How investors can cut methane emissions

By Diana Glassman, director – engagement, EOS, Federated Hermes

Methane’s unique role as a greenhouse gas and as the primary component of natural gas means that reducing methane emissions can yield significant economic, environmental and social benefits.

Reducing these emissions this decade is probably the single most important action the world can take to cut the rate of global heating. Methane warms the planet about 80 times more effectively than CO2 over 20 years, but after about a decade starts to dissipate.

Making swift reductions in methane would curb rising temperatures more quickly than carbon dioxide cuts in the short term. It would also buy valuable time for big carbon-emitting sectors to find viable alternatives, helping to keep 1.5C of heating within reach.

The importance of methane as an effective short-term lever against rising planet temperatures was recognised at COP26 when the US and EU announced a partnership to cut methane emissions by 30% by 2030, from 2020 levels. More than 100 countries signed up to the Global Methane Pledge, acknowledging the urgency of the issue.

The latest global heating forecast from the World Meteorological Organization and the UK Met Office underscored that time was running out, with a 48% chance we will exceed 1.5C within the next five years because of record greenhouse gas levels.

There is also a critical social benefit to reducing methane emissions. Methane has deleterious health impacts, contributing to premature deaths, asthma-related hospital visits due to the formation of ozone at ground-level, and lost labour due to extreme heat.

Therefore, curbing methane emissions to mitigate climate change, which disproportionately impacts those least able to adjust to it, would help to avoid exacerbating existing inequities.

Engagement approach

Investors have a key role to help support companies on this journey and produce tangible methane reduction results. It is important to ask investors and their representatives to push investee companies to urgently reduce their methane emissions.

The need to act this decade means senior company executives can be more easily held to account, for example, by pushing for the inclusion of methane-reduction targets in executives’ short-term compensation structures.

For example, the Federated Hermes EOS team seeks a 60-75% reduction in oil and gas operational methane emissions by 2030, from a 2015 baseline.

Specifically, we ask for methane reduction commitments and implementation plans aligned with the UNEP-managed Oil and Gas Methane Partnership (OGMP) 2.0, and an advocacy plan in favour of the Paris Agreement goals. The OGMP offers oil and gas companies a comprehensive framework to improve the transparency and credibility of measuring and reporting methane emissions from oil and gas operations.

Alignment with the OGMP must be a priority for oil and gas producers. It is in their own financial interest with increasing customer preference for lower-methane-emission suppliers and investor scrutiny of methane-emission practices. This latter factor may make it harder for poor methane performers to access financing, especially from investors that have their own net-zero financed emissions goals.

Methane emissions have not received the attention they need and we welcome the shift in global focus towards this issue following COP26. Their reduction is material to financial performance and long-term stability of investment portfolios across asset classes, and it is one critical lever we have to enable the reduction of the rate of temperature rise and to stay within striking distance of 1.5C.

It is imperative investors continue to engage with companies and policymakers to encourage the transition to renewable energy and an overall reduction in demand for fossil fuels. In parallel, they must push fossil fuel companies and trade associations as well as their bankers and customers to develop collaborative solutions that reduce actual methane emissions and have a real near-term impact on climate outcomes.