The ESG of Methane Emissions
A growing number of investors are assessing oil and gas companies on their environmental, social and governance (ESG) records. A company’s ESG considerations are largely what differentiates progressive and forward-looking oil and gas companies from the pack. Many investors consider ESG performance as a strong reflection of the company’s management, shareholder value and overall performance. This connection between a company’s ESG record and their overall performance has arisen from investors’ recognition that the oil and gas sector is not a world unto itself but a major contributor to both the environment and society. Companies that recognize and appreciate this fact put greater emphasis on their ESG performance and thus signal to investors that they are a company that provides value to both shareholders and stakeholders alike and are therefore worthy of investment. As such, both oil and gas investors and companies are now turning their attention towards methane gas emissions, which has quickly become one of the most prominent ESG issues today.
Already well known as a potent greenhouse gas which drives climate change, methane’s notoriety has grown after two recent reports from both the UN and IEA. These reports highlighted methane emissions’ harmful effects on human wellbeing by contributing to the formation of toxic air quality and ground-level ozone. They also show how unmitigated methane emissions lead to financial repercussions for both industry, through penalties and loss of investments, and civil society, through the loss of work time and even crop yields. Thereby making methane emissions a serious threat to each component of ESG and in the eyes of investors, necessitating strict action by oil and gas companies for their own sake as well as the communities they operate in.
The following offers an investor’s perspective on the ESG of methane emissions:
Environment:
When investors look at the environmental aspect of an oil and gas company’s ESG, they are interested in how that company performs as a steward of the natural environment and address such issues such as climate change, pollution and depletion of natural resources. In respect to methane emissions investors are looking for how companies are:
Addressing the global efforts to limit temperature rise to 1.5°C through methane mitigation
Reducing methane emissions by 40-45% before 2030
Using emissions reducing technologies to meet their targets
How they are reporting / disclosing emissions performance
Social:
When investors look at the social aspect of an oil and gas company’s ESG, they are interested in how that company manages its relationships with employees, the communities where it operates and with the greater society. Unsafe working conditions or a disregard for communities and human welfare are considered tangible risks for many investors. In regards to methane emissions, considerations include:
Be cognizant of the number of people who suffer from cardiovascular, respiratory, asthma-related problems and/or premature death as a result of surface level ozone for every million tonnes of methane emitted
Recognize the million hours of work lost globally due to heat-exposure per million tonnes of methane emitted*
The relationship between methane emissions and workplace safety
Governance:
When investors look at the governance aspect of an oil and gas company’s ESG, they are interested in the company’s board and management structures, policies, information disclosures and compliance record. Investors will avoid companies with governance practices that are illegal or ethically questionable. Concerning methane emissions, investors will search for oil and gas companies who:
Act in accordance with local and national methane emissions mitigation law and regulation
Cooperation with governments and other stakeholders to develop and assess methane emissions management policies and regulations
Since methane emissions are so intimately linked with each ESG component, its mitigation and reduction presents oil and gas companies with one of the greatest opportunities today to address ESG concerns. Fast and ambitious reduction action is one of the most impactful strategies for oil and gas companies to deliver immediate and multiple ESG benefits. Previously incomplete knowledge and lack of direct emission measurements limited the potential of mitigation and strategic decision making to effectively reduce emissions. However, due to technological innovation, that is no longer the case. Third parties now offer independently-verifiable emissions data and mitigation analysis which have improved understanding of emissions levels and sources. Decision makers are now better able to develop and assess their methane emissions management policies and to track their success. As such, oil and gas companies can implement more comprehensive mitigation measures and demonstrate to investors that energy companies are not mere contributors to the world but in fact leaders in a host of urgent global issues.
Reference:
*Global Methane Assessment: Benefits and Costs of Mitigating Methane Emissions (United Nation Environment Programme & Climate and Clean Air Coalition, 2021) - https://www.unep.org/resources/report/global-methane-assessment-benefits-and-costs-mitigating-methane-emissions