27 Apr 2020 3 min read

Methane: carbon’s shadier sibling

By Iancu Daramus , Alexander Burr

Why tackling methane emissions must be a priority for companies and policymakers

 

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With viral videos of gallivanting goats in Wales and boars in Barcelona, it is easy to think that nature is having a small moment of respite, with emissions of carbon and other pollutants falling drastically amid the economic shutdown. Yet given the tragedy of COVID-19, this is not something any of us can cheer.

Some environmental threats we can see – like the smog clogging up our cities. Some, we have learned to respect – like the invisible carbon dioxide that is now increasingly the focus of action from regulators, companies, and civil society. Others, however, have received comparatively little attention.

Foremost among these is methane, a greenhouse gas that is 80 times as potent as carbon dioxide over shorter timeframes[1]. It is currently leaking in huge quantities: recent studies suggest as much as 2% of the gas the world produces leaks into our atmosphere every year[2]. As most of these leaks are often undetected, the real number might in fact be higher: a recent study found methane emissions in a key US shale gas region were twice as high as previously estimated. And there are worries that, with methane being less regulated than carbon, its emissions might actually rise during the coronavirus crisis as oil and gas companies postpone planned pipeline maintenance.

There are also important financial implications. At a macro level, tackling methane leakage will be the defining issue if the industry’s planned pivot from Big Oil to Big Gas proves a success in meeting growing energy demand at a lower environmental cost. At a micro level, this can generate savings for companies, as an estimated 40% of methane emissions could be avoided at no net cost

Despite the gloomy picture, there is some good news. We have already seen companies – from large oil majors to smaller shale producers – adopting zero or near-zero methane leakage targets. Just as the mining industry has adopted zero fatalities as the only acceptable target, zero leaks must similarly become the norm, not the exception. It is incumbent on the industry to step up, not only in terms of targets but – equally importantly – on what and how it measures.

Tools are becoming available – from satellites to drones – to go beyond current measurement practices, which often involve desktop-based estimates which underestimate the reality. And crucially, responsibility for measuring methane emissions cannot be fully waived when a company’s gas enters someone else’s pipeline or ship.

Investors need to trust the data that companies report, and other data providers are coming to the fore to help us verify their accuracy. Ideally, though, high standards should be set by regulators.

This brings us to the difficult but important role policymakers have in formulating regulation that stimulates more consistent, comparable, and verifiable non-financial disclosures by companies across sectors and countries.

The formula for methane

In the EU, there is just such an opportunity at the moment. As part of the European Commission’s (EC) work on the European Green Deal and its strategy for scaling up sustainable investment across markets, the Commission is looking at ways of improving and expanding the Non-Financial Reporting Directive (NFRD) for companies.

Whether the revised NFRD sets a stronger disclosure framework or builds off existing disclosure standards, one thing is clear: we need more granular, comparable, and verified reporting on methane emissions. The disclosure work should of course be coordinated with and supportive of the EU’s ongoing efforts to develop a specific methane strategy.

While the EC develops the methane strategy over the course of this year, we strongly recommend that the EC and the other European institutions consider strengthening their emissions limits by introducing a minimum methane standard of 0.25% intensity of upstream supply covering all gas sold in the EU by 2025 (striving for 0.2%). These immediate steps would be a highly beneficial message to the market that the EU is committed to taking the net zero emissions target seriously.

There are many aspects of the climate debate where we are asked to think of future generations. This is not one of them. Unlike carbon, which remains in the atmosphere for centuries, methane dissipates much quicker – so if we stop emitting, the positive benefits can be felt within just a decade or two.

As investors, we will continue to engage with companies and regulators on this key issue.

 

[1] Source: Environmental Defense Fund

[2] Source: International Energy Agency

Iancu Daramus

Senior Sustainability Analyst

Iancu joined LGIM in 2017 as a Sustainability Analyst. He brings an understanding of climate change to our company engagements and a passion for clear reasoning to our communications. He has worked for a leading environmental think-tank as well as the Cabinet Office, and has degrees in philosophy and public policy. An enthusiastic guitar player, he takes advantage of London’s music and art scene, though he has no tours currently scheduled.

Iancu Daramus

Alexander Burr

Global ESG Public Policy Analyst

Alexander joined the team in September 2019 to focus on strengthening LGIM’s public policy engagements across jurisdictions. Prior to this, Alexander spent three years leading international government and institutional relations for a firm that uses alternative finance to invest in sustainable projects in emerging markets. Before that, he spent five years negotiating investments in emerging markets with the European Commission and international climate change funds at the European Bank for Reconstruction and Development (EBRD). He also spent time advising middle and low-income governments on alternative finance and jointly establishing a nuclear energy safeguards organisation. Alexander holds a BSc in Politics and International Relations from the University of Southampton.

Alexander Burr