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.

To make its climate commitment a success, BlackRock must focus on methane

BlackRock, the world’s largest asset manager with over $5 trillion in assets, recently announced a new commitment to focus on the financial risks of climate change, with a specific eye towards the disclosure and governance of climate risk. The company also signaled a potential greater willingness to support shareholder resolutions on climate issues.

Considering Blackrock’s massive size and influence, the significance of these announcements should not be understated. The development has the potential to drive increased attention among corporate executives in all industries on the need for more action on climate.  The move is also another welcome sign that mainstream institutional investors are taking climate risk seriously.

BlackRock’s announcement puts them in-line with other investors already doing good work on climate risk. A robust effort to limit oil and gas methane will be essential to their success, and provides a number of opportunities for BlackRock to truly lead.

Why Methane Matters to Investors

As EDF has previously highlighted, methane is a highly potent form of carbon, and therefore a significant climate risk. In fact, methane is 86 times more harmful to our climate than carbon emissions, and is responsible for a quarter of the warming we are already experiencing today.  The oil and gas industry is the largest industrial source globally, and emissions occur across the entire value chain.

From an investor’s perspective, methane poses distinct risks. As the primary component of natural gas, methane represents lost product. All told, the oil and gas industry loses $30 billion a year on otherwise saleable product.  As such, smart investors should look at proactive methane management as a proxy for executive leadership and operational excellence.  In an increasingly carbon-constrained world, unmanaged methane emissions also invite regulatory scrutiny. Smart companies will be prepared. Lastly, methane undercuts the reputation of natural gas being cheaper and cleaner, and jeopardizes its opportunity to play a role in a transition to a lower-carbon economy. This has negative long-term demand implications.

Leading investors, including Legal & General, BMO Global Asset Management, and CalSTRS already understand that methane poses a significant risk, and BlackRock should too.

How Investors Can Engage Industry

To help investors manage methane risk through engagement, EDF, in partnership with Principles for Responsible Investment (PRI), released An Investor’s Guide to Methane.  The publication highlights best practices for measuring and reducing emissions while equipping investors with suggested questions to guide constructive dialogue.

The Guide also focuses on improving disclosure, given recent research from EDF has shown that current methane disclosure is inadequate to meet investor needs.  The methane metrics highlighted in the Guide were designed to provide investors with actionable methane data, and align with The Task Force for Climate-Related Disclosure’s framework and its focus on metrics and targets companies should use to manage climate risk, for which BlackRock prominently highlighted its support recently.

In response to growing investor concerns around methane, PRI is launching a collaborative engagement on methane, and is currently recruiting investors. BlackRock should join this effort to engage with oil and gas companies globally to reduce methane risk and improve disclosure. This is an opportunity for global leadership on climate.

Shareholder Resolutions – An Opportunity for Near-Term Action

As mentioned, BlackRock indicated it is more open to using its voting power on shareholder resolutions to manage climate risk. Currently, there are 8 methane-related shareholder resolutions up for vote this spring, and BlackRock appears to be a top shareholder for 6 of these companies.  The resolutions urge companies to provide better disclosure on methane management, and similar resolutions have earned the support of both ISS and Glass Lewis, the two major proxy advisory firms in the US. They deserve BlackRock’s vote.

New Products – An Opportunity to Innovation and Leadership

One way BlackRock could raise the bar on methane and be a global leader would be to use its platform to develop products to incentivize comprehensive emissions management.  BlackRock has already launched low-carbon exchange traded funds (ETF) that over-weight (i.e. reward) less-carbon intensive companies. Could BlackRock launch a low-methane index that screens in methane leaders and locks out methane laggards, thereby rewarding effective methane management with relatively higher share prices?

So, What is Success?

BlackRock is right to focus on climate risk as a key priority for its engagements over the next two years. If BlackRock is successful, effective methane risk management will be appropriately rewarded in the public markets, and will be par for the course for oil and gas companies who want BlackRock’s significant investment dollars. EDF stands at the ready to help BlackRock in making their important work on climate risk a success.

