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Pipeline sector stays behind the curve as BlackRock addresses climate risk

While some industry experts believe that BlackRock Inc.'s directive to fossil fuel companies on environmental disclosures and sustainability should help motivate energy pipeline companies to improve reporting, others are not sure that it will move the needle at all.

In his annual letter, BlackRock Chairman and CEO Larry Fink urged chief executives to put climate consideration at the forefront of their operations ahead of a "fundamental reshaping of finance" spurred by climate risk, and the world's largest asset manager elected to make sustainability a "new standard" within its own approach to investing through a series of proposals it rolled out Jan. 14.

Investors such as BlackRock, which holds material positions in a slate of North American midstream C-corps and master limited partnerships, are increasingly reshaping the way the oil and gas industry talks about and mitigates its businesses' impacts on climate change. But that remodeling has largely stopped short of the North American pipeline sector, where standardized environmental data sharing has yet to become mainstream, despite growing investor inquiries about environmental, social and governance issues.

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While midstream corporations such as Williams Cos. Inc., Kinder Morgan Inc. and Oneok Inc. have separated themselves from the pack by ramping up annual disclosures, the majority of the industry needs to catch up, and BlackRock's directive helps put that urgency "front and center," BMO Capital Markets midstream analyst Danilo Juvane said.

"They're going to have to disclose. … They've done a poor job of disseminating data to the masses," Juvane said in an interview. "Some midstream companies, for instance, will have what they call ESG disclosures, but it's really like a pamphlet, and it's two or three pages, very bare-bones information. … It's pretty clear that they are just trying to check the box."

Credit Suisse midstream analyst Spiro Dounis said that while BlackRock's announcement is not an "inflection point" for midstream companies, he does expect more large institutional investors to issue similar messages this year.

"ESG as part of a framework for investing is getting even more important, and midstream companies … can sit there and look at it as a threat or an opportunity to distinguish themselves, and … the latter is preferred," Dounis said in an interview.

In addition to investing in the sector, BlackRock also includes several pipeline corporations such as Kinder Morgan and Oneok in multiple ESG-focused exchange-traded funds it manages.

While the asset manager's executives have publicly championed strong sustainability practices, BlackRock has been found to have a spotty record when voting on climate-themed shareholder proposals at its portfolio companies, in addition to retaining investments in oil, gas and coal companies. A 2018 report found that BlackRock supported 9% of key climate shareholder initiatives in the 2017 proxy season while voting in favor of 14% of proposals for companies to specifically outline their risks under the Paris Agreement on climate change.

"We live in a hydrocarbon-based economy, and BlackRock isn't going to not invest in Inc. because they use trucks for delivery or Apple Inc. due to the mining of materials in its phones," Henry Hoffman, a partner at energy-focused investment firm SL Advisors LLC, said in an email.

According to Robert W. Baird & Co. midstream analyst Ethan Bellamy, history also shows that investors ultimately care more about their bottom line than any ESG impacts.

"Recall how well tobacco stocks performed even as they became socially unpalatable. The vast majority of investors still care about making money more than virtue signaling," Bellamy said in an email.

Meanwhile, environmental slipups like pipeline spills do not usually hurt stock prices long term or eat significantly into balance sheets.

"Pipeline spills damage reputations but not pocketbooks," Morningstar's Stephen Ellis wrote in a Dec. 13, 2019, note to clients. "These incidents are notorious for creating negative buzz for the oil and gas industry. But despite the notoriety, spill-related costs have a minimal impact on pipeline operators' cash flow."