Investor Insights: Best Practice for Emissions Reporting and Mitigation

Environmental considerations are increasingly becoming a central element of investment decision-making, with investors recognizing that companies that prioritize environmental responsibility are often more resilient and better aligned with the expectations of consumers, regulators, and society at large. Investors are now pushing for greater transparency and disclosure regarding methane emissions, encouraging companies to adopt best practices that align with industry standards.  

As one of the largest public pension funds in the United States, CalSTRS holds significant sway in financial markets and plays a pivotal role in shaping corporate behaviour and sustainability practices, with an increased focus on ESG considerations and methane emissions.  

To explore the shifting dynamics of investment around methane emissions and environmental responsibility, we spoke with Nile Garritson, Associate Portfolio Manager, CalSTRS to hear his views about the trends and initiative shaping investor attitudes. In this exclusive interview, Nile talks about the evolving landscape of methane data, benchmarks, and collaborative efforts between companies and investors. Read as the conversation delves into the growing pressure on investors to prioritize sustainability and sheds light on the profound changes in investor attitudes and its impact on the industry. 

Grant Schwer, Industrial Decarbonization Network: What do investors, like CalSTRS, regard as best practices for methane emissions reporting and mitigation? 

Nile Garritson: First and foremost, the basics provide us with the primary inputs, such as methane emissions measured in metric tonnes of CH4. Additionally, we require intensity calculations, which align with industry standards. As of now, these standards typically involve expressing emissions as kilograms of CO2 equivalents per barrel of oil equivalent (BOE) of production. Alternatively, you can present your methane intensity as a percentage relative to your gas production. It's equally crucial to share the methodology behind intensity calculations, to enable benchmarking. This transparency is vital because there are nuances to consider, and comparability is very important for investors, especially those that own stocks across the value chain. 

Finally, I'd emphasize the importance of providing context and quantification regarding how widespread the use of various direct measurement technologies is. In many sustainability reports, there is often a lot of discussion and general statements about the use or experimentation with different technologies. However, from an external perspective, it can be challenging to understand just how prolific the use of these technologies is.  

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Grant Schwer, Industrial Decarbonization Network: Are there any specific benchmarks or standards that investors use to assess a company's methane management efforts? 

Nile Garritson: I would say it's still very much evolving, but for us, there are a few aspects that are important to observe. I assume these factors will become more prevalent over time.  

First, we look to see if companies are developing a marginal abatement cost curve. Sometimes, this is the case, yet they may not explicitly mention it in their sustainability reports. Often, we discover this information through conversations, which is equally helpful. However, I believe it's something the market would appreciate knowing. This approach helps stakeholders better understand and appreciate that the company has a method for prioritizing their abatement efforts to maximize their impact, similar to how they manage other annual activities like drilling programs. 

Another aspect we look for is whether companies are utilizing the Veritas protocols to align their direct measurement activities with industry standards. Finally, we are keen to see if companies have made a commitment to the OGMP 2.0 framework for methane emissions. 

Grant Schwer, Industrial Decarbonization Network: How do you foresee the types of methane data required by investors changing in the future? Are there emerging technologies or methodologies that might influence how investors evaluate methane emissions? 

Nile Garritson: I believe that the kinds of methane data that investors will demand in the future will evolve away from estimations based on factors towards the results of direct measurements. This seems almost inevitable. 

With respect to emerging technologies and methodologies, there are developments. Some of these innovations come from third-party entities. Specifically, I'm referring to initiatives like MethaneSAT by EDF and the Basin Wide Index by Kairos, where these third parties are conducting direct measurements on a company's assets, ultimately leading to their own intensity measurements. In many cases, we can expect to see different results from these third-party direct measurement activities as compared to what companies have been reporting. It's important to note that these differences don't necessarily indicate improper conduct; it’s just the nature of differences between factor-based estimates and direct measurements. However, companies will need to develop strategies to help investors in reconcile the differences between the two sources. 

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Grant Schwer, Industrial Decarbonization Network: Are there global trends or initiatives that are shaping investor attitudes towards methane? 

Nile Garritson: Yes, indeed! Firstly, there is a general growing recognition that the abatement of methane emissions from oil and gas operations is positioned at the lower end of the world's marginal abatement cost curve. When considering all man-made greenhouse gas emissions, this is where you can achieve the most substantial impact in terms of abatement and its impact on climate change. 