Methane Detectors Challenge: An Unlikely Partnership

The 2016 election was one of the most divisive in recent history. I cannot remember a more polarizing time. However, today, I believe, more strongly than ever, that many Americans across the political spectrum have a hunger for something better: for turning down the volume, having rational conversations and finding common ground that unites us.

In the energy sector and environmental communities, this common ground means achieving solutions that benefit the environment and help businesses thrive, not pitting one against the other.

Three years ago, Environmental Defense Fund launched the Methane Detectors Challenge, an unlikely partnership between oil and gas companies and U.S.-based technology developers. This partnership aims to reduce methane emissions by catalyzing technology solutions that continuously detect these emissions. This is our story.

 A Shared Problem, A Shared Solution

25-percent

About 25 percent of today’s warming is driven by emissions of methane, a potent greenhouse gas. Methane emissions from the oil and gas industry speed global climate change, waste a valuable energy resource (methane is the key component of natural gas), and often slip into the atmosphere with other pollutants, harming air quality.

In other words, methane emissions are a problem and detecting leaks quickly is a needed solution.

However, in 2013, we learned that no oil and gas operators were conducting 24/7 monitoring of methane emissions. None. Some companies were not using technology to conduct leak detection and repair activities, while others conducted manual leak surveys with special cameras once or twice a year – far better than nothing, but a long way from continuous detection made possible in the digital age.

When EDF learned about this lack of continuous monitoring, we could have launched a negative ad blitz. Started a petition. Designated a villain.

We didn’t.

Instead, where some might see failure, we saw opportunity and a reason to partner. We decided to take a risk, try something bold. We decided to partner with leading companies in the oil and gas industry, technical experts, and others, to source innovative technology solutions from the marketplace and solve the methane leak problem.

We called it the Methane Detectors Challenge. Our aim was to catalyze the development and adoption of new, cost effective, continuous detection systems.

I remember sharing our vision with Mark Boling, President – V+ Development Solutions at Southwestern Energy, over breakfast. Before the food had even arrived, Mark committed to Southwestern’s participation. We had our first partner. And this was just the beginning.

A Partnership Blooms

In the months that followed, we recruited partner after partner: Apache, Anadarko, BG Group, Hess, Noble Energy, Shell, Southwestern and Statoil. We found experts willing to lend their knowledge, from places like the Environmental Protection Agency, the Department of Energy, and the University of Houston.

We launched a series of gatherings that brought stakeholders together in Houston to define the problem and develop a shared plan of action. We got to know one another and to develop a common empathy for the challenges we all shared.

At the end of our first Steering Committee meeting, one of our corporate partners came up to me and said, “Great meeting today, but one thing you should change. Don’t call it the EDF Methane Detectors Challenge. Just call it the Methane Detectors Challenge. We’re all in this together.”

In March 2014, our jointly developed request for technology proposals was out in the world, and we soon reviewed twenty proposals from four different continents. The surge of market interest was incredible, and the best of the proposals inspired excitement among all partners.

By the end of 2015, in partnership with the independent non-profit Southwest Research Institute, we had conducted rigorous indoor and outdoor controlled testing of nearly a half dozen technologies. Two technologies performed excellently, catching leaks of various sizes in various wind conditions. Next step? Industry pilots.

When Challenge Strikes

As the Methane Detectors Challenge shifted from third-party evaluation to piloting, there were increased expectations of our oil and gas partners. They had already helped inform the project’s direction and shared invaluable technical input about their technology needs. The next step was a higher bar – purchasing one or more units and committing organizational resources for pilot testing.

And then a challenge struck.

In 2015, the oil and gas commodity markets fell off a cliff. Oil nose-dived from over $100 a barrel to as low as $29 a barrel. Natural gas prices crashed. Before we knew it, our partners were making layoffs, in some cases as large as 40%, and cutting capital expenditure by as much as 80% for the year ahead.

