Your investors are asking about methane risk: here’s why, and what you can do

This article was originally published in Petroleum Economist.

With the corporate annual shareholder season coming to a close and the World Gas Conference around the corner, one thing is abundantly clear – investors are strengthening their stance on climate, and they want the oil and gas industry to step up and reduce methane emissions.

In an open letter in the Financial Times earlier this spring, investors overseeing more than $10.4 trillion wrote they are expecting the oil and gas industry to change how it operates and transition its operations and corporate strategy to a low-carbon economy.

In the past three years, nearly 40 methane shareholder resolutions have been filed, and it doesn’t require a crystal ball to know that more are coming. This year’s shareholder season included 11 methane issue resolutions; eight were withdrawn (meaning the companies took action on their own without a vote). Chevron shareholders generated a 45 percent vote in favor of a methane resolution, and Range Resources’ resolution passed with a majority vote, while Kinder Morgan garnered a strong 38 percent shareholder vote.

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Investor concern on methane rises in 2018 proxy season

At Chevron’s annual general meeting last week, a shareholder resolution calling on the company to improve its methane management and disclosure received a 45% vote. This strong vote follows a majority vote at Range Resources, where 50.3% of voting shareholders supported a similar methane disclosure resolution (up from just 20% in 2013). Oil and gas industry shareholders are sending a powerful message– methane is a material risk that companies must manage to compete in a capital- and climate-constrained world.

Such resolutions are effective at driving change, even for non-majority votes like the 38% of shareholders at Kinder Morgan who supported a methane resolution. For example, last year ExxonMobil’s methane resolution received a 39% vote, and the company responded with a new methane emissions production program, which now includes a quantitative methane reduction target.

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3 ways sustainable finance can accelerate the Fourth Wave of environmentalism

Close your eyes and think about innovation. How many of you thought about a widget – a robot, a self-driving vehicle, a sensor? I’m guessing almost all of you. How many of you thought about regulations, contracts and financing? Maybe a few at most. This is the exercise that former Secretary of Energy, Ernest Moniz, and David Cash, former Massachusetts Department of Environmental Protection Commissioner, prompted at the launch of the WBUR Environmental Reporting Initiative.

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Investors: Methane targets wanted

With upcoming annual meetings full of shareholder resolutions calling on companies to set greenhouse gas (GHG) reduction targets, EDF released "Taking Aim", a new paper explaining why methane targets are the next frontier for the oil and gas industry and establishing five keys for strong targets. The paper explains how companies that set targets are more likely to be successful when it comes to securing methane emission reductions. Setting targets also demonstrates to investors that corporate decision makers understand methane risk management is critical to competing in an ever-cleaner energy market.

With the Task Force for Climate-Related Financial Disclosure (TCFD) framework also highlighting the importance of targets, “Taking Aim” provides some initial guidelines that can help frame what an ambitious, leading target looks like for oil and gas industry methane.

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Methane a potential blind spot for Canadian oil and gas industry, says investor

While a growing number of global oil and gas companies step up to reduce methane emissions, many operators in Canada have hesitated to take concrete action, perhaps waiting instead for federal and provincial regulations to address the issue.

EDF’s Sean Wright recently sat down with Jamie Bonham, Manager of Corporate Engagement at NEI, a Canadian investment firm based in Toronto with $6 billion in assets under management. Bonham is concerned many Canadian operators do not understand the full scope of their oil and gas methane problem, but says there is considerable opportunity for Canadian companies to exert leadership.

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As ESG goes mainstream, methane disclosure divide looms large on investor agenda

The demand for corporate transparency is here to stay. Just last year, 390 investors representing more than $22 trillion assets signed a letter in support of the Task Force on Climate-Related Financial Disclosures, advocating for a unified set of recommendations for corporate climate disclosure. So as financial markets increasingly recognize Environmental, Social, and Governance (ESG) risks, and increasingly embrace ESG strategies, oil and gas companies failing to report on environmental risks, like methane emissions, will be at a disadvantage.

