Investor interest in climate-related financial risk is at an all-time high. So it makes sense for shareholders and lenders to increasingly be voicing concern over methane leaks.
In December 2017, a group of 225 investors with more than $26 trillion in assets joined a new initiative with several partner organizations to strengthen climate-related financial disclosures among the world’s largest corporations.
It followed a year during which United States shareholders filed at least 17 methane resolutions with companies across the natural gas value chain – and leading companies such as Exxon subsidiary XTO Energy responded with new plans to manage methane emissions.
Clearly, methane – which accounts for 25 percent of Earth’s warming today – is on investors’ minds.
When it comes to operators, however, it’s a tale of two industries where a few show strong leadership and others lag woefully behind. This could have major financial implications for the oil and gas industry going forward.
Large investors wield their power
The wide gap between methane doers and non-doers will come into full display as leading investors increasingly tilt their portfolios toward businesses that follow environmental, social and government principles, known as ESG. This trend will create new winners and losers, and possibly shuffle market shares in the already-volatile oil and gas world.
Just as large institutional investors such as State Street are now steering publicly-traded companies to include women on their boards to boost business performance – and BlackRock, Vanguard and Fidelity vote for shareholder proposals pushing for climate change disclosure – oil and gas operators must reckon with the fact that methane risks are central to investors.
Methane management, with its cost-effective and easily implemented solutions, will be viewed as a near-term proxy for effective risk management. Oil and gas companies, in other words, need to take action to keep spigots for financing wide open and to remain competitive in a world that is quickly shifting to cleaner, and increasingly cost-effective, forms of energy.
Which makes it surprising that more companies don’t.
35% of surveyed operators ignore risks
A recent report for which I served as a reviewer, Disclosing the Facts, included 13 new and detailed survey questions to leading oil and gas companies about methane management. The results were startling considering recent high-profile methane accidents and how much methane, the main ingredient in valuable natural gas, is going to waste.
Of the 28 companies that participated in the study, 35 percent scored fewer than 4 points – meaning, they had yet to grasp that methane leaks and emissions pose a significant reputational and financial risk to their business. About 20 percent scored 1 point or less.
But there were also several companies that came out on top – Apache, BHP, Southwestern, ConocoPhillips, Hess and Shell – after showing they are taking concrete action to reduce emissions from their oil and gas operations.
Still, all but four had yet to put in place quantitative emission reduction targets. Where will the many companies that are now resting on their laurels be one, five or 10 years from now?
Investors demand stronger policies
Investors today are not content only to engage at shareholder meetings. They’re also trying to affect state, national and international policymaking on methane.
In 2017, investors testified at U.S. Environmental Protection Agency hearings to stop attempts to delay federal methane rules. Internationally, investors co-signed a letter to Canadian policymakers to strengthen proposed methane rules in that country to better protect investors’ stake in the oil and gas industry.
All this signals that the risk of ignoring methane problems in the industry today is too great to ignore. As the pressure continues to build, operators should only expect investor engagement – and the spotlight on their operations – to grow.
The question for these companies now is simply whether or not they plan to stay ahead of this race.