As the markets sunk and companies down-sized, our effort became much more challenging, but the foundation of trust and the value of our common mission remained unchanged. And so we persevered.

Over the course of 2016, dialogues continued between the leading entrepreneurs and a number of our industry partners. The unglamorous, but necessary issues were resolved: contracts, prices, disclosure and data sharing agreements.

And then one day, I came into my office to find a note from my colleague. “We have a deal”, it said. A large energy producer and Methane Detectors Challenge partner, Statoil, agreed to purchase a methane detection system and host a pilot with Colorado based start-up Quanta3.

Weeks later, we got more good news. Following a successful pilot test, Pacific Gas & Electric (PG&E) (an enthusiastic recent addition to the Methane Detectors Challenge), agreed to send a device from Acutect, the other leading entrepreneur, to an operating facility in California for real-world testing.

In praise of an unexpected partnership

In the coming months, we will learn much more about how the technologies developed for the Methane Detectors Challenge perform in the trials with Statoil, PG&E, and likely others. It’s too soon to know whether these technologies will provide the needed breakthrough for continuous methane detection, whether they will require additional development, or whether other advances from the marketplace will propel methane management forward.

But it’s not too soon to appreciate this unexpected partnership.

pge-methane-sensor-3828-300dpiWe have demonstrated that there is a vibrant global marketplace of entrepreneurs eager for the chance to accelerate a clean energy future and willing to take risks along the way. And, we have shown that diverse groups can come together over a shared vision.

Most of all, I hope we have proven that even in this era of divisiveness, partnerships are not just possible, they are powerful. Our door is always open to new partners.

 

EDF is grateful to our partners and hope the Methane Detectors Challenge is the beginning of something even bigger.


Follow @RatnerBen on Twitter


 

The Value of Pursuing a Rational Middle in Polarized Times

rational-middleAt Energy Dialogues’ North American Gas Forum last month, I had the opportunity to participate on a panel moderated by Gregory Kallenberg of the Rational Middle. While the panel pre-dated the presidential election, the topic of constructive engagement through rational discourse is now more important than ever.

We explored how environmental groups, industry, and other stakeholders need to come together to rationally discuss and collaboratively act on the challenges of meeting rising energy demand while addressing real and growing environmental risks.

The still principally fossil-based energy system, which includes natural gas, is not the only cause of climate change, but it is the largest. And so a range of stakeholders, from protesters holding signs, to investors with a long term interest in the future of natural gas, to industry consumers, are looking with increasing criticism at fossil fuels. That was true before the election, and it’s true today. They’re asking: How can we reconcile the environment we want to protect for the future with the traditional energy and feedstock resources we are using now?

Unfortunately, industry, when pressed with concerns and asked to act, has often come up short. For example, with precious few exceptions, oil and natural gas companies have declined to set quantitative methane reduction targets – of their own choosing, and for their own product. And they have declined to join their counterparts’ support for a 2 degree limit on temperature rise. Too often, industry has failed to engage with the real concerns of their customers and communities.

But there’s a better way.

As Sarah Sandberg, from the Colorado Oil & Gas Association, said on the panel, “You’re either at the table or on the menu.” As panelist Michael Crothers from Shell observed, industry must engage directly and responsively with the legitimate climate concerns of the general public. And they’re right.

At Environmental Defense Fund, we work to create opportunities for diverse stakeholders to come to the table and have the conversations that feed the actions – whether establishing public policy, catalyzing technology innovation, or making best practice standard practice – to address environmental challenges and protect our future.

There have been bright spots of industry leadership, like energy companies joining the table in Colorado to help craft the first methane regulations, or Shell Canada supporting Alberta’s new climate strategy, including a methane goal backed by regulations. Unfortunately, such constructive engagements have been the exception to the rule. All too often, industry’s response to environmental concerns and opportunities has amounted to “Just Say No”.

