Earlier this year, we had the opportunity to sit down with Michael Cappucci, Senior Vice President of Compliance and Sustainable Investing at Harvard Management Company (HMC). In a recent blog post, Michael shared his outlook on the methane opportunity for oil and gas companies, along with his opinion on the pace of change within the industry.
Below is the second part of our conversation, where Michael offers new insights on investor ESG engagement and its correlation to portfolio performance. He also talks about private equity’s somewhat quiet stance on methane, and the sector’s potential to bring about change among mid-size operators who have yet to tackle methane emissions.
Kate: In the past few years, investor focus on material environmental risks like climate has soared, yet some are suggesting investor engagement efforts and shareholder resolutions on ESG issues are harmful to retail investors and the long-term interests of companies. What is your view on this?
Michael: We think that the current focus on environmental risks is very well aligned with companies’ long-term interests. For example, Exxon’s announcement of its methane emissions reduction targets came after a majority of shareholders voted in 2017 in favor of a resolution calling on Exxon to provide information to shareholders on the implications of two degree Celsius scenarios and a lower-carbon future. This was the culmination of a persistent, multi-year engagement by the Church of England and New York State pension funds. They showed real leadership that resulted in real action by the company. I can think of no better example of the benefits of shareholder engagement to Main Street investors.
I also take complaints about the harm to retail investors by ESG measures with a grain of salt. Far from being harmful to their investments, ESG measures have been shown to benefit company stakeholders. Research suggests that active stewardship by institutional investors benefits stakeholders by helping to overcome agency problems. Separate research has shown that firms with good performance on sustainability issues significantly outperform firms with poor performance and that filing shareholder proposals is effective at improving company performance on the focal ESG issue. So there is plenty of support for the value of ESG measures.
Kate: Methane continues to get more attention from industry, especially after a recent study found methane emissions to be 60 percent larger than EPA estimates. Do you think companies share this sense of urgency? Are the financial requirements needed to address methane a barrier to be overcome or more of a long term investment? Compared to other climate risk management solutions, how do companies view methane mitigation technologies from a cost/benefit standpoint, or do they take a more holistic view?
Michael: My sense from talking with experts is that most of the technology necessary to significantly reduce methane emissions is available today and is already cost-effective for most new operations. The challenge is updating old equipment and facilities. For example, the technology for replacing high-bleed pneumatic devices has been around for many years, and it is currently standard practice to install low-bleed or zero emission devices in all new projects. Retrofitting older equipment in lower production facilities with newer lower-emitting equipment presents a tougher set of challenges. Updating old equipment takes time and money. Some companies are operating with a sense of urgency, but it is on the timescale of a multinational integrated energy company. They just don’t move as quickly as investors or activists may want. That’s why it’s important to emphasize the business case. Each dollar of emitted methane that could be captured and sold is a dollar of revenue lost.
Effective monitoring presents a different set of challenges. In many cases, the relevant regulations require the companies to produce estimates, which, as the study showed, can significantly underestimate leakage. Right now, a cost-effective solution for continuous leak monitoring at industrial scale does not exist. That’s why investments in sensor and camera technology by EDF and others are so important. That’s also why, when we speak with companies, we encourage them to report on their emissions rates and leak detection targets. Only by setting ambitious goals and holding each other accountable will we solve these problems.
Kate: Beyond public equities, can you tell us about what investors should be looking for from General Partners (GPs) who manage private equity funds? Are GPs receptive to conversations about the risks of methane?
Michael: Private equity fits in between the major multinationals and the small mom and pop operators. The largest public operators get the most attention, as you would expect, but the vast majority of oil and gas wells in the U.S. are independently owned and operated. When we talked to managers, we looked to see that they were facile on ESG issues generally, and aware of the relevant risks and opportunities posed by methane. Frankly, I have been a bit surprised that private equity firms haven’t taken more of a lead role on methane, since, in addition to the environmental impact, methane is such a big operational and safety issue for oil producers. Many of the potential solutions, like the use of wellhead sensors to detect leaks, are cost-effective today, but still haven’t been widely adopted. Private equity firms tend to think of methane as just a legal or regulatory risk, which misses a big part of the picture. That’s another reason there needs to be stronger and consistent regulation.
Sean Wright, outgoing Senior Manager at EDF+Business contributed to this Q&A.
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