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Buying Time on the Road to 2050

COP26’s methane pledge will force change, but impacted sectors must first improve measurement of emissions. 

The transition to net zero greenhouse gas (GHG) emissions by 2050 can feel like an impossible task, requiring the sustainable reconfiguration of whole industries. When reconstructing their portfolios, where do investors even start? For many, the answer is CH4.

“Methane emissions are the biggest driver of near-term global warming that we have the ability to address,” Andrew Logan, Director of the Oil and Gas Programme at US-based NGO Ceres, tells ESG Investor. With asset owners and asset managers under pressure to set net zero GHG emissions targets, it’s vital they pay attention to methane-related risks alongside CO2, he warns.

Methane is the second most abundant anthropogenic (human-influenced) hydrocarbon in the world, accounting for around 25% of global emissions, according to a Principles for Responsible Investment (PRI) report.

It is also “80 times more potent than CO2 as a contributor to global warming over a 20-year period”, notes Teni Ekundare, Head of Investor Outreach at the FAIRR Initiative, a collaborative investor network focused on food and agriculture and supported by US$45 trillion in assets under management.

The biggest emitters are oil and gas companies and the agricultural sector, producing 134 million tonnes and 145 million tonnes of methane emissions a year respectively, the International Energy Agency (IEA) has said.

Further, these man-made emissions have the potential to trigger releases from natural stores. Significant warming in the Arctic is thawing the frozen permafrost below ground, which will in turn release more CO2 and methane into the atmosphere.

The good news is that while CO2 can stay in the atmosphere up to 1,000 years, methane sticks around for just 12 years on average. Cutting methane emissions will very quickly have a positive impact, noticeably slowing overall global warming and buying the world more time to source solutions to combat long-lasting CO2 emissions.

Cutting these emissions from oil and gas and agriculture will also help investors decarbonise their portfolios in line with their own interim targets on the way to net zero.

Winds of change

Governments around the world are recognising the important part methane will play in their overall net zero targets and nationally determined contributions.

At COP26, over 100 countries representing 70% of the global economy committed to reducing global methane emissions by at least 30% from 2020 levels by 2030. The Global Methane Pledge, spearheaded by the US and EU, also includes a commitment to identify and implement the best available methodologies to quantify methane emissions. Delivering on the pledge will reduce global warming by at least 0.2°C by 2050.

“We’re now talking about methane in the same way as we were about CO2 ten years ago,” says Ekundare. “However, too few companies track and measure it properly, and that has to urgently change.”

It is expected that methane-focused regulations and policies will be increasingly introduced by pledge signatories, putting pressure on companies to more actively measure, disclose and reduce their emissions.

The EU and US are leading by example, both having published their own policy agendas that will address methane emissions produced by the oil and gas and agriculture sectors.

Europe’s methane strategy has outlined plans to improve the measurement and reporting of emissions, require the energy sector to improve the detection and repair of gas leaks in infrastructure, promote opportunities to reduce emissions in agriculture through the Common Agricultural Policy and reharness methane produced in landfills.

President Joe Biden announced draft US rules at the summit, including the requirement for oil and gas companies to more accurately detect, monitor and repair methane leaks in their infrastructure. The Environmental Protection Agency (EPA) has estimated this would cut 41 million tonnes of methane emissions between 2023-35. The Department of Agriculture will be focusing on ways to capture methane from agricultural practices and across the food chain.

If methane-emitting companies commit to absolute reduction targets that, at a minimum, align with the Global Methane Pledge, they will find it much easier to reach their interim decarbonisation goals, typically set for 2030.

But it’s going to be easier for oil and gas than agriculture. Investors need to be aware of the challenges and opportunities within each sector, engaging with companies to ensure they are prioritising methane emission reductions, experts say.

Stopping a methane leak

The oil and gas industry has its work cut out to align with the goals of the Paris Agreement, and is already subject to climate-related engagement and escalation from asset managers and asset owners.

However, cutting methane emissions could be a “short-term easy win” that will help companies meet their interim decarbonisation targets, says Logan. The industry’s methane emissions typically come from leakage during gas flaring, which is the burning of natural gas during activities such as oil extraction, he explains.

There has been a “dramatic increase” in investor interest in methane over the course of the past year or so, Logan adds, “especially in the oil and gas sector where it’s eminently solvable”.

“Companies need to be investing in new piping and valves to plug the gaps methane is escaping from,” he says. “As well as reducing emissions, they will be wasting less by-product, so it’s very cost-effective.”

However, disclosure on methane emissions by oil and gas companies is “generally lacking”, making it hard for investors to keep track of progress, according to the PRI report. This is despite the fact the oil and gas industry is losing an average US$30 billion a year in methane emissions.