A better response? “Just Say How.” For example:

  • How will operators demonstrate that they hear and are addressing in practical terms, the air and groundwater pollution concerns of the 15 million Americans who live within a mile of a well?
  • How will industry leaders acknowledge and finally engage on public policy to reduce their contribution to climate change?
  • How will they make unnecessary methane emissions a thing of the past, by finding and fixing leaks?
  • How will the companies that do step up and lead on these issues maximize the competitive advantage of being cleaner companies in a world that demands it?

Let’s hope industry can take the real issues head on and start showing how we can make positive changes by working together. Pressure on industry is not going away, and rational engagement can help cut a productive path through polarization.

America knows better: Addressing climate change is good business

President-elect Donald Trump made claims of his own business smarts a cornerstone of his campaign. Vote for him, the logic went, and send a first-rate businessman to the Oval Office to apply business acumen to make America great. Unfortunately, Trump’s actions to date on climate and energy – notably charging a climate change denier with leading the EPA transition and signaling desire to abandon the historic Paris climate accords – send a message of business obliviousness.

In contrast, a smart business approach would embrace tackling greenhouse gas emissions and supporting clean energy. Here are four reasons why:

  1. Create American jobs – The opportunity to create new American jobs in the transition to clean energy is tremendous. There are now more jobs in solar energy than in coal mining, and the number of solar jobs has grown more than 20 percent in each of the last three years. States like Florida and Nevada are bountiful in sun and can contribute to American energy self-sufficiency.Moreover, just as smart action to nurture domestic clean energy can accelerate jobs in the renewable sector, there are jobs on the line helping the oil and gas industry reduce its air pollution in a cost effective way. Environmental Defense Fund found that there are over 70 American firms employing Americans to help keep potent methane emissions in natural gas pipelines and out of the atmosphere. These jobs, thriving in states like Texas and Pennsylvania, are mainly small business and above average wages – exactly what we all want to see more of. Of course, it’s a competitive global economy, and taking our foot off the pedal in creating green jobs could well cede the space to others like China, which already leads the United States in clean energy investment. Whatever a politician’s personal views on climate change, it is undeniable that global demand is growing for clean energy solutions. Growing demand means growing commercial opportunity for the United States in terms of innovation and exports. But only if we seize it.
  1. Listen to leading American businesses – Savvy business people listen to each other. So Mr. Trump should be interested to learn that 154 American businesses supported the American Businesses Act on Climate Pledge in the run-up to the Paris climate accords. These businesses are a part of the backbone of the American economy, employing nearly 11 million people across all 50 states, with a then market capitalization of over $7 trillion. Participating companies of particular interest: 21st Century Fox, Dupont, Wal-Mart, even a name that will be familiar to any casino magnate – MGM Resorts.These companies not only voiced support for a strong Paris outcome, they committed to increase their low-carbon investments in line with the direction of America’s leadership. Pulling out the rug from American businesses investing in low-carbon would send a destabilizing signal to the market. More recently, 365 companies including Unilever, Intel, General Mills and others reinforced that “implementing the Paris Agreement will enable and encourage businesses and investors to turn the billions of dollars in existing low-carbon investments into the trillions of dollars the world needs to bring clean energy and prosperity to all”. In sum, the overwhelming voice of businesses who have weighed in on the Paris talks are supportive of climate action. This business groundswell cannot be ignored. Nor should Trump ignore his own prior signing of a 2009 letter that failure to act on climate and the environment would cause “catastrophic and irreversible consequences for humanity and our planet.”
  1. It hits home – Continued American leadership on climate change can help mitigate physical risks to some of Mr. Trump’s most cherished investments, for example the Mar-a-Lago golf club in Palm Beach. NOAA found that “tidal flooding is increasing in frequency within the U.S. coastal communities due to sea level rise from climate change and local land subsidence.”Just a week before the election, the Palm Beach Daily News reported that the local Shore Protection Board unanimously recommended a six-figure “coastal vulnerability evaluation” as flooding has remained long after high tide in certain cases.
  1. Voters want clean energy – One of many things that will change for Donald Trump is that going from CEO to President means having a boss – actually about 300 of million of them. A recent Gallup poll found that 64% of Americans worry “a fair amount” or “a great deal” about climate change, an increase from last year, and including 84% of Democrats, 64% of independents, and 40% of Republicans. Clean energy is also wildly popular, with over 80% of Americans saying they support increased wind and solar, according to a recent Pew Poll.

