As Investors Benchmark Methane Management, Where Will Companies Stand?

Ben Ratner headshotGlobal attention on oil and gas methane emissions is taking off. The International Energy Agency has recognized that  “the potential for natural gas to play a credible role in the transition to a decarbonized energy system fundamentally depends on minimizing these [methane] emissions.” North American heads of state recently committed to reduce oil and gas methane emissions 45% by 2025. And the U.S. Environmental Protection Agency has issued standards for methane from new sources, while Canada and Mexico begin executing their commitment to develop regulations necessary to achieve waste-cutting emission reductions.

With a rising wave of public and policy maker scrutiny, it’s no surprise that methane has become a hot topic in investor circles. A group of 76 investors representing $3.6T assets under management publicly supported the North American methane announcement. And a much broader set of investors, from large institutional investors to private equity, and socially responsible investors to large banks, are turning their attention to reading up on the issue and engaging operator management in quiet but important conversations on managing this rising risk. As leading global asset management company Allianz Global noted to its clients, methane emissions are “the next frontier for the Oil & Gas industry” and there is an “urgent need to act."

EDF has long recognized the power of stakeholders with an economic incentive to drive progress that helps people and nature prosper. That’s why we are devoting a growing effort to educate oil and gas investors on why methane risk matters and what they can do to address it through constructive engagement with operators across the world.

In a post-Paris, carbon constrained world where investors constantly demand more and better information on all manner of corporate responses to climate risk, it’s only a matter of time until investors have the data at their fingertips to use the quality of methane management as one additional input in decision making processes, even including which companies to buy or sell.

If that seems like a stretch, just consider: an operator managing methane aggressively is better poised for smooth regulatory compliance, while also reaping operational efficiencies through waste reduction, providing evidence they can be part of the transition to a lower carbon energy economy, showing neighbors they are helping to reduce air pollution, and even appealing to top talent in an environmentally conscious workforce.

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In the meantime, EDF has released a new resource in partnership with the Principles for Responsible Investment: “An Investor’s Guide to Methane: Engaging with Oil and Gas Companies to Manage a Rising Risk”, which builds on our landmark report “Rising Risk: Improving Methane Disclosure in the Oil and Gas Industry.” While the primary audience is investors who represent growing demand for improved methane management (and indeed gave us the idea for creating a guide in the first place), the Guide is public for a reason – operators who want to get ahead of the curve can review it for themselves.

Our Guide is based on three simple ideas. 1) Methane poses a material risk, in the form of financial, reputational, and regulatory risk. 2) Managing the risk well requires directly measuring emissions, transparently reporting the plan of action and its results, and actively reducing emissions. 3) Continuous improvement is key: each company can advance along the spectrum from beginner, to intermediate, to advanced, on each dimension of measure, report, reduce.

As operators review the Guide, they can use it to benchmark where they are today, prepare for dialogue with investors, and develop an action plan for continuous improvement. Whether motivated by investor relations, operational enhancements, regulatory positioning, or simply doing the right thing, we hope operators will find the guide to be a useful tool. Competitive advantage is at stake, and there’s no time to waste.


Follow Ben Ratner on Twitter, @RatnerBen


 

Managing the Rising Risk of Methane, What Investors Can Do

sean-headshotIn 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.

summary-performance-assessment-toolThe 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.

managing methane riskMethane 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.

Download An Investor's Guide to Methane


Follow Sean Wright on Twitter, @SeanWright23


Additional reading: Why energy investors need to manage methane as a Rising Risk

 

Old Excuses on Policy Advocacy Don’t Work Anymore

I admire corporate sustainability leaders who, as hockey great Wayne Gretzky once said, know how to “skate to where the puck is going, not where it has been.”

I’m optimistic about our future when I see courageous leaders at companies like Unilever, Pepsi, Mars and others lead the way by looking beyond short-term profits for long-term success and publicly advocating for the smart regulatory and policy changes required to preserve the natural systems that people, communities and companies need to thrive.

Yet, there are too many companies that still rely on old excuses when asked to take a public stand on energy and environmental policy.

To be a bold leader in the 21st century requires a strong voice on the most pressing environmental issues of the day. It’s no longer good enough to put a green label on a product or declare in an annual report that your company is making the world a better place. It’s time to take the next leadership step.

