Smart Money: Top Investors Press Oil & Gas Companies to Tackle Methane Emissions

A global group of 30 leading institutional investors coordinated by the PRI (Principles for Responsible Investment) has announced a new initiative that will encourage oil and gas companies, including gas utilities, around the world to initiate or improve efforts to measure, report, and reduce methane emissions. The move is the latest evidence that investors are concerned with the financial, reputational and environmental risks associated with unmonitored and unchecked methane venting and leakage.

Methane is a potent greenhouse gas with over 80 times the warming power of carbon dioxide over a 20-year timeframe. It’s responsible for about 25% of the warming our planet is experiencing today. Globally, the oil and gas industry is among the largest man-made sources of methane.

Methane is also the main ingredient in the natural gas, the product that major global producers have marketed to investors as central to their growth in the years ahead. Companies tout gas as a clean, low-carbon fuel, ignoring the vast amounts of unburned methane escaping from their systems each year, or the lack of transparency with regard to monitoring and reduction strategies.

The owners and asset managers involved in the PRI’s methane initiative oversee more than $3 trillion. They are global in scope, representing a dozen countries across North America, Europe and Asia-Pacific. PRI plans to engage 29 companies on four continents, from across the natural gas supply chain (the names aren’t being made public). They will be urging greater transparency and stronger, more concrete actions, including setting methane targets and participating responsibly on methane policy.

A centerpiece of PRI’s ongoing efforts to improve companies’ methane management and disclosure will be the Investor’s Guide to Methane, published jointly with EDF last fall. PRI’s global methane initiative complements ongoing U.S. engagement efforts on methane led by the Interfaith Center on Corporate Responsibility and CERES.

Trumping Shortsighted Politics

This is an uncertain time for the methane issue globally. On the one hand, President Trump and many U.S. lawmakers are trying to roll back methane policies established during the Obama administration. On the other, officials in Canada are expected to release draft oil and gas methane regulations this year, and similar rules are being developed in Mexico.

Political backpedaling from methane controls is shortsighted and counterproductive for both industry and environment, ignoring one of the biggest and most cost-effective opportunities we have to slow the warming of our globe. But these major investors, whose long-term investment horizons require them to look beyond the short-term calculus that dominates both politics and executive compensation packages, are taking a view to match their financial stake in the industry’s future.

What they see is a growing liability for an industry looking to the production and delivery of natural gas a growth engine over the coming decades. The problem isn’t going to go away, no matter what they’re saying in Washington.

Producers like BP, Shell and Chevron routinely cite rising global demand for natural gas as a primary driver of growth and valuation. But in markets for new electric generating capacity, natural gas is increasingly competing on a cost basis with clean, renewable sources like wind and solar. Failure to deliver on its frequent promises to deliver a more climate-friendly energy choice puts the gas industry and its investors at risk.

That makes methane the key variable. Conservative estimates are that, worldwide, companies are releasing at least 3.5 trillion cubic feet of methane to the atmosphere each year. That’s about the same amount as all the gas sold by Norway – the world’s seventh largest producer. Besides being a huge climate problem, it’s also a huge waste of a valuable product, and perhaps an indicator that attention to the integrity of operations is not as great as what companies claim.

Industry Awakens to the Problem

Concern about methane isn’t limited to oil and gas investors. There’s growing awareness within the industry itself that methane poses a reputational risk, sparking some companies to start addressing the challenge.

For example, 10 of the world’s largest oil and gas companies – BG Group, BP, Eni, Pemex, Reliance Industries, Repsol, Saudi Aramco, Shell, Statoil and Total – recently launched the Oil and Gas Climate Initiative (OGCI), a billion-dollar investment to accelerate commercial deployment of low carbon energy technologies. Their primary focus will be carbon capture and storage and reducing oil and gas methane emissions.

Similarly, the Oil and Gas Methane Partnership (OGMP), a voluntary effort to improve emissions reporting and accelerate best methane reduction practices recently issued its first annual report, detailing emissions found in nine key source categories throughout individual operator’s systems. Launched in 2014, participating companies include BP, Eni, Pemex, PTT, Repsol, Southwestern Energy, Statoil, and Total.

First Steps toward Big Benefits

These are crucial first steps for the industry, and is a sign that companies looking for ways to adapt to the changing climate surrounding its business. But the industry still has a very long way to go. Fixing the problem could yield huge benefits: A 45% reduction in global oil and gas methane emissions would have roughly the same climate impact over 20 years as closing one-third of the world’s coal fired power plants.

Investor calls for action on methane are quickening and now industry needs to show shareholders it will take the necessary steps to deliver on the low-carbon fuel promise of natural gas. Investors want to invest in well-run companies with good governance, and increasingly look to methane as a proxy for efficient operations. As company executives think about how to attract capital, they will be well-served to note this emerging dynamic and proactively get ahead of the issue.

Spurring investment in environmental solutions starts here

As the Stanford Social Innovation Review (SSIR) blog series “Mission Possible: How Foundations Are Shaping the Future of Impact Investing” rightly states, there are increasingly innovative ways for philanthropic money to play a more strategic role in capital markets to advance social and environmental progress.

Like the thoughtful foundation leaders contributing their perspectives to this series, we at Environmental Defense Fund (EDF) continue to evaluate, evolve and articulate our own sustainable finance strategies. And, over the past several years, we have become ever more convinced that leveraging the power of financial markets is core to delivering on the ambitious goals we laid out in our Blueprint 2020 strategic plan. This is because we know that the amount of philanthropic and public sector resources deployed to addressing our key issues is a small fraction of the total capital needed. We, therefore, must tap into the influence, expertise and capital of the private sector and the financial markets that direct those capital flows to be successful in our efforts.

EDF is a proven leader within the environmental community in working with the financial sector to drive progress on key issues. Over the past several years, EDF initiatives have raised the bar for environmental management across the private equity (PE) industry through pioneering partnerships with KKR, Carlyle, and Oak Hill Capital, delivered healthier air to millions of New York City residents by empowering building owners and operators to invest in nearly 6,000 heating oil conversions through NYC Clean Heat, and accelerated the transition to sustainable fisheries management by providing loans totaling over $4.2 million to support California Fisheries Fund borrowers.

Building on this successful track record, we are now introducing a robust three-part sustainable finance strategy that complements the amazing work of foundations profiled in the series:

EDF’s Sustainable Finance Strategy:

  1. Getting the rules right We are working to advance policies and practices that improve transparency, reduce risks, and create clear incentives and price signals in order to design more efficient and effective markets for environmental investment opportunities.
  2. Making engagement and investment easier To spur new investment in environmental solutions, we must lower barriers and transaction costs. We are creating and promoting tools and resources that improve information flows, standardize complex projects, and build capacity in the marketplace.
  3. Demonstrating returns Environmental investments remain below the radar for many investors. We aim to connect private capital with priority environmental opportunities by working with partners on “lighthouse” or pilot transactions that demonstrate a strong investment case, mitigate risks, and deliver returns. In the process, we are creating new investment models for others to follow and take to scale.

Keep an eye out for subsequent blogs from a range of EDF experts that will profile a few specific examples to showcase how this strategy is being put into action across EDF’s programmatic work. We look forward to collaborating with those who are working in this growing space!