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.

Investors Can’t Diversify Away from Climate Risk

With the U.S. role in the Paris Climate Agreement hanging in the balance, over 280 investors managing a collective $17 trillion in assets spoke up in support of the agreement:

As long-term institutional investors, we believe that the mitigation of climate change is essential for the safeguarding of our investments. . . . . We urge all nations to stand by their commitments to the agreement.

Why do investors care?  As pointed out in a blog earlier this year, for investors, it all comes down to risk and return. And, where climate change is concerned, this is a risk that is omnipresent.

Simply put, investors cannot diversify away from the risks of climate change. Unlike other risks such as currency fluctuations or new regulations, the disruptive impacts of climate change on the global economic system are so pervasive they cannot be offset by simply shifting stock portfolios from one industry to another.

A study from Cambridge University found equity portfolios face losses of up to 45% from climate shocks, with only half of these losses being “hedgeable.” Likewise, The Economist Intelligence Unit estimates that investors are at risk of losing $4.2 trillion by 2100, with losses accruing across sectors from real estate to telecom and manufacturing.

Because investors recognize that climate risk is unavoidable, they support a coordinated global effort as envisioned in the Paris Agreement. It is also why investors have already expressed such strong support for regulatory limits on carbon and methane emissions.  Governments globally will need to take further proactive action to limit greenhouse gases, and incentivize technology shifts towards lower-carbon energy.

Seizing opportunities in a low-carbon economy

Technology changes will require significant adjustments in how global capital is allocated, which is an opportunity investors are eager to seize because of the promise of risk-adjusted returns in the space.

It is estimated that a shift to a clean-energy economy will require $93 trillion in new investments between 2015 and 2030 and the rise of impact investing shows markets are starting to respond to opportunities in renewable energy, grid modernization, and energy efficiency among others.

For example, the green bond market has grown from $11 billion to $81 billion between 2011 and 2016 with projections for 2017 as high as $150 billion. On top of this, leading global investment banks have already pledged billions towards sustainable investing.

And where capital flows, so do jobs.

As we’re seeing in the US, renewable energy jobs grew at a compound annual growth rate of nearly 6% between 2012 and 2015 and the solar industry is creating jobs 12 times faster than the rest of the economy.  Similarly, the methane mitigation industry is putting Americans and Canadians to work limiting highly potent emissions from oil and gas development.

Technology and capital changes are already happening, but are unlikely to happen quickly enough on their own.  Government policies and frameworks that speed this transition, like a price on carbon, will be critical.

Which brings us back to the importance of the Paris Agreement…

The Paris Agreement is crucial to addressing climate change

Investors vote with their dollars, and are strongly backing U.S. participation in the Paris Agreement. Global investors understand the risk of climate change and see the Paris Agreement as a good return on investment, with an optimistic $17 trillion nod to the power of capital markets to provide the innovation and jobs we need if the right policies are in place. The U.S. administration should ensure it is considering the voice of investors and the capital they stand ready to put to use as it makes its decision.

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.

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.

investorguide_cover

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


 

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

Investors Voice Market Support for Methane Regulation

banner_gasLast week, financial community leaders took a big step into the intersection of business and policy on the urgent need to curb methane emissions from the oil and gas sector. A group of investors managing more than $300 billion in market assets sent a letter to the U.S. Environmental Protection Administration and the White House, calling for the federal government to regulate methane emissions from the oil and gas sector. The letter urged covering new and existing oil and gas sites, including upstream and midstream sources, citing that strong methane policy can reduce business risk and create long-term value for investors and the economy.

Spearheaded by Trillium Asset Management, the cosigners of the letter to EPA Administrator Gina McCarthy included New York City Comptroller Scott M. Stringer, who oversees the $160 billion New York City Pension Funds, and a diverse set of firms and institutional investors. They spelled out in no uncertain terms that they regard methane as a serious climate and business problem – exposing the public and businesses alike to the growing costs of climate change associated with floods, storms, droughts and other severe weather.

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