By Kate Gaumond, Analyst, EDF+Business
When I worked on the trading floor at Goldman Sachs, one of the major services we provided our corporate clients was risk management. Sitting on the commodity desk, we bought and sold financial products that allowed the world’s biggest consumers and producers to manage their exposure to the often fluctuating price of natural resources like aluminum, crude oil, and natural gas. Companies take action to manage this price risk in order to provide long-term stability for the company and its investors.
Now as a member of the EDF+Business team, I focus on a different kind of risk: climate risk. And just like financial risk, it needs to be managed for the long-term benefit of all stakeholders involved.
Methane Risk is Climate Risk
Investors are catching on, recognizing that information about climate risk is vital to maintaining robust portfolios of well-managed companies. And for investors to be serious on climate, they have to be serious not just on carbon dioxide, but on methane as well.
Beyond contributing to climate change, methane poses a specific reputational risk to the long-term future of the oil and gas industry. Oil and gas operators are betting on the idea that natural gas could be the cleaner burning fuel of the future. However, until the methane problem is fixed, operators are leaking away much of the climate benefit of natural gas, and tarnishing their product’s brand of “clean” energy.
Fortunately, investors have a unique business-minded voice, and important power, to influence industry and policymakers to ensure that climate risk, like any other material risk, is managed and disclosed to everyone’s gain.
Shareholder Resolution Successes
One kind of powerful leverage investors have to call for better methane management is through direct company engagement. This engagement can involve collaborative problem-solving between investors and operators to best address methane risk. Another route is shareholder resolutions. In 2017, investors filed 17 total methane resolutions with companies across the natural gas value chain. And this year these resolutions had unprecedented success.
The resolutions that went to a vote achieved near majority turnout. Resolutions for ExxonMobil, Kinder Morgan, and Occidental all received roughly 40% votes. And while those votes do not obligate a company to respond, the investor voice is a persuasive one to management. When 40% of a company’s shareholder base wants information, it is in the company’s best interest to act. For example, just months after the near 40% vote on methane, ExxonMobil announced a sensible and innovative plan to manage methane emissions on all upstream and midstream XTO assets. Investors spoke and management listened.
Methane management disclosure still has room to improve. The oil and gas industry prides itself on continuous improvement, and investors must hold these companies to high standards on methane risk management, calling for clear reduction targets and detailed action plans on how to achieve them.
Regulations and Returns
Not limited to company engagement, investors can use their voice to advocate for sensible and effective policy as well. In an industry as fragmented as oil and gas, investors understand that smart, common-sense methane rules are necessary to ensure that the best operational practices are standard across the industry, minimizing the risk of long-term reputational damage to natural gas. In 2017, investors engaged on policy at the state, national, and international level. Investors testified in front of EPA hearings to stop short-sighted attempts at delaying US federal methane rules. Internationally, investors co-signed a letter to Canadian policymakers to strengthen the proposed methane rules in order to best protect investors’ stake in the oil and gas industry.
Especially considering today’s political environment, investors will need to continue to leverage their voice to make policy makers understand the business case for smart regulations. Investors have the unique ability to hold companies accountable for their public statements, and to their lobbying and trade association memberships that attempt to dismantle risk-reducing rules.
Looking to 2018
Investors understand the risk methane poses to their portfolio, and are increasingly tilting their portfolios towards companies that are seriously addressing climate risks like methane. Astute operators recognize this trend and are listening to the voices of their investors. The risks of unresponsiveness are too great to ignore. With the progress of 2017 as a springboard, operators should only expect investor engagement on this material risk to grow.