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ESG Explainer: Managing the Methane Menace

Six months on from COP26’s Global Methane Pledge, the quick wins needed to achieve 2030 targets pose steep challenges.

At COP26, 112 countries signed the Global Methane Pledge, an initiative designed to reduce global methane emissions by at least 30% by 2030. The signatories recognised that rapid action on methane is an essential complement to cuts in CO2 and other greenhouse gases (GHGs). Delivering on the pledge could reduce warming by at least 0.2⁰C by 2050.

Just prior to COP26, the UN Environment Programme (UNEP) launched the International Methane Emissions Observatory (IMEO) to improve the accuracy and public transparency of human-caused methane emissions. The Observatory will initially focus on methane emissions from the fossil fuel sector, expanding to other emitting sectors including agriculture and waste.

In this explainer, we will look at why methane is attracting such attention and what investors can do to ensure their portfolio companies are supporting action on this gas.

Why is methane a problem?

The Global Methane Pledge states that methane is “a powerful but short-lived climate pollutant that accounts for about half of the net rise in global average temperature since the pre-industrial era”. Methane causes 17% of global GHGs from human activities, principally from energy, agriculture and waste industries.

Of these sectors, signatories to the pledge recognised that the energy sector “has the greatest potential for targeted mitigation by 2030”. To keep a global 1.5⁰C temperature rise within reach, methane emission reductions “must complement and supplement, not replace global action to reduce CO2 emissions, including from the combustion of fossil fuels (coal, oil and natural gas), industrial processes, and the lands sector”.

The Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report from Working Group III points to the need for “deep reductions” in GHG emissions beyond CO2, flagging methane in particular. Global methane emissions – primarily ‘fugitive’ emissions from production and transport of fossil fuels – accounted for about 18% of global GHG emissions from energy supply, the report found. Fugitive emissions are leaks that occur in all parts of energy industry infrastructure, from connections between pipes and vessels, to valves and equipment.

Drew Shindell, Chair of the UN’s Climate & Clean Air Coalition (CCAC) Scientific Advisory Panel and Special Advisor for Action on Methane, says action will be needed in all sectors – fossil fuel, agriculture, and waste – and in all regions to cut emissions by 30% in 2030 and 45% by 2040. “It can’t be just developed countries, it can’t just be developing countries, it’s got to be everywhere because the reductions we need are so large.”

The importance of non-CO2 pollutants, in particular short-lived ones such as methane, in climate mitigation has been “underrepresented”, according to a research paper published by the US’s National Academy of Sciences. The authors found that when historical emissions were partitioned into fossil fuel (FF) and non-FF related sources, nearly half of the positive forcing from FF and land-use change sources of CO2 emissions has been masked by co-emission of cooling aerosols. Pairing decarbonisation with mitigation measures targeting non-CO2 pollutants is “essential for limiting not only the near-term warming but also the 2100 warming below 2°C”, says the paper.

How will the Global Methane Pledge make good on its promise?

The signatories to the pledge committed to work collectively to reduce emissions across all sectors while also taking “comprehensive domestic actions” to achieve the target, “focusing on standards to achieve all feasible reductions in the energy and waste sectors and seeking abatement of agricultural emissions through technology innovation as well as incentives and partnerships with farmers”.

A commitment was also made to using the highest tier IPCC good practice inventory methodologies, as well as working to continuously improve the accuracy, transparency, consistency, comparability, and completeness of national GHG inventory reporting under the United Nations Framework Convention on Climate Change and the Paris Agreement.

The Pledge recognises the “essential roles” that private sector, development banks, financial institutions and philanthropy play to support implementation and welcomes their efforts and engagement.

“With over 100 countries on board, representing nearly 50% of global anthropogenic methane emissions and over two thirds of global GDP, we are well on our way to achieving the Pledge goal and preventing more than eight gigatons of carbon dioxide equivalent emissions from reaching the atmosphere annually by 2030,” says the Climate & Clean Air Coalition Secretariat, a UN programme that hosts the Pledge website.

Ministers from signatory countries will meet to review progress on methane emissions reductions annually. The first meeting is scheduled for November 2022. Andrew Logan, Senior Director of Oil and Gas at US investor network Ceres, says the pledge is an “unprecedented public commitment” to multilateral methane mitigation.

“It came as a welcome vote of support for the major investors, companies, and environmental and sustainability advocates around the world who have been calling for strong government action on this potent greenhouse gas for years. Now, with just eight years remaining until we reach the Pledge’s 2030 deadline, countries and companies must turn their words into concrete, quantifiable action,” he says.