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At Environmental Defense Fund (EDF), we like to call the next step of sustainability leadership the business policy nexus. It simply means that your company has aligned your sustainability goals and strategies with your external engagement on policy.

If your company isn’t operating in the business policy nexus, it’s time to retire the following excuses and go public in support of forward-facing environmental policies:

Excuse #1 "We're not political."

Companies can no longer be silent on issues like the environment. Customers expect the brands and companies they love to stand for something and to show leadership on issues that matter to them.

In previous decades, this excuse might have sounded more like, “we want Democrats and Republican to buy our products.” However, this recent working paper by researchers at Duke and Harvard suggests that C.E.O. activism can sway public opinion — and even increase interest in buying a company’s products.

Corporate neutrality on the issues that matter may be outdated. If you don’t believe me, maybe ask Paul Polman of Unilever or Indra Nooyi of Pepsi or Yvon Chouinard of Patagonia. Their corporate voices ring loud and clear when it comes time to stand up for the environment.

Excuse #2 "It's not part of our core business."

In a 2015 article the head of government relations for one of the world’s biggest companies told the Guardian: “There’s a reluctance if a regulation doesn’t get into your core competency to get into somebody else’s backyard. It’s an unspoken acknowledgment that you stick to your knitting.”

The earth is everyone’s backyard. And the state of our environment affects every business.

Just take a look at the companies who have backed the Clean Power Plan. “Clean energy” isn’t the core competency of global giants like Amazon, General Mills, Nestle, or Levis, but these companies and many others made their corporate voices heard for the good of business and society.

Excuse #3 “Our government affairs team deals with policy.”

Some corporate leaders have been passing the buck to other departments, other industries and other leaders for too long.

You have a responsibility to inspire everyone in your organization to maximize the triple bottom line: profit, people and planet.

Leaders find it easy to measure profit; measuring social and environmental impact is a little harder. Without good data, no one in a company feels comfortable taking the lead on policy.

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This is where an NGO like EDF can help make a difference. EDF has built a framework for corporate sustainability success that encompasses science, strategy, and systems to create measurable environmental and business benefits. Your organization can use this framework to become a sustainability leader and confidently stand up for smart climate policy that addresses your future business risks.

The old excuses don’t work anymore. So stand up for change and advocate for policies that will help us overcome the most serious environmental challenges we face. The issues are too important; the consequences for little or no action are too serious.

Follow Tom Murray on Twitter: @tpmurray

Further reading:

Why Investments in Agricultural Carbon Markets Make Good Business Sense

sarasnider-287x377Over the past decade, private investment in conservation has more than doubled, with sustainable forestry and agriculture investments as the main drivers of growth. This unprecedented expansion in “impact investing” or “conservation finance” has occurred as investors seek ROI that can also benefit the environment.  According to Credit Suisse, sustainable agriculture is particularly appealing to investors as it offers a wider array of risk mitigation approaches than sectors such as energy and transportation.

Yet despite this boom, there has been very little investment from private capital in emerging ecosystems markets, especially in the agricultural sector.

We’ve blogged before about the benefits growers – and the environment – realize from participating in agricultural carbon markets or habitat exchanges. But here’s why the private sector, food companies and retailers should invest in agricultural carbon markets. Read more

With Green Bonds, Legitimacy Comes to Those Who Verify

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.


Namrita KapurGreen bonds have been hailed as a key vehicle for driving clean energy investments both before and after the signing of the Paris climate agreement. And the range of organizations utilizing them continues to diversify – Apple issued its own $1.5 billion bond last month to finance energy efficiency and renewable energy projects for its operations. But as the pool of bonds issued each year grows, investors are increasingly concerned that clear standards are needed.

Through 2013, the World Bank was the primary issuer of green bonds. The simplicity of the market made it easier to verify the environmental benefits. As the market has grown, so has the need for institutionalizing transparency to validate the promised benefits.

While roughly two-thirds of global green bonds issued in 2015 received either third-party verification or second-party opinion, only two U.S. municipal offerings received any external review, casting doubts on the U.S. market’s credibility. Investors like insurance firm Allianz are concerned that many of the funds earmarked for sustainable development projects are not achieving the desired impact, and are calling for strong standards to help provide the market with increased certainty.

Bankers and investors are driving progress on transparency Read more

Green Bonds: A Year in Review

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.