Yet despite the reputational and financial risks posed by methane emissions in the oil and gas sector, over 40 percent of oil and gas companies analyzed in a new EDF report fail to report even basic information on methane management. The report finds that the quality and quantity of methane risk management reporting has increased amongst nearly 60 percent of companies analyzed. But the overall improvement has not been enough.

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Methane management is risk management

When I worked on the trading floor at Goldman Sachs, one of the major services we provided our corporate clients was risk management. Sitting on the commodity desk, we bought and sold financial products that allowed the world’s biggest consumers and producers to manage their exposure to the often fluctuating price of natural resources like aluminum, crude oil, and natural gas. Companies take action to manage this price risk in order to provide long-term stability for the company and its investors.

Now as a member of the EDF+Business team, I focus on a different kind of risk: climate risk. And just like financial risk, it needs to be managed for the long-term benefit of all stakeholders involved.

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Methane leadership is a competitive advantage, says global investor

Environmental Defense Fund Q&A with Tim Goodman, Director of Engagement at Hermes Investment Management

Tim Goodman, Director of Engagement at Hermes Investment Management

Early oil and gas industry adopters of methane management strategies and technologies are starting to see these reductions as an opportunity to gain a competitive edge.

Just last week, ExxonMobil announced  a new methane reduction program for its XTO Energy subsidiary, underscoring that the industry is paying close attention to the issue.

Methane, the main ingredient in natural gas, is leaked and vented across the oil and gas supply chain every day as the world energy mix shifts towards greater natural gas usage, according to the International Energy Agency. The oil and gas industry wastes billions of dollars a year of methane that simultaneously acts as a climate change accelerator, harming the brand of natural gas as a cheap and clean fuel source. Methane is 84 times more powerful as a heat-trapper than carbon in its first 20 years in the atmosphere. Read more

Investor sees methane management as self-help for oil & gas companies

Environmental Defense Fund Q&A with Tim Goodman, Hermes Investment Management

Tim Goodman, Director of Engagement at Hermes Investment Management

When burned, natural gas produces half the carbon as coal, so it is often touted as a “bridge” fuel to a cleaner energy future. But the carbon advantage of natural gas may be lost if too much of it escapes across its value chain.

Natural gas is mostly methane, which, unburned, is a highly potent greenhouse gas accounting for roughly a quarter of today’s global warming. Worldwide, oil and gas companies leak and vent an estimated $30 billion of methane each year into the atmosphere.

EDF’s Sean Wright sat down with Tim Goodman, Director of Engagement at London-based Hermes Investment Management. Goodman, who views methane management as practical self-help for the industry to pursue, engages with oil and gas companies on strategies to manage their methane emissions. This is the first of a two-part conversation with Hermes, a global investment firm, whose stewardship service Hermes EOS, advises $330.4 billion in assets.

Wright: Do you think the oil and gas industry is changing its overall attitude towards climate after the historic Paris agreement and recent successful shareholder resolutions? If so, how do you see that change manifesting itself?

Goodman: I think climate change is obviously an existential question for the industry. The really big question is can it actually change in response to Paris? The industry is beginning to respond as a result of Paris and shareholder proposals and other stakeholder pressure. You’re seeing some of the majors increasing their gas exposure at the expense of oil. You’re seeing a number of international oil companies reducing or ending their exposure to particularly high carbon or high risk assets, such as the Canadian oil sands or the Arctic. The oil and gas industry is also starting to place a greater focus on methane management and its own emissions.

Wright: What about investors – what do you think is driving the continued momentum around methane and climate as we see larger and more mainstream funds tackling these issues?

Goodman: Let’s talk about climate for the moment – the roles of both investors and companies in the run up to the Paris agreement and during the negotiations were crucial. The investors made it absolutely clear that they wanted to see a successful Paris agreement. Addressing climate change is good for business and good for their portfolios. And we saw this with the Exxon vote – the two-degree scenario proposal where mainstream asset managers voted for this proposal. We believe that this happened because of the underlying pressure asset managers were getting from their own clients who have a long-term perspective and see climate change as a risk to their funds.