While top emitters such as China, Russia, India, and Iran have not yet signed the pledge, committed countries represent enough emissions to give the pledge the potential to reshape practices and markets – if they follow through on their commitments, adds Logan.

As the world’s largest importer of natural gas, the EU in particular has the potential to impact methane emissions in the countries that wish to sell into its massive market.

What actions are being taken on methane emissions reduction in the energy sector?

Proposed EU regulation provides for measurement, reporting and verification of energy sector methane emissions and immediate reduction of emissions through mandatory leak detection and repair and a ban on venting and flaring (when excess natural gas is released into the atmosphere). The proposal is currently being discussed by the EU Council of Ministers.

Measurement and reporting, says the EU, will help clarify where exactly and how much methane is emitted. This means a shift from estimates to direct measurements, checked by independent verifiers.

Oil and gas companies would need to frequently survey their equipment in order to detect leaks, and to repair them immediately. The proposal allows venting only in “exceptional or unavoidable circumstances” for reasons of safety. It allows flaring only if re-injection, utilisation on-site or transport of the methane to a market are not technically feasible. Finally, it requires flaring to occur under conditions of complete combustion.

For coal, the proposal envisages a ban on venting and flaring of methane by 2025 from drainage stations and by 2027 from ventilation shafts, ensuring that safety aspects in coal mines are accounted for. The proposal also requires Member States to establish mitigation plans for abandoned coal mines and inactive oil and fossil gas wells.

In the US, the Environmental Protection Agency (EPA) has proposed a rule that would sharply reduce methane and other harmful air pollution from both new and existing sources in the oil and natural gas industry. The proposal would expand and strengthen emissions reduction requirements that are currently on the books for new, modified and reconstructed oil and natural gas sources, and would require states to reduce methane emissions from existing sources nationwide for the first time.

What are the risks to investors?

In a February 2021 report highlighting methane emissions from gas-powered electricity generation, Climate Bonds Initiative noted “a major risk that investment in gas is a threat to achieving the goals of the Paris Agreement”.

The report says expected GHG emissions savings from using natural gas instead of coal have been exaggerated, based solely on a plant-by-plant comparison between coal and gas-fired power. These estimates have not included the gas supply chain, which CBI says is a “significant omission”. Gas is lost at the wellhead and through equipment along the transportation route.

“Because gas is mostly methane, even tiny amounts have a significant impact on climate,” the report observed, calling in vain for the EU Taxonomy to take a robust approach to electricity generation by fully excluding gas.

A report from US-based investor network Ceres and the Clean Air Task Force revealed “dramatic variability” between US companies and basins in emissions intensity. The report focuses on exploration and production emissions among the 300 largest oil and gas producers in the US.

Emissions intensity, or the amount of methane or GHG emissions per unit of production, varies widely between even similarly-sized operations, largely due to differences in equipment and operational practices.

Ceres says the findings should help investors differentiate between companies, and will also inform regulators, lawmakers and company executives.

What actions are investors taking?

On 25 May, 98% of Chevron investors voted in favour of a shareholder proposal from Mercy Investment Services calling for the oil and gas major to report on the reliability of its methane disclosures. Chevron will join the Oil and Gas Methane Partnership 2.0, a measurement-based reporting framework for the oil and gas industry.

Mary Minette, Director of Shareholder Advocacy for Mercy Investment Services, said: “Companies that work to reduce their methane emissions will benefit their reputation and licence to operate, as investors, regulators and civil society are setting expectations to address this issue. We urge the company to continue to look for new partners in the work to measure and reduce methane emissions.”

Many investors understand the impact of methane on climate, says Ceres’ Logan and that beyond destabilising the climate and compromising human health, methane emissions represent lost product. “Last year, we saw investors representing US$6.23 trillion AUM call for comprehensive regulations with strict enforcement aimed at urgently curbing methane emissions in a letter to the Biden administration,” he notes.

A key challenge, says Logan, is that methane emissions have been difficult to fully quantify because bottom-up approaches to accounting, which rely on emissions factors, have been the only window into company activities. Those numbers offer a consistent, comparable historical record, but are incomplete. Newer, ‘top-down’ direct measurement tactics, including flyovers and infrared cameras, can help create a more accurate ledger and have the capacity to capture infrequent super-emitter events. But they still need investment and further development to reach their needed scale.

Ceres’ research, which benchmarks the emissions of oil and gas producers in the US, helps investors to directly compare companies’ reported emissions based on the best available data, says Logan. “Investors should advocate for more information by asking companies to join the Oil and Gas Methane Partnership 2.0, which will enable more reliable, comparable top-down data in the future.”

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