Green bonds were a glimmer in the eye for investors when we first reported on them two years ago, but since then these sustainability-oriented debt financing instruments have exploded onto the investment scene. In fact green bonds were held up as a key instrument to keeping warming below the global high-end target of 2°C at COP21.

career-544952_640-300x211In the past year, the market to buy these bonds — which, by design, are linked to an environmental benefit — has significantly grown and matured. Over the course of 2015, the green bond market expanded from $37 billion to $42.4 billion, with much of this growth due to diversification — both in who is issuing them and for what wider types of projects.

While expansion of this market is encouraging, its growth is much slower than most experts had originally anticipated. Early predictions for 2015 had the green bond market booming to $80 billion, or even $100 billion. Instead, numbers seem to have stagnated. What does the future hold for this market, especially in the wake of COP21? Read more

KKR Expands Its Green Portfolio by Shepherding Green Solutions

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.


We’re proud to see the Green Portfolio Program, an initiative we helped kickstart in 2008 with private equity firm Kravis Kohlberg & Roberts (KKR), evolve to identify and implement more efficient practices in its portfolio companies that drive business value and reduce environmental impacts. Last week, KKR relaunched this initiative as the Green Solutions Platform (GSP), expanding its mission to include companies outside of its private equity portfolio, as well as a wider range of business and environmental benefits.

kkr_logo_13932KKR announced a shift in its investment strategy in its latest ESG report, and the relaunch of the GSP gives us a first glimpse into what that means in practice. The GSP’s scope has expanded beyond finding energy, water and waste reductions – what KKR refers to as “eco-efficiency projects” – to include portfolio company projects that can drive both top-line and environmental gains (“eco-innovation”) and companies whose core business drives a positive environmental impact (“eco-solutions”).

Much like GE with its Ecomagination product line or social enterprises focused on delivering renewable energy or clean water, the GSP’s new direction has the potential to support business activity that, by its nature, curbs climate impacts and creates value for communities and companies alike.

In just eight short years, 27 KKR portfolio companies reported that they achieved nearly $1.2 billion in avoided costs and added revenue, and avoided more than 2.3 million metric tons of greenhouse gas emissions, 27 million cubic meters of water use, and 6.3 million tons of waste through eco-efficiency efforts. We’re heartened to see an already-forward looking firm push its boundaries further in the pursuit of greater environmental gains, and look forward to seeing what innovations emerge from the Green Solutions Platform.

Innovations in Sustainable Finance: The View From SOCAP15

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.


SOCAP logoI recently returned from SOCAP15, an annual conference “at the intersection of money + meaning”… in other words, a good place to be if you’re interested in how to harness markets to deliver financial, as well as social and environmental, returns. A record 2,600 attendees turned up this year, evidence of the growing interest in sustainable finance.

The increased focus on this space has triggered a wave of innovations aimed at addressing some of the sector’s key challenges, such as building and supporting a pipeline of investible entrepreneurs, securing sufficient demand from investors, and linking those players so that capital can flow efficiently to provide the greatest impact. It’s a challenging road ahead, but the conference offered important proof points that help show the way forward.

Growing support for entrepreneurs

Now is a very good time to be a social or environmental entrepreneur. We are witnessing a growing array of resources, services, and incubator and accelerator programs aimed at kick-starting ventures and preparing them for investment. One exciting example: Agora Partnerships hosted 20+ “deal rooms” at this year’s conference, offering Latin American-based entrepreneurs who had completed Agora’s intensive six-month accelerator program the chance to pitch to interested investors. Last year, these deal rooms resulted in eight investments, ranging from $50,000 to $500,000. EDF is in the early stages of engaging with Agora as we look to scale our sustainable fisheries finance work in Latin America.

Increasing demand from investors

Investor demand is rising to meet the growing supply of social and environmental ventures. A recent survey by US SIF – The Forum for Sustainable and Responsible Investment shows that U.S.-based sustainable, responsible and impact investing assets grew 76% from 2012 to 2014. Another driver of demand is the growing trend of big banks, such as Citi, Goldman Sachs, and Bank of America, committing to increased investment in environmental innovation.

