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.

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.

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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

 

Three Ways Investors Can Drive Environmental Gains

sean-headshotInvestors can be powerful change agents when it comes to the environment. Investors have capital which they can allocate in ways that either help or hurt the environment. They also have significant influence with the companies they invest in and with policymakers globally, both critical stakeholders when it comes to improving the environment.

While some investors are already working at the nexus of the environment and finance, given the earth’s pressing environmental challenges like climate change, overfishing and deforestation, there has never been a greater need for all investors to engage on sustainability issues. For example, private capital will be essential in order to mitigate the worst impacts of climate change – a recent UN study estimated that it will require roughly $90 trillion dollars, much more than philanthropic or public (i.e., government) investments can fund.

Of course, investors should consider environmental issues not just to do good, but also because the returns often meet if not exceed the performance of more traditional investments. And because investors are interested in risk-adjusted returns, managing environmental risks like carbon and water is critical to any comprehensive investment process.

Below are three levers investors can use to when considering environmental impacts:

  1. Capital allocation – The first decision any investor must make is where to invest their money. Considering sustainability issues can help drive capital towards investments that provide both an environmental and financial dividend.

One way to allocate capital toward more sustainable investments is to integrate environmental criteria into the investment process. Organizations like Carbon Disclosure Project (CDP) and Sustainability Accounting Standards Board (SASB) improve disclosure on issues like carbon emissions and water, enabling investors to gain insight into how efficiently a company operates and manages environmental risk. In this respect, as Environmental, Social and Governance (ESG) disclosure improves, investors can move from screening out whole sectors to proactively allocating capital toward companies that better manage material environmental issues, an investment trend which is becoming more mainstream in the U.S.  For example, while Environmental Defense Fund’s (EDF) Rising Risk report found methane disclosure in the oil and gas industry to be poor, as methane data improves, investors will be able to shift capital to those operators who are actively managing risk from this powerful pollutant and wasted product.

Investors can also place their money into investments with an explicit environmental component, like green bonds. These bonds are a debt instrument specifically tied to achieving a beneficial environmental outcome like energy efficiency, climate resiliency, or water infrastructure. The market for these double bottom line investments has grown from less than $3b just a few years ago to over $40b in 2015.

Investors are gaining new opportunities to invest in innovative products that help to reduce carbon emissions from deforestation and agriculture and improve sustainable fishing practices around the globe. Sustainable investing is also no longer just for sophisticated institutional investors. As financial tech startups are enabling individual retail investors to invest in an environmentally-friendly manner – giving all an opportunity to do well by doing good.

  1. Company engagement – Once their money is allocated, investors can then use their influence as equity or debt-holders to hold corporations accountable for environmental performance, risk management and disclosure. Organizations like Principles for Responsible Investment (PRI) and Interfaith Center on Corporate Responsibility (ICCR) act to help investors be effective engagers by coordinating efforts on topics from deforestation and palm oil to water risks, and encourage collaboration where possible.

Engagement can include the ability of asset owners like private equity to work with portfolio companies to become more sustainable. EDF worked with leading private equity companies to design the Green Returns tool, which enables private equity to approach value creation through an environmental lens, and spot opportunities such as energy efficiency and waste reduction initiatives that generate cost-savings. Using this tool, Kohlberg Kravis Roberts (KKR) was able to add $1.2 billion to the value of their portfolio while avoiding significant greenhouse gases, water use, and excess waste.

Shareholders in public companies also have the ability to file shareholder resolutions to publically encourage better environmental management. In 2016, shareholders filed a record number of climate-related resolutions, which a recent Harvard Business School study has shown to be effective in improving both financial and environmental performance when focused on material ESG issues.

  1. Policy Support – Getting the rules right will be critical in both addressing environmental issues directly and in driving private capital towards environmentally-friendly assets. As Hank Paulson, the former Treasury Secretary and CEO of Goldman Sachs noted in a recent NY Times Op-Ed, we need policies that “include environmental regulations to stimulate clean, sustainable development; incentives and subsidies for clean energy investments; and the pricing of carbon emissions.”

Investors with expertise on business, markets, and finance have an important role to play in the policy process. The next generation of investor leadership on sustainability will require aligning external policy positions with internal sustainability practices and playing a proactive and public role to support legislation and regulations.

Organizations like CERES have been instrumental in activating investors on policy matters. Just this year, CERES played a leading role in getting 76 global investors with $3.6 trillion in assets under management (AUM) to support methane regulations in the U.S. and Canada while working with organizations like Institutional Investors Group on Climate Change (IIGCC) in Europe to recruit 130 investors with $13 trillion in AUM to support implementation of the Paris agreement. Such statements of support are meaningful in helping build the business case for environmental policy.  And direct engagement with law and policy makers is a next frontier for investors looking to maximize their impact on supporting sound policy development.

The need for investors to engage on environmental issues has never been greater, and the opportunities to do so profitably have never been more widespread. Investors of all kinds should incorporate the levers of allocation, engagement and policy in their investment process – a move with the potential to benefit both the planet and their portfolios.


Follow Sean Wright on Twitter, @SeanWright23


Why energy investors need to manage methane as a Rising Risk