A new guide outlines how oil and gas companies can practically apply the recommendations of the Task Force on Climate-related Financial Disclosures, or TCFD, when it comes to methane emissions-related risks, opportunities and strategies.
The guide by Ceres, the Environmental Defense Fund and the United Nations' Principles For Responsible Investment, breaks down how a company could apply each component of the TCFD's recommendations in three phases and describes what investors may hope to glean from the information the companies provide in their related sustainability or other reports.
The Financial Stability Board's TCFD in 2017 issued recommendations on a voluntary, common international framework for large companies across most sectors and investors to make informed decisions about their exposure to climate-related risks and opportunities and in a manner that would allow apples-to-apples comparisons.
The task force at the time suggested four areas companies should cover in their disclosures: governance, strategy, risk management, and the use of metrics and targets.
Gas-fired generation offers a cheaper and lower carbon-dioxide-emitting generation resource than coal-fired plants and can aid nations in the transition to a low-carbon economy, the guide said. But methane emissions threaten the potential climate benefits of natural gas and therefore pose a "serious reputational risk for the energy source," said the guide titled "Setting the Bar: Implementing the TCFD Recommendations for Oil and Gas Methane Disclosure."
Uncombusted natural gas is primarily made up of methane, which can leak from a number of points along oil and gas infrastructure, including at the well site where the fuels are drilled. Methane is estimated to be at least 84 times more powerful than carbon dioxide as a global warming agent over a 20-year time period, according to the UN's Intergovernmental Panel on Climate Change. And oil and gas companies have come under increasing pressure from investors to assess and address their methane-related risks and opportunities.
But methane also represents some near-term economic potential for the oil and gas sector, the guide said, because any methane emissions are a lost opportunity to sell more natural gas. The Rhodium Group in 2015 estimated that the amount of natural gas that had escaped into the air from oil and gas operations in 2012 translated to about $30 billion in lost revenue. And the International Energy Agency in a 2017 world economic outlook estimated oil and gas companies could curb between 40% and 50% of methane emissions from their operations at no net cost because the value of the captured methane would cover the abatement measures.
In addition to being an environmental issue, methane poses a governance challenge for oil and gas companies. Investors will read the governance section of companies' TCFD-related reports to understand the reporting structure and accountability mechanisms between senior management and the board on methane oversight. "A key question for investors is whether incentives for senior management are aligned in a way that encourages executives to appropriately prioritize the issue," the guide said.
Companies should also outline in their reports how methane-related risks and opportunities impact their business and how those risks and opportunities are addressed by the companies' short- and long-term strategies. The guide said companies should also report if methane management is included in the company’s financial planning process and over what time period.
On the topic of risk management, the guide suggested that a company reveal if it has analyzed whether methane emissions pose a material risk to the company and, if so, the results. Investors may want to know how the company will continue to monitor methane risks. But investors also want to know how the company is managing methane in its operations, including leak detection and management, and employee training programs.
The TCFD recommended companies disclose the metrics and targets they use to assess and manage material climate-related risks and opportunities. The metrics are designed to help investors understand and track how companies are implementing policies and processes around governance, strategy and risk management, the guide explained. "For example, a company may discuss how methane mitigation technology ... fits into their emissions management strategy while also disclosing the amount of capital invested into such new technologies," the guide said.
It also said a company should indicate whether it uses an internal price on carbon and if the company applies that price to methane and why. A company can also provide details on the financial impacts of lost methane and on methane emissions levels by business segment, emissions category, source and geography.
Companies can also give investors a clearer idea of how different data is gathered so the investors know how accurate the information is likely to be. For instance, the company could indicate to what degree it is measuring emissions directly or estimating the emissions inventory through engineering equations. "Companies that do not utilize direct measurement will risk underestimating their emissions and will also lack the detailed information needed to develop and execute an optimized risk management plan," the guide said.
Outlining targets for methane may be a bit trickier, the guide said, because no standard framework exists for setting a science-based methane target. But companies can still set ambitious targets based on technical data that support their strategy and risk management priorities. Methane targets could include the scope and methodology, and the targets can be operations-focused, the guide said.