Specifically on methane, it’s practical self-help for the industry to embark on methane management. It’s an obvious practical measure for investors to engage upon. If you can reduce your contribution to greenhouse gases, save money, and gain revenue by being more efficient and safe, why wouldn’t you do that? It’s an easy entree into engaging with the oil and gas industry. Whereas the existential question, what’s your business going to look like 20 years from now, is a more difficult question perhaps both for the industry and the companies themselves.

Wright: You pretty much just explained why Hermes prioritized methane – is that correct?

Goodman: Yes. But the science is a big part of it. Methane is a far more potent greenhouse gas than carbon – the more that we can minimize its effects, the greater the window the world has to transition to a low carbon economy. Methane’s effects don’t last as long as carbon, but if we don’t tackle methane, we aren’t taking meaningful action to move to a low-carbon economy.

Wright: What do you see as the risks of unmanaged methane emissions?

Goodman: There is an economic risk and benefit for companies. Most of the measures to manage methane are relatively low-cost and can very easily be implemented for new projects. If you’re not doing them, for example, and you’re fracking shale, you’re at a competitive disadvantage to your peers. The cost-benefits perhaps are more difficult, but still there, in existing infrastructure. But particularly among the oil majors, their relationship with their host governments, local communities, and other stakeholders is vital. It’s important for companies to demonstrate good corporate citizenship. If you’re a laggard on methane, you’re more likely to be considered as an irresponsible partner both commercially and also in your local community. So I think oil and gas companies risk massive reputational and legal risks if they’re not managing methane effectively, notwithstanding the economic benefits.

Wright: What do you typically hear from operators in your conversations about methane management? Do you hear different things from operators in different parts of the world?

Goodman: Methane management is part of a number of important issues that we’re engaging with the industry on, including other pollution, health and safety, human rights, corruption and climate change. What we’re hearing on methane does vary. It’s fair to say in some emerging markets methane management is not often discussed by investors with those companies. But when we do address this topic in these markets, the companies show interest and want to know why it’s important to us, what they should be doing, how they should be disclosing, etc. So we’re often having positive and interesting conversations in these markets.

In the developed markets, there’s a difference. And I think there’s a distinction between Europe and North America. The EU companies, particularly the majors, are realizing it’s an important issue and are talking about it and disclosing at least some data. In private dialogue with North American companies, it is clear methane is often an important issue for them, but their disclosure is less convincing. It does vary around the world, but you also have this interesting phenomenon, where some companies seem to be doing a good job in private dialogue, but the disclosure lags behind what they are actually doing. We also see companies attempting to present their efforts in a better light than perhaps they deserve. It’s a complex mixture, which is why engagement is so important because we are able to view the reality on the ground through private dialogue.

For more information on EDF’s investor resources on methane mitigation, please see our recent report, An Investor’s Guide to Methane, or subscribe to our newsletter.

Global investor touts methane opportunity with oil & gas industry

Institutional investors worldwide are increasingly encouraging oil and gas companies to improve and disclose their management strategies to minimize methane risk.

Methane – an invisible, odorless gas and main ingredient in natural gas – is routinely emitted by the global oil and gas industry, posing a reputational and economic threat to portfolios.

Natural gas is widely marketed as a low-carbon fuel because it burns roughly 50 percent cleaner than coal. But this ignores a major problem: methane. Natural gas is almost pure methane, a powerful pollutant that speeds up Earth’s warming when it escapes into the atmosphere.

Last month marked a significant milestone in investor action on the methane issue. The Principles for Responsible Investment (PRI) launched a new initiative representing 36 investors and U.S. $4.2 trillion in assets that will engage with the oil and gas industry across five different continents to improve its methane management and disclosure practices. The PRI initiative complements existing methane engagement efforts focused on the U.S. led by the Interfaith Center on Corporate Responsibility and CERES.

