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Improving disclosures is key to ESG investment in midstream, analysts say

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Improving disclosures is key to ESG investment in midstream, analysts say

Efforts to lower greenhouse gas emissions and improve pipeline safety make the U.S. midstream energy sector an area of opportunity for environmental, social and governance-focused investors, but companies must disclose their progress to attract more shareholders, analysts at BMO Capital Markets said.

The analysts pointed to data from the U.S. Environmental Protection Agency and the U.S. Pipeline and Hazardous Materials Safety Administration that showed a drop in emissions from 2011 through 2017 and a decrease in pipeline incidents from 2010 through 2018, even with exuberant oil and gas production and construction of additional pipeline mileage. But the industry is behind the curve when it comes to engaging the specific class of unit holders interested in ESG issues, the analysts wrote in a Sept. 19 note to clients.

"The U.S. midstream sector is addressing environmental and social concerns at the micro level, but the data is not being properly disseminated to investors by companies," the analysts said. "It's incumbent upon the midstream sector to be the mouthpiece for the significant strides in adequately addressing ESG investor concerns."

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The analysts' conclusion that the communication efforts lack "homogeneity and standardization" echoed other recent comments. Portfolio managers, research analysts and proponents of ESG standards have said guidelines and policies for ranking pipeline companies' environmental performance are developing more slowly than investors' interest in climate change.

"I've suggested ... that maybe some of the bigger companies should form an intercompany working committee or something to standardize what everyone's going to disclose, because until then, it's great that they're embracing this, but it doesn't lend itself again for me to declare definitively that Midstream Company A is better on ESG metrics than Midstream Company B," said ClearBridge Investments LLC Managing Director Chris Eades, who focuses on the firm's energy master limited partnership strategies. Eades made his remarks in an August interview.

Still, companies such as ONEOK Inc., Kinder Morgan Inc. and Williams Cos. Inc. have ramped up disclosures enough to be included in ESG-focused exchange-traded funds. Their conversion from MLPs to C corporations also helps because the partnership structure's tendency to limit shareholder voting rights and concentrate decisionmaking power in the C-suite presents corporate governance issues, the BMO Capital Markets analysts said.

"We ... found unsurprising the ubiquitous holding of [Oneok], which we attribute to the company having been a sector leader in ESG disclosures after having provided annual sustainability reports for the past 11 years," the analysts said.

Kinder Morgan, meanwhile, became the first pipeline company to adopt a climate change-related shareholder resolution, after shareholders at the company's 2018 annual meeting voted in favor of issuing reports on sustainability and how the company will function in a world that restricts the use of carbon in accordance with the Paris Agreement on climate change.

The analysts observed, however, that spills from liquids pipelines did not substantially improve during the Pipeline and Hazardous Materials Safety Administration's reporting period. Even Oneok spilled at least hundreds of thousands of gallons of natural gas condensate around a pipeline at its Garden Creek processing plant in North Dakota in 2015.