By Sean Wright
An early leader in ESG (Environmental, Social and Governance) investing, Harvard Management Company (HMC) was the first U.S. university endowment to sign the UN-supported PRI ESG investing initiative in 2014. Sean Wright, Senior Manager at the Environmental Defense Fund had the recent opportunity to speak about methane and ESG investing with Michael Cappucci, Senior Vice President of Compliance and Sustainable Investing at HMC.
HMC manages the university’s $37 billion endowment and believes ESG risks can have indirect and direct impacts on a company’s performance. Part of HMC’s work with Principles for Responsible Investment (PRI) includes co-leading a group of institutional investors examining the global efforts underway to limit methane emissions and the opportunities to increase their effectiveness. As HMC’s representative to that group, Michael explains below why methane is a risk for all investors and how far the industry has come in just a few short years.
Sean: How did methane management become a topic of interest for HMC, and how do you view methane among other climate risks? How has the issue changed in the past 12 months?
Michael: Harvard has been committed to sustainable investing principles for a long time. In the early 1970s, the university formed two committees to focus on matters of shareholder responsibility—in particular, exercising the university’s right to vote proxies. Becoming a signatory to the PRI, as well as the CDP’s climate action program in 2014, were natural extensions of that commitment.
We became interested in methane emissions as a result of our involvement with the PRI. What caught our attention was the direct link between fugitive methane emissions in the supply chain and wasted saleable product where markets exist, with implications for operational efficiency and the bottom line. If natural gas is going to achieve its promise as a “cleaner” transition fuel in a low-carbon economy, it is imperative that companies do a better job of eliminating preventable waste.
Organizations like the PRI and EDF have really put a spotlight on the issue of methane emissions. We’ve seen several prominent operators announce voluntary initiatives—moving beyond federal regulatory requirements—to improve their methane reporting and set emissions reduction targets. These are signs of real, positive momentum.
Sean: How does engaging on a topic like methane fit into your broader sustainable investing framework?
Michael: Methane is an example of a commodity that creates both a series of risks and opportunities for investors, which is at the crux of what investors must do when evaluating ESG considerations. As a pollutant, methane is 84 times more powerful than carbon dioxide over a 20-year period and responsible for a quarter of the global warming happening today. That is a risk not just to emitters in the oil and gas sector, but to investors everywhere. On the other hand, one study estimated that the oil and gas industry loses $34 billion a year from methane waste. Those might as well be dollars lost into the atmosphere. Operators who are better at tackling methane risk are better at driving operational efficiency and, therefore, better positioned for the long-term.
Sean: HMC, along with a number of peers, have engaged public companies on the issue of methane emissions for several years. ExxonMobil’s subsidiary XTO recently announced it has been able to decrease methane emissions by 9 percent since initiating methane mitigation efforts in 2016, and the company has set a methane target for future reductions. What is the significance of companies like ExxonMobil committing to support methane policies and regulations?
Michael: We were thrilled to see the ExxonMobil announcement. The 9 percent reduction by XTO equates to something like 1.4 million metric tons of CO2 equivalent emissions avoided. That is a great step in the right direction. But to achieve the targets of the Paris Agreement, we need all companies to set and achieve more ambitious CO2 and methane emissions reduction targets.
I don’t know if it got as much attention, but just recently, ExxonMobil reaffirmed its call on governments to regulate and reduce methane emissions from the oil and gas industry. That’s a significant change from just a few years ago. We’d like to see the company follow through and work with governments to support common-sense regulations. In addition to individual target setting, there needs to be coordinated regulation and policy at the state and federal levels, building on current technology, if we’re going to fulfill the Paris Agreement.
There is a group of large natural gas companies working under the name ONE Future, which is promoting voluntary measures to reduce methane emissions across the supply chain. That’s another step in the right direction. We would also like to see companies improve their direct measurement and public reporting of methane emissions so that investors can hold them accountable.
The next great leap will come as oil and gas companies implement the TCFD recommendations. I know EDF, along with the PRI and Ceres, is working on a whitepaper to address the issue of methane emissions disclosure within the TCFD framework. That will be a great tool for investors and companies alike.
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KEYWORDS: tcfd, PRI, methane, endowment fund, esg, SRI, Climate Risk, EDF+Business