Another trend we see is the general expansion of LNG (liquefied natural gas) trade, a development that has been ongoing for several years. Methane emission intensity, particularly the intensity profile of a cargo throughout its value chain from the well to its ultimate delivery, is gaining importance for buyers, particularly in Europe and Asia. Russia's invasion of Ukraine has perhaps accelerated this trend, given the need to displace many pipeline-based gas imports into Europe with LNG. 

Lastly, consumer expectations are evolving. As U.S.-based investors, we hold a perspective that shows growing interest among states and state regulators in the emissions intensity profile of the gas molecules being delivered to end-users. This reflects a broader shift toward greater transparency and environmental responsibility. 

Grant Schwer, Industrial Decarbonization Network: How can companies and investors work together more effectively to address methane emissions and strategies? 

Nile Garritson: There are steps that both companies and investors can take. From the company's perspective, they need to be candid about the limitations of their existing disclosures. On the investor's side, it's essential to communicate the understanding that the results of direct measurements may, in some cases, reveal higher-than-expected emissions intensities, potentially by a significant margin. However, it's crucial to convey to companies that this is acceptable, as the intention is not to play a "gotcha" game but to foster transparency and provide better data. 

In fact, investors, like ourselves and hopefully others, see this as an opportunity to have a more substantial impact. If a company's actual methane emissions intensity is significantly higher than expected, it might indicate profitable opportunities for abatement because there's more gas to recover and generate revenue. Another important point for investors to communicate to companies, especially as direct measurement becomes more common, is that a degree of uncertainty represented by error bars is acceptable. We acknowledge the challenges involved in conducting precise direct measurements, and it's perfectly fine to present a range of values, as this reflects the current state of measurement technologies. This is part and parcel of the landscape until technology improves and becomes cheaper. 

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Grant Schwer, Industrial Decarbonization Network: There is growing pressure on investors to invest in companies that focus on sustainability. Where do these pressures come from? 

Nile Garritson: Pressure on this issue comes from a variety of sources, and the nature of the pressure varies depending on the source. First and foremost, I can't offer a mathematical or quantitative proof of the statistical significance of a company's methane emissions intensity on factors like valuation multiples or the cost of debt. However, we do hear about various impacts across different capital markets that suggest it does have an effect. Anecdotal evidence suggests that this influence is observable in areas such as private equity, with companies experiencing greater interest in their data rooms if their operations demonstrate clean emissions practices. This influence is also noted when companies negotiate their credit facilities and seek access to private debt markets. While it's challenging to provide a precise quantification at this stage, there's a clear presence of this effect. 

I'd say that equity investors likely hold the most substantial voice in the broader capital markets. There is growing pressure and rising expectations for companies to elevate their environmental standards.  

I'd also like to emphasize that attention to detail in one area of your business often serves as an indicator of attention to detail in another area of your business. While this is a sweeping characterization, it's generally true that companies which are capital-efficient and effective in managing their costs are likely to excel in emissions reduction efforts. Investors generally prefer to be associated with clean and environmentally responsible operations, and this sentiment is quite pervasive. 

Grant Schwer, Industrial Decarbonization Network: That's always been the case, but is it now more pronounced?  

Nile Garritson: It is indeed on the rise and a major catalyst was COVID. When oil demand plummeted to the low 80s, it acted as the final straw for many investors. They started exiting the industry, viewing it as uninvestable and even as a career risk to be associated with oil and gas stocks. There was also business risk as clients applied pressure to asset managers and hedge funds to divest from this sector. What remained were mostly asset owners and a significant number of index holders who had some of the loudest voices when it came to ESG and emissions. 

As the generalist investors departed, the voices of those who remained became even more prominent. While there may have been some subsiding of these pressures to some extent, they continue to be a focal point. The active attention to these concerns remains strong. 

Interested in learning more?

Join over 200 of your peers at the Methane Mitigation America Summit, taking place at the Norris Conference Center in Houston, TX this December 5-7, 2023. America’s largest gathering of oil and gas leaders, methane mitigation vendors, NGOs and policy makers, this year’s summit will cover the latest tools, strategies and opportunities for reducing emissions across your operations. Download the agenda for more information.