EDF Senior Manager Sean Wright recently sat down with Sylvia van Waveren, a Senior Engagement Specialist with Robeco Institutional Asset Management, a Dutch-based investment firm managing over $160 billion, to discuss the matter and understand why some investors are keen to affect the status quo on methane.

Wright: Why is methane a focus of your engagements? What do you see as the risks of unmanaged methane emissions? 

Sylvia van Waveren, Senior Engagement Specialist, Robeco Institutional Asset Management

van Waveren: Methane is one of the most important drivers of engagement with the oil and gas industry. We invest in oil and gas companies worldwide. A year ago, we started engaging them, specifically on climate change – and within that the methane issue is included.

In the past, methane was viewed as a U.S. shale gas issue, but more recently it has become important in Europe as we learned that methane is a powerful greenhouse gas. So in that sense, we learned a lot from the U.S. discussions and we still do.

I would like to stress that we see the methane issue more as a business opportunity than a risk. What we often say to companies is that methane is a potential revenue source. It would be a waste if companies do not use it. 

Wright: The scope of PRI’s initiative is global, with investors from 3 different continents as far away as Australia and New Zealand, and a plan to engage with companies from the Latin America, Europe, North America and Asia-Pac. What does this level of global collaboration convey about methane emissions? 

van Waveren: I am happy and it is good to see that others have taken up the seriousness of this issue, as well.  Methane is no longer a U.S. only problem. The issue is being raised and discussed in all kinds of geographies.

I’m a firm believer in collective engagements. They can be a powerful force when the issue is not contained within borders. That is the case with greenhouse gases. So yes, I’m happy to see the PRI initiative taking off and I am an active believer in getting this solved and bringing attention to this subject.  

Wright: In your conversations thus far with companies about methane, what resonates best when making the business case for improving methane management and disclosure?

van Waveren: When we talk about motivation at the company level, I have to be honest, it’s still early days. The European companies are talking in general terms and just now conceptualizing methane policies. If we’re lucky, they have calculated how much methane is part of their greenhouse gas emissions. And if we’re more fortunate, they are producing regional and segregated figures from carbon, but it’s really very meager how motivated the companies are and what triggers them most.

I really feel we should emphasize more with companies to get them motivated and to really look at the seriousness of methane. One issue that is particularly bothersome is that many companies do not know how to calculate, estimate and set targets to reduce methane. It is still a mystery to many of them. That’s why we come in with engagements. We need to keep them sharp on this issue and ask them for their actions, calculations and plans. 

Wright: Who are other important allies that have a role in solving this problem, and why?

van Waveren: We always would like to have an ally in the government. For example, carbon pricing or carbon fixations are all topics that we look for from the government. But in practice, that doesn’t work. Governments sometimes need more time. So we do not always wait for the government. When companies say they will wait for government, we say, “You should take a proactive approach.”

We rely very much on our knowledge that we get from within the sector. We review data analyses and make intermediate reports of scoring. We find best practice solutions and we hold companies accountable. There are also times when we name names. So in that sense, that is how engagement works. The data providers and other organizations with good knowledge and good content on methane – and EDF is certainly one of them – are very instrumental to get the knowledge that we need.

Wright: Can you give me an example of a widespread financial risk facing an industry in the past that was proactively improved by investors leading the charge – similar to this initiative?

van Waveren: More than 20 years ago, we had a greenhouse gas issue – acid rain. Investors helped solve that problem. Because of this, I’m hopeful that investors can also play a positive role in reducing methane.

I would also say the issue of Arctic drilling. Not so long ago, this was top of mind when we talked to our portfolio companies. A lot of companies have now withdrawn from Arctic drilling, especially from offshore Arctic drilling. I think investors were quite successful in sending a clear signal to the industry in a collective way that we didn’t see Arctic drilling as a good process. Maybe profitable – if at all – to the companies, but certainly not for the environment.

Wright: Thank you, Sylvia. We really appreciate your time and your thoughtful answers showing how investors can be part of the solution on methane.