In a recent blog post, I discussed three ways investors can have a positive impact on the environment. One of those levers is engagement, or using your influence with the companies you invest in to help ensure those companies are being managed both profitably and sustainably.
Principles for Responsible Investment (PRI) is a recognized global authority on how investors can engage with companies to manage environmental risks. Environmental Defense Fund (EDF) is partnering with PRI to release a new how-to guide for engaging with oil and gas companies globally on methane emissions.
As investor scrutiny ramps up on all forms of climate risk, investors globally are becoming more aware of and concerned about the material risks that methane poses to portfolios, detailed in EDF’s Rising Risk report. That report found methane poses a series of reputational, regulatory and financial risks to operators and their investors. Methane, 84 times more powerful than carbon dioxide, is a potent form of carbon risk, and left unmanaged it can literally leak away shareholder value.
An Investor’s Guide to Methane responds to growing demand from investors globally for practical guidance on how to not only manage these risks through company engagement, but surface opportunities as well. Investors want to understand how companies should measure their emissions, what they should be reporting, and what kinds of best management practices they should adopt to keep more product in the pipeline. This guide provides details on what leading methane management looks like.
Just as investors use quarterly earnings to understand who the most profitable companies are, investors can use the performance benchmarking framework included in the guide to help differentiate relative methane performance. Because methane management is such a powerful proxy for operational excellence, understanding relative performance on the issue can be a helpful insight for investment decision-making. As such, early-engagers will have a first-mover advantage. This framework is also designed to help identify concrete next steps companies can take to improve management, such as using additional emissions reductions technologies or adopting methane reporting metrics.
The guide also provides detailed questions to help support constructive dialogue. For example, EDF’s Rising Risk report found that as of early 2016, zero of the leading 65 companies in the US had disclosed a methane reduction target. The guide includes questions such as “What form of a quantitative methane reduction target would work best for your company?” that can help an operator think through how to best set an ambitious but achievable target.
As part of their engagement, investors should expect all operators to measure, report and reduce their emissions:
Measure – We’ve all heard the phrase “what gets measured, gets managed.” Getting accurate information on a company’s methane emissions is the first step in understanding the extent of the problem, uncovering hidden risks, and identifying opportunities to bring more product to the bottom line. The more accurate the information, the better positioned companies will be to effectively reduce emissions. Expert level methane management requires companies to utilize robust direct measurement, or the process of getting out into the field to measure emissions, as this is more accurate than desk-top estimates.
Report – Investors require actionable methane information in order to understand the relative performance of operators, and leading companies will demonstrate how they are managing methane risk. Operators should set and disclose a methane reduction target, and report how they plan to meet that target. For example, expert level operators will report the frequency, scope and methodology for their leak detection and repair (LDAR) programs as one best practice to limit emissions.
Reduce – Minimizing methane emissions is highly cost effective, and can be done using proven, off the shelf technologies. Because methane is both pollutant and product, many of these technologies have a positive payback. Investors should feel confident in encouraging companies to reduce emissions knowing they can do so in a shareholder-friendly manner. Leading operators will show a declining trend in emissions, frequently inspect assets for leaks, join global voluntary initiatives like the Oil and Gas Methane Partnership, and support regulations to reduce emissions.
The key points from these three buckets, as well as related engagement discussion questions, are summarized in a 2-page cheat sheet summary investors can take to meetings with them.
Methane is the next frontier for investor engagement on climate and carbon risk. Unmanaged emissions of methane can directly undermine the natural gas’ ability to play a role in a lower-carbon energy economy, impair social license to operate and be a proxy for operational inefficiency. Conversely, active methane management can inspire investor and stakeholder confidence, keep product in the pipeline and prepare companies to operate in an increasingly carbon-constrained, regulated world.
Investors should utilize their influence, and this guide, to ensure companies are proactively managing methane risks and leveraging opportunities.
Follow Sean Wright on Twitter, @SeanWright23
Additional reading: Why energy investors need to manage methane as a Rising Risk