“Engaging with companies to better manage methane can strengthen the strategic goal of the gas business in delivering clean energy, lowering emissions and creating more efficient operations while putting more saleable product in the pipeline,” the report added.

Investors have also been calling for an increased regulatory focus to ensure companies are better prioritising, measuring and disclosing methane emissions.

Last year, Ceres partnered with the Interfaith Center on Corporate Responsibility, heading the launch of a now 168 investor-strong movement (managing US$6.23 trillion in assets) calling for ambitious methane regulations for the oil and gas industry. Signatories, including Allianz, Legal and General Investment Management and Wespath Benefits and Investments, said that virtually eliminating methane emissions supports the financial goals of both companies and investors.

Further, a 75% reduction in global methane emissions is already possible with current technology, with up to 40% mitigated at no net cost, the statement added.

The United Nations has also been working to incentivise the sector to report on and reduce its methane emissions. The Climate and Clean Air Coalition, launched by the UN Environment Programme, introduced the Oil and Gas Methane Partnership (OGMP) in 2014 as a voluntary initiative to help companies reduce their emissions through its methodology.

The framework was updated in 2020 and aims to improve the credibility of methane reporting and best practice, stimulate growth in OGMP participation from non-members and broaden the understanding of methane-related risks across all oil and gas segments. Members include bp, Shell and the Abu Dhabi National Oil Company.

“It’s going to become increasingly difficult for oil and gas companies to defend themselves if they are still leaking methane in a few years’ time,” says Logan, adding that oil and gas companies could realistically cut out all methane emissions as soon as 2025.

Betting the farm

Reducing the world’s dependence on livestock – through meat, milk, and other products – and therefore cutting agriculture’s methane emissions is far more challenging.

To an extent, it requires a cultural shift away from existing farming practices and dietary habits, but some companies are already proving willing to experiment. For example, last year dairy producer Fonterra trademarked ‘Kowbucha’ following a trial in which it fed kombucha, a fermented tea, to cattle to reduce the amount of methane they generate.

As the human population growth places further demands on farming, methane emissions will become a more urgent problem for investors to address, warns Sudhir Roc-Sennett, Head of Thought Leadership and ESG at Vontobel Asset Management. It will also become more visible, due to a ratcheting up of disclosure requirements.

“The impact of methane emissions is only going to become more apparent when data on Scope 3 emissions improves, as this is where the vast majority of agricultural companies and suppliers sit,” he adds.

Roc-Sennett says the bigger multinationals working with farmers should be engaging alongside investors. “The big buyers have the power to ask farmers to make changes, and they can offer them financial support to help them do so,” he says. “Change is the goal, not destroying the supply chain.”

A recent study by the FAIRR Initiative, assessing 60 publicly-listed animal protein producers against ten ESG-related factors, noted that only 18% of livestock producers said they measured methane emissions. Jeremy Coller, Chair of FAIRR, said that there is a “growing sense in the market that cows are the new coal”.

This current lack of reporting underlines the need for investors to also engage with policymakers on methane, to encourage an increased focus from companies on these emissions.

“The [COP26] announcement on methane reduction was a positive step, but given the livestock industry’s contribution to methane, we need urgent action to underpin those announcements and make them credible,” says Ekundare.

Governments are beginning to take action, she acknowledges, with New Zealand, California and Ireland setting targets to cut emissions from livestock by at least 10%. “They are likely to just be the start,” she says.

But change is overdue, given past performance. FAIRR’s ‘Where’s the Beef?’ statement, which had the backing of investors managing US$12 trillion in assets, called for animal agriculture to be specifically included in countries’ NDCs for reducing emissions. The statement was a response to the absence of agriculture-specific targets in the 16 NDCs submitted by G20 nations ahead of COP26. In comparison, half of the NDCs included specific targets for the energy sector.

Open to innovation

Awareness of the risks of inaction should be balanced with an appreciation of potential upsides. To encourage transition, one of the best things investors can do to help reduce methane emissions produced by the agricultural sector is to invest in the development of sustainable solutions, so that they can be upscaled, experts say.

For example, investors could back companies developing feed additives, such as fats and oils, which some governments suggest could reduce methane production in cattle by 18%. DSM, a Dutch health, nutrition and materials multinational, has developed an additive called Bovaer for cows, sheep, goats and deer. The additive aims to suppress the enzyme that triggers methane production in the livestock, reducing emissions by 30% for dairy cows and up to 90% for beef cows.

Promoting sustainable agriculture solutions is on the radar for many asset owners. A joint report by the World Economic Forum and investment consultancy firm Mercer said that 29% of 30 asset owners representing US$3.4 trillion in assets are investing in sustainable agriculture.

“Cutting methane from agriculture is challenging, but the potential size of the solutions is also very significant and an opportunity for investors,” says Roc-Sennett.

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