Two big developments this month suggest that investor interest in climate-related financial risk is at an all-time high. The first is Climate Action 100+, a new initiative led by Ceres and 225 investors with more than $26.3 trillion in assets under management to strengthen climate-related financial disclosures among the world’s largest corporations.
As investors work to increase reporting on climate risk, methane emissions will be top of mind. Methane, the main component of natural gas, is 84 times more potent than carbon dioxide when released to the atmosphere over a 20-year period – and is responsible for 25 percent of the warming we’re experiencing today.
That’s why the second development, this year’s Disclosing the Facts report, departed from its normal broad survey of chemical, air, water and community impact risks facing U.S. gas producers to do a deep-dive on methane reporting. (Full disclosure: I’m an acknowledged reviewer of the report.) The report is a joint effort between As You Sow, Boston Common Asset Management, and The Investor Environmental Health Network.
The report poses 13 questions that span both quantitative metrics and qualitative narrative with the aim of testing whether companies report a thorough, systematic approach to methane management. The disclosures of 28 U.S. producers are evaluated against these parameters and a company can earn one point for each of the 13 questions posed.
Four main takeaways emerge from the analysis:
- It’s a tale of two industries
The results of the report show a significant gap between the leading operators and those who are just not keeping pace with best practices. A methane vanguard has appeared, with companies like Apache, BHP, and Southwestern coming out on top. All three companies scored 12 out of a possible 13 points, with ConocoPhillips, Hess and Shell close behind all with 11 points.
And yet almost 35% of companies scored four points or less, including Chevron, Cabot, and EQT. Over a fifth of companies scored one point or less. Such a wide gap shows which companies understand methane to be a critical risk, and which don’t. As ESG considerations break further into the mainstream and lead investors to increasingly tilt portfolios towards higher ESG performers, such a spectrum of reporting performance has significant implications for lagging companies.
- Companies step up on leak detection and repair (LDAR) reporting
Two of the highest scoring questions involve the scope and methodologies companies use to conduct LDAR. Given that LDAR is a critical piece of any comprehensive emissions management program, this is a positive. It’s why EDF called for companies to report on the scope, frequency and methodology of LDAR in our 2016 Rising Risk report as one of four key metrics. Unfortunately, far fewer companies (12) report on the frequency of LDAR so there is work left to be done on the basics of LDAR disclosure.
- Companies off target on target setting
Only four companies surveyed in the report have a quantitative, time-bound emissions reduction targets. While this is up significantly from 2015 when EDF’s Rising Risk report found zero companies reporting targets, it still underscores the significant lack of targets among oil and gas operators. One thing my team will watch for in 2018 is companies stepping up on robust yet achievable targets that demonstrate credible intent and action on methane. The issue remains a sticking point between investors and operators as reflected in many shareholder resolutions that in part call for methane targets, but with mainstream institutions like State Street and the Task Force for Climate-Related Financial Disclosure (TCFD) adding to the call for emissions targets, the oil and gas industry won’t be able to maintain the status quo forever. While companies may approach target setting in various ways, time-bound methane-specific targets based on absolute emissions reductions from a baseline are best.
- Methane and climate governance remains weak
Also a low scorer is the question that asks companies to disclose “how it incentivizes greenhouse gas reductions at the board, management, and/or staff level through compensation structures?” Only eight out of 28 companies report on this topic. Investors increasingly understand that methane and climate pose significant financial risks to companies’ bottom lines in the same way that changes in technologies, currencies, and interests rates do. This is why investors are calling for climate competent boards to ensure governance expertise to recognize and manage these risks. Additionally, the TCFD highlights governance as one of its four “core elements” of climate-related financial disclosures. Investors see proper governance as the backbone that supports corporate strategy. No climate governance suggests no climate strategy.
The report highlights the pockets of progress made by some in industry, while underscoring how this forward movement is quite uneven. This reaffirms the need for tighter, not weaker, federal methane emissions rules that bring along industry laggards, the opposite of the current U.S. administration’s short-sighted efforts. As discussed in Disclosing the Facts, “To stay in the game in a decarbonizing global economy, the oil and gas industry must be quick to demonstrate responsiveness and demonstrable success in reducing greenhouse gas emissions, especially with regard to methane and its high global warming impact.” Couldn’t have said it better myself.
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