Understanding methane: risks and opportunities for fixed income investors | Insight Investment

Methane emissions are presenting risks and opportunities for investors, with such emissions presenting financially material implications for some companies. They are also a focus of regulatory and voluntary initiatives worldwide. We consider the implications.

• The management of methane emissions has emerged as a critical focus for efforts to address climate change. Methane is many times more potent than carbon dioxide in trapping heat within the atmosphere, with methane emissions from human activity originating mainly from the fossil fuels, agriculture and waste management sectors.
• Regulatory support for reducing methane emissions has continued to grow in the past few years with most major countries now having methane on their agenda. For oil and gas, EU and US rules regarding methane are setting the tone globally. For agriculture, the policy background is more complex and country-specific, but there has also been significant progress. A range of voluntary initiatives and pledges, at the country and company-specific level, offer evidence of ongoing efforts to reduce methane emissions at scale.
• Methane emissions can be financially material for companies across relevant sectors. Emissions from the oil and gas industry could be cut dramatically at no net cost, and even with potential for positive financial impact. Reducing agricultural methane emissions is far more complex, with varying methods of both measuring and reducing emissions.
• In our view, analysing and assessing methane risks for companies involves two aspects. These are to assess a company’s standing in terms of its management, technology and disclosures; and tracking specific operational and performance metrics. Insight is formalising an approach to consider methane emissions from a financial materiality perspective, and to support clients focused on sustainability and with emissions-related goals or objectives.
• There are two primary routes for investors seeking to reduce methane emissions: financing of projects and initiatives to reduce emissions directly, and engagement with issuers to encourage them to pursue such efforts. There are a wide range of opportunities to finance emissions reductions, which largely focus on methane abatement technology and/or transition finance. With regard to engagement by bondholders, national oil companies (NOCs) in emerging markets, small independent fossil-fuel companies in developed markets, and food and agriculture companies offer some of the most significant opportunities.