Early on the campaign trail, Donald Trump often used his association with his alma mater, the Wharton School at the University of Pennsylvania, as Exhibit A in establishing his business smarts. Political leaders including Mr. Trump must learn from experts like Wharton’s Professor Eric Orts, who noted that moving away from President Obama’s climate change polices would come with stiff costs.

From missing out on job creation to ignoring business leaders who have studied the issue and have a stake in its resolution, and from fueling risk to Trump’s own business interests to overlooking voter desires, the case is clear that the costs are stiff indeed. Climate action is good business, and the smart money says it’s time to stay the course.

Technology Breakthroughs: Creating Fertile Ground for Innovation in the Oil and Gas Sector

aileen_nowlan_31394David Hone, Chief Climate Change Advisor at Shell, recently stated that it takes 25 years for a new technology to reach one percent of the energy system. At the multinational companies I have worked with as clients and partners, I have seen how much time it can take to launch a new idea or product.  But, I believe we can and must accelerate the pace of technology development and adoption. This is especially crucial in the area of methane detection. Methane is the main component of natural gas and methane emissions are the cause of 25% of today’s global warming.

For the past three years, the Methane Detectors Challenge (MDC), a groundbreaking partnership between Environmental Defense Fund, oil and gas companies, technology developers, and other experts, has focused on designing and testing promising methane detection technologies. Two of the most promising technologies, both of which provide low-cost continuous methane emissions monitoring, will soon be pilot-tested by major oil and gas companies. Moving from concept to pilots in just a few years teaches us that it is possible to accelerate the adoption of new technology in the oil and gas sector.

Lesson One: Bring all stakeholders to the table around a realistic shared goal

During tMDC_teamhe initial phase of the Methane Detectors Challenge, we facilitated a series of meetings between environmentalists, scientists and oil and gas companies, including Shell, Noble Energy and Southwestern Energy.  This collaborative approach set MDC up for success.  We gained insights on how methane detectors would need to work in the field—simple, self-powered, able to send automated alarms—and this helped the technology entrepreneurs target key functionality.

Our environmental goal for MDC struck a balance of ambitious and pragmatic; detecting big emissions that account for the vast majority of total methane emissions.  By understanding which features would deliver the most impact, we focused on key—but not all—technology gaps.  This dramatically sped up the development and testing time.

Lesson Two: Cast the net widely

At the start of the Methane Detectors Challenge, we cast the net widely for initial applications. If existing providers aren’t already solving the problem, there is no reason to stick with the familiar.  MDC invited applications from all over the world and from different industries.  The result was technologies adapted from outer space, coal mine safety, and personal breathalyzers, to name a few: fresh ideas and new approaches brought together by entrepreneurs who are committed to slowing the tide of climate change.

Lesson Three: Small, flexible investments can pay off

Small investments in emerging technologies can yield great results, and while not all will pay off, those with promise will improve rapidly. This is a portfolio approach to innovation—much like successful Silicon Valley enterprises. This requires leadership commitment and clear communication of project goals to all stakeholders, then being flexible and creative.

Taking some early-stage risk is necessary to create opportunity for big payoffs. Oil and gas companies are familiar with this at the exploration stage; the same is true for technology innovation.  MDC focused on new hardware solutions. Many entrepreneurs (as with entrepreneurs in other sectors) were often advancing personal funds to contract manufacturers or suppliers. This is a dangerous stage that many startups do not survive.

