Financial Sector Focuses on Risks from Methane

By: Sean Wright, Senior Analyst, Corporate Partnerships

Source: Ash Waechter

Source: Ash Waechter

Environmental concerns about methane emissions continue to grow as more people understand the negative climate implications of this incredibly potent greenhouse gas. Now the financial community is taking note of not only the environmental risks but the impact of methane emissions on the oil and gas industry’s bottom line. Methane leaks not only pollute the atmosphere, but every thousand cubic feet lost represents actual dollars being leaked into thin air—bad business any way you look at it.

Last week the Sustainability Accounting Standards Board (SASB)—a collaborative effort aimed at improving corporate performance on environmental, social and government issues—released their provisional accounting standards for the non-renewable resources sector, which includes oil and gas production.

These accounting standards guide companies on how to measure and disclose environmental, social, and governance (ESG) risks that impact a company’s financial performance. Their work highlights the growing demand amongst investors and stakeholders for companies to report information beyond mere financial metrics in order to provide a more holistic view of a company’s position.

Setting a New Standard

In the newly released standards, SASB writes that “the management of highly potent methane emissions from oil and gas [extraction and processing] systems has emerged as a major operational, reputational and regulatory risk for companies.” This language signals a shift in the way the financial sector views the impacts of the oil and gas industry.

Moreover, these standards are developed through a rigorous, multi-stakeholder process involving participants from the energy industry, investment community, accountants and NGOs, including EDF. According to SASB, participants in this industry working group represented companies with a combined market cap of more than $2 trillion, and investment firms with more than $3 trillion in assets under management. Such broad participation implies that a considerable portion of both industries now consider methane emissions a major environmental and financial issue. 

Why Now for Methane?

SASB’s approach to creating these standards comes from the traditional accounting and auditing focus on materiality. In layman’s terms, an issue is material if its omission in reporting would potentially influence the economic decision of an investor. Methane emissions—both their quantification and disclosure—are now being seen as a significant data point for making an investment decision.

SASB’s standards come on the heels of Goldman Sachs CEO Lloyd Blankfein’s very public comments about methane emissions. Speaking on The Charlie Rose Show following Goldman Sachs’ North American Energy Summit last month, Blankfein discussed the importance of methane emissions to the oil and gas industry, stating that getting permits without strong methane rules is a “very hollow victory.” He asserted that it’s in the industry’s interest to get strong, sensible regulations in place now because in the long run industry is going to need to address this issue one way or another. I couldn’t have said it better myself.

Having worked in both accounting firms and on Wall Street for a number of years prior to EDF, I can tell you from firsthand experience that these are communities where, traditionally, environmental issues are not top of mind. Wall Street is wholly and entirely focused on gauging and understanding risks, and creating returns for clients, period. When financiers and accountants start expressing public concern about an environmental issue, you can be sure that it has a direct impact on a company’s competitiveness.  The oil and gas industry should pay special attention to this dynamic.

The EPA will make a decision later this year on how to best obtain methane reductions from the oil and gas industry, including whether to move forward with new national rules.   Given the growing risks to the industry’s social license to operate and bottom line, it’s in their own interests to proactively address methane as suggested by Blankfein. The best way to do this, in our view, is by supporting smart, cost-effective national policies that will achieve signification reductions of methane emissions.

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3 Comments

  1. john bosch
    Posted July 8, 2014 at 5:37 pm | Permalink

    Very well written. This is exactly the situation I predicted five years or so ago. I also predicted increased pressure points on petroleum-related industries including health damage litigation and environmental justice lawsuits dealing with methane and corresponding air toxics. Both the fenceline measurement technologies (e.g. Picarro CRDS technology) and internet mapping capabilities are now commercially available and beginning to be used for evidence of excessive and harmful emissions.

    My EPA experience convinced me that industry has worked hard and lobbied diligently for many years to minimize their reported emissions of Volatile Organic Compounds as well as methane–and which are far, far below their real emissions and which is becoming publicly known as emissions are.measured by the new mobile and fenceline measurement techniques.

    The above tools are now ready for use by the public and purposeful environmental action groups including civil rights organizations. Emitting petroleum industries in all the upstream, midstream, and downstream sectors should beware and take heed before they really feel the pain. (For that matter, I don't understand why there is not real self-regulation within the industry since just one bad upstream incident could force many well-run wells to shut down similar to what happened in the Gulf of Mexico.)

    • Sean Wright
      Posted July 9, 2014 at 5:00 pm | Permalink

      Thank you John for your response and nice comments. I appreciate your interest in EDF’s work on natural gas and methane emissions. I agree with your point that industry should certainly “take heed” of this issue, and proactively address it now. Concern around methane emissions continues to grow as people better understand the size and nature of the problem, driven in part by advancements made in monitoring technology and evolving scientific research. I agree that the industry should do more to self-regulate since, as you rightly point out, it’s in their own collective self-interest. However, considering the highly fragmented nature of the oil and gas industry with thousands of individual producers it’s not realistic to think that we can get all the emissions reductions that we need through voluntary measures alone. To really address this issue properly we need smart, national policy that ensures industry is utilizing the cost-effective technologies and operational practices we know exist to limit emissions as much as possible.

  2. Posted July 14, 2014 at 11:38 pm | Permalink

    Methane pollution is occurring for long time. People protested but nothing happened. Its inevitable, what's happening now. Thanks for sharing your concern.

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