wrong side of investors.
Whether through divestment, activism, or smarter financing, ESG criteria are changing the rules. And pipelines are learning that the flow of money is just as important as the flow of oil.
