Financial Sector Focuses on Risks from Methane

Environmental concerns about methane emissions continue to grow as more people understand the negative climate implications of this incredibly potent greenhouse gas. Now the financial community is taking note of not only the environmental risks but the impact of methane emissions on the oil and gas industry’s bottom line. Methane leaks not only pollute the atmosphere, but every thousand cubic feet lost represents actual dollars being leaked into thin air—bad business any way you look at it.

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Source: Ash Waechter

Last week the Sustainability Accounting Standards Board (SASB)—a collaborative effort aimed at improving corporate performance on environmental, social and government issues—released their provisional accounting standards for the non-renewable resources sector, which includes oil and gas production.

These accounting standards guide companies on how to measure and disclose environmental, social, and governance (ESG) risks that impact a company’s financial performance. Their work highlights the growing demand amongst investors and stakeholders for companies to report information beyond mere financial metrics in order to provide a more holistic view of a company’s position.

Setting a New Standard

In the newly released standards, SASB writes that “the management of highly potent methane emissions from oil and gas [extraction and processing] systems has emerged as a major operational, reputational and regulatory risk for companies.” This language signals a shift in the way the financial sector views the impacts of the oil and gas industry.

Moreover, these standards are developed through a rigorous, multi-stakeholder process involving participants from the energy industry, investment community, accountants and NGOs, including EDF. According to SASB, participants in this industry working group represented companies with a combined market cap of more than $2 trillion, and investment firms with more than $3 trillion in assets under management. Such broad participation implies that a considerable portion of both industries now consider methane emissions a major environmental and financial issue. 

Why Now for Methane?

SASB’s approach to creating these standards comes from the traditional accounting and auditing focus on materiality. In layman’s terms, an issue is material if its omission in reporting would potentially influence the economic decision of an investor. Methane emissions—both their quantification and disclosure—are now being seen as a significant data point for making an investment decision.

SASB’s standards come on the heels of Goldman Sachs CEO Lloyd Blankfein’s very public comments about methane emissions. Speaking on The Charlie Rose Show following Goldman Sachs’ North American Energy Summit last month, Blankfein discussed the importance of methane emissions to the oil and gas industry, stating that getting permits without strong methane rules is a “very hollow victory.” He asserted that it’s in the industry’s interest to get strong, sensible regulations in place now because in the long run industry is going to need to address this issue one way or another. I couldn’t have said it better myself.

Having worked in both accounting firms and on Wall Street for a number of years prior to EDF, I can tell you from firsthand experience that these are communities where, traditionally, environmental issues are not top of mind. Wall Street is wholly and entirely focused on gauging and understanding risks, and creating returns for clients, period. When financiers and accountants start expressing public concern about an environmental issue, you can be sure that it has a direct impact on a company’s competitiveness.  The oil and gas industry should pay special attention to this dynamic.

The EPA will make a decision later this year on how to best obtain methane reductions from the oil and gas industry, including whether to move forward with new national rules.   Given the growing risks to the industry’s social license to operate and bottom line, it’s in their own interests to proactively address methane as suggested by Blankfein. The best way to do this, in our view, is by supporting smart, cost-effective national policies that will achieve signification reductions of methane emissions.