The demand extends beyond banks and institutional investors – to individuals, foundations, and companies, all of which have roles to play. During a panel discussion, Sasha Dichter, Chief Innovation Officer of Acumen Fund, an international nonprofit venture fund, noted a recent shift in how companies invest in their supply chains to build more sustainable businesses: moving from funding initiatives to becoming more deeply engaged, strategic partners. He cited the example of Acumen’s partnership with Unilever and Clinton Giustra Enterprise Partnership, which will improve the livelihoods of up to 300,000 smallholder farmers globally by investing in enterprises to support farmers and incorporate them into Unilever’s global supply chains. Read more

Faith-Based Investors Call on Exxon, Valero and Others to Support Methane Regulations

Since the president announced in January a national goal of reducing methane emissions from the oil and gas industry nearly in half by 2025, an outpouring of voices has supported the move. Now, EPA has proposed rules to help meet that target, and we’ve seen another wave of support – everyone from editorial boards in the heart of oil and gas country to massive investors like California’s pension funds has recognized that the rules are a manageable, commonsense means for reducing methane pollution.

ICCR-logoThe one voice that’s been silent? The companies with the opportunity to adopt the proven, cost-effective technologies and services to not only reduce pollution but also prevent the waste of the very energy resource they’re producing. Now another voice has emerged to make the case directly to these companies that it’s worth constructively engaging in the rulemaking process: the Interfaith Center on Corporate Responsibility (ICCR), a group of shareholders dedicated to promoting environmentally and socially responsible corporate practices.

Several shareholders from ICCR’s coalition sent letters today to dozens of energy companies in which they invest, voicing their concern about the impact of methane emissions on the climate and public health. As You Sow, BCAM, Mercy Investments, Miller Howard, the Sisters of St. Francis of Philadelphia, Trillium Asset Management, and others made their case to companies whose shares they own, including some of the biggest names in the business, like Chesapeake Energy, ConocoPhillips, Exxon, Kinder Morgan, and Valero.

Specifically, the investors asked the companies to file public comments on EPA’s proposed methane rules, sharing the companies’ data and experience with methane monitoring and management and providing perspective on how the methane rules can be designed to reduce emissions cost effectively. They also urged the companies to guide their powerful trade associations –which have been some of the most vocal opponents of the rules – to engage honestly and transparently in the rulemaking process. Read more

Inside the Climate Bonds Initiative with Sean Kidney

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.

2014 has seen exciting growth in the maturing green bonds market, with clear investor demand and issuance tripling compared to 2013. However, for the market to grow to scale, this sector needs the kinds of systems and accepted standards in place that sustain the $80 trillion global debt capital markets.

Climate Bonds InitiativeI recently caught up with a key figure in the green bond movement – Sean Kidney, chief executive and co-founder of the Climate Bonds Initiative (CBI) – to discuss the current state of green debt and what it will take to scale up investments. Kidney launched CBI as a project of the Network for Sustainable Financial Markets, after a career in social marketing and strategy consulting, including working at some of the largest Australian pension funds. Here are some highlights from our conversation:

I understand that policy will play a key role in scaling the green bond marketplace. What role is CBI playing in the policy arena?

A price on carbon is critical to creating a scale, but that has proved challenging to secure in the near-term. Instead, we are largely focusing on what we call financial system policy.

First and foremost, we are advancing international standards, working to establish clear, green and robust definitions. We have a huge number of organizations involved in this, representing $34 trillion of investors, and sizeable grants from Bloomberg and the Swiss government. The type of certification system we are working to establish is critical to building and maintaining reasonable confidence in green bond “credentials”.

Our second focus is what we call policy formulation, helping governments see that ‘There’s a pot of gold over there,’ and showing them how to harvest it. Examples of this effort include a couple of papers we published in the spring. One is about what China can do to grow its green bond market and the macroeconomic reasons to do it. We also published a report for the European Commission on Financing the Future, where we articulated the role of green bonds in designing stable financial markets.

Our third effort is what we call market education; here our focus is to increase issuance. We’ve established there is investor demand, and now we need to feed it with bonds, so we travel the world working with the issuer community. We brief banks and cities on this new market, hoping to motivate them to enter it and thereby build supply.

There’s a lot of issuance coming through the system. I think we’ll see double the market this year than we saw last year without too much difficulty, but I want it to triple again because triple gets us to a magical $100 billion issuance, which has political resonance. Read more