Managing Methane Will Protect Climate and Reduce Investor Risk
A warming planet, which we’ve seen these past few decades, is linked to systemic risks to portfolios, operational and financial risks to companies, and existential risks to human health and life on Earth.
What gives? Science tells us that there are gases that contribute to the “greenhouse effect,” which traps heat that would otherwise escape from Earth’s atmosphere and keeps it circulating, creating a warming effect. These greenhouse gases (GHGs) include water vapor, nitrous oxide, carbon dioxide and methane.
NASA calls GHGs “a blanket around the Earth” – presumably for their ability to smother, not snuggle – and highlights the Intergovernmental Panel on Climate Change’s conclusion that there’s a greater than 95 percent chance that human-produced GHGs “have caused much of the observed increase in Earth’s temperature over the past 50 years.”
Each GHG plays a role in the greenhouse effect, but methane, the primary component of natural gas, has an outsized impact. While methane is present in lower quantities than carbon dioxide in the atmosphere, it packs a bigger punch: it has 86 times the warming potential of carbon dioxide over a period of 20 years.
For investors, methane’s powerful warming potential intensifies concerns are:
First, methane emissions can expose companies to reputational and/or market share risk by reducing the environmental advantages of natural gas over other carbon-intensive fuels such as coal. Some estimate the environmental benefit threshold for methane is a leakage rate of merely 3.2 percent, after which point natural gas may lose its environmental edge.
Second, methane emissions generally represent lost product resulting from imperfect systems that fail to bring natural gas to market: somewhere along the value chain, in extraction, transportation, storage or processing, the product leaves the system. This possibly leads to environmental damage and risks shareholder value. One study estimated that the “sector loses $30 billion globally each year from leaked or vented methane at oil and gas facilities.”
Third, though companies may assert “compliance with existing laws and regulations,” regulatory compliance does not necessarily ensure sufficient management of emissions. Considering current political trends, it seems likelier that regulations will be retracted rather than drafted, weakened rather than enforced. We believe that inattention on the policy level does not indicate an absence of risk on the operational, environmental, or investment levels. Regardless, minimum regulatory compliance will not help investors identify leaders or innovators.
Methane as Risk; Methane as Opportunity
You’ve heard the phrase, ‘canaries in the coal mine?’ It is tied to methane: Before technology existed to warn miners about the presence of dangerous gases such as odorless, colorless methane, canaries were the detectors. The question, “Is methane present?” was answered with: “is the canary still breathing?”
If you want to keep the canaries singing, you may wish to support strong methane management systems by supporting proposals that encourage companies to manage emissions transparently and reduce them ambitiously. That is what companies situated to lead in a lower-carbon future can do, to the benefit of their investors.
Chief Operating Officer, Miller/Howard Investments