Oil and gas companies should consider offering working capital, rapid payment terms, and in-kind support for early-stage ventures.  The payoff could be significant—a more efficient, more effective strategy that works with a company’s exact specifications. With the right assistance, hardware startups are still not going to turn a profit on the first units, but they might make it through their first year.

MDC headerCatalyzing innovation requires flexibility and compromise on all sides.  Just as entrepreneurs aim to learn about the culture, quality and safety standards and business priorities of oil and gas customers, oil and gas companies will learn and improve faster if they ask themselves what they do and do not need from an early-stage entrepreneur as compared to their expectations of an established provider.  Their requirements for fast iteration of a developing technology may be different from adoption of a tested and proven technology. A lower risk, rapid improvement orientation can be reflected in product or service agreements, warranties, and the feedback offered to innovators.  Similarly, for oil and gas companies, the business case for adopting a new technology may not initially outweigh their current approach.  But with a portfolio of small bets, and the patience to help new ideas progress down the cost curve, these companies increase the odds that a new technology dramatically improves on the status quo.

During the Methane Developers Challenge, I have witnessed first-hand how environmentalists and oil and gas companies can learn from the portfolio approach and rapid iteration lessons of Silicon Valley innovation. In the next few months, MDC entrepreneurs will learn from deploying their technologies at major oil and gas companies. This is a powerful example of ambitious and pragmatic collaboration. This corporate leadership, with oil and gas companies taking a risk and putting their unique resources and insights to work catalyzing innovation, will enable business and the planet to thrive.


Follow Aileen Nowlan on Twitter, @aileennow


Additional information on EDF Methane Detectors Challenge

 

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


 

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

 

Time to Tell the EPA What Works in Methane Mitigation

aileen_nowlan_31394The Environmental Protection Agency (EPA) has committed to regulate existing sources of methane from the oil and gas industry, and it is asking for information from the methane mitigation industry to make sure the rule’s approach and requirements account for recent innovation. The EPA’s announcement comprises the U.S. portion of the North American commitment to cut methane by up to 45% from the continent’s oil and gas industry by 2025. Existing sources in the oil and gas industry make up over 90% of the sector’s emissions, which contribute over 9 million tons of methane pollution annually.

The opportunity is open now to tell the EPA what works in methane mitigation.

methane_technician

Emission standards for existing sources of methane will not only reduce greenhouse gases but could also create new markets and customers for the growing mitigation industry. The regulation will likely start with one or more approved work practices to find and fix methane leaks, describing a technology or group of technologies that must be used in a certain manner. For example, EPA’s New Source Performance Standards for new and modified sources of methane required the use of optical gas imaging cameras or “Method 21” instruments. With far more existing sources of methane than new or modified sources, being part of an approved work practice for existing sources would open up a significant market opportunity.

In one of the first steps toward developing the existing source rule, the EPA has set up a voluntary Request for Information, asking anyone with “information about monitoring, detection of fugitive emissions, and alternative mitigation approaches” to submit details by commenting on the Request for Information docket online. The EPA states it is particularly interested in “advanced monitoring technologies” that could be “broadly applicable to existing sources.” The EPA cites as an example “monitoring systems that provide coverage across emission points or equipment in a way that was not previously possible, thus enabling a different approach to setting standards.” A good submission may include “published or unpublished papers, technical information, data, or any other information” that might be relevant.

The deadline to submit information via comment to the agency is November 15, 2016. But there is no need to wait–those who submit earlier will be part of the conversation sooner. And a number of important topics need to be discussed to shape the existing source regulation. The federal New Source Performance Standards and Colorado’s methane regulation contain a pathway for innovative technologies—a mechanism, supported by industry and  environmentalists alike, for the EPA to evaluate and approve better methane reduction approaches. A similar approach could help incentivize advanced technology deployment for existing sources.  This request for information is the first invitation of many to highlight innovation in the methane mitigation industry.


Follow Aileen Nowlan on Twitter, @Aileennow


Read more about the emerging Methane Mitigation industry

Why energy investors need to manage methane as a Rising Risk