Skip to main content

The Right Chemistry

European banks want more hard data on risks from frackers

<p>Some of the world&#39;s largest banks will use new guidelines to make investment decisions about energy companies using hydraulic fracturing.</p>

Europe's Climate Principles Framework Initiative, which includes some of the world's largest banks, has released new guidelines on fracking for energy companies.

"Fracking" is the popular term for horizontal drilling and well completion operations using hydraulic fracturing to extract natural gas from shale formations. The banks, including Crédit Agricole S.A. and Standard Chartered Bank, wish to see quantitative data on key performance indicators showing how energy companies are managing and reducing environmental risks and community impacts in their fracking operations.

The guidelines identify 16 areas of "responsible business practice." Four relate to companies' overall quality of management, accountability and disclosure, and 12 relate to specific operational activities.

By relying on the guidelines when making investment decisions, financial institutions can minimize risks to both their investments and their reputations from environmental hazards and adverse community impacts. The financiers couldn't be any more clear: "Companies' quantitative disclosure of their performance against KPIs will be fundamental to their credibility and to track progress."

The call for quantitative data signals that energy companies' qualitative descriptions of environmental and community impact management are insufficient. Because what gets measured gets managed, corporations must show investors their measurable steps to reduce the chances of the kinds of incidents that have led to bans and moratoria on shale gas development in the U.S., Europe and elsewhere.

Non-financial data are as critical as traditional hard financial data related to profits, operating costs and the like, as a failure to minimize environmental risks can negatively impact companies' bottom lines. This is especially true when the value of company investments in leases and licenses is lost to bans and moratoria.

The four practices related to management and accountability include topics such as oversight of risks by boards of directors, supply chain and contractor management, community engagement and consent, and fines, penalties and litigation. The 12 topical areas include such issues as well integrity, toxic chemicals reduction and disclosure, waste water management, air emissions, occupational exposures and fresh water use.

The guidelines are the latest in a series of recommendations from government agencies, government advisors and the investment community over the last 15 months calling for much more detailed, quantitative data on environmental and social risk management.

The Department of Energy Secretary's shale gas advisory panel recommended in November 2011 that companies "adopt a more visible commitment to using quantitative measures as a means of achieving best practice and demonstrating to the public that there is continuous improvement in reducing the environmental impact of shale gas production."

In December 2011, the Investor Environmental Health Network (IEHN) and the Interfaith Center on Corporate Responsibility (ICCR) published "Extracting the Facts: An Investor Guide to Disclosing Risks from Hydraulic Fracturing Operations." The guide identifies 12 core goals, practices for achieving them and key performance indicators for measuring progress.  

These guidelines, now supported by investors on three continents managing assets of more than $1.3 trillion, also have received support from Apache and Southwestern Energy in the U.S, Talisman Energy in Canada and BG Group in the U.K. Both Environmental Defense Fund and the Natural Resources Defense Council also have expressed support for the guidelines, while noting that strong regulations are needed to ensure best practice requirements apply to all companies. The Climate Principles Framework Initiative guidelines incorporate most of the detailed recommendations from the "Extracting the Facts" report and add entirely new sections on biodiversity, seismicity and occupational exposure to silica from the tons of sand used in fracturing operations.

The International Energy Agency (IEA) report, "Golden Rules for a Golden Age of Gas," published in 2012, addressed the energy industry's need to maintain or earn its social license to operate, stating that "full transparency, measuring and monitoring of environmental impacts and engagement with local communities are critical to addressing public concerns."

"Operators need to explain openly and honestly their production practices, the environmental, safety, and health risks and how they are addressed," IEA continued.

IEA called for measurement and disclosure of operational data on water use, the volumes and characteristics of wastewater and on methane and other air emissions.

Several energy companies have recognized the growing demands for disclosure and have released specific sets of principles and practices for shale gas operations on which they plan to report. These include Shell's "Onshore Tight/Shale Oil & Gas Operating Principles," Talisman's "Shale Operating Principles" and BG Group's "Public Position on Unconventional Gas." Talisman has stated, "We will measure our progress by setting quantitative performance metrics." The company plans to audit its operations and report publicly on its progress.

Investors are pressing additional companies to develop concise statements of principles and practices on which they commit to report and eagerly await the first round of quantitative reports from the companies already committed to their production. The intensity of investor concern about unreported risks has been reflected in the very large votes in favor of shareholder resolutions introduced over the last three years seeking greater corporate disclosure about environmental risks, community impacts and their management.

Thirty-one resolutions have been introduced at 19 companies seeking such reports. During the first year, the average vote in favor was 30 percent, the average second year vote was 40 percent and the average third year vote was 30 percent. In the history of shareholder activism on environmental and social issues, these stand out as among the highest supporting votes secured so rapidly on a newly introduced environmental issue. In contrast, for example, resolutions on global warming have taken much longer to secure such sizeable backing from investors.  

When investors initially began to press companies for increased disclosure in late 2009, companies were saying very little about their shale gas operations and tended to be dismissive of their most vocal critics despite highly visible contamination episodes. As corporate disclosures have increased, investors have responded by withdrawing about half their filed resolutions before they were formally presented for votes at corporate annual meetings. But along with the rapid spread of horizontal drilling and hydraulic fracturing operations across the United States, so too have grown expectations about the scope of disclosure.

The growing chorus of voices calling for quantitative reporting, including the DOE shale advisory panel report, the IEA, IEHN/ICCR and now the Climate Principles Framework Initiative, makes clear that if they are to ensure their "social license to operate," companies need to report concrete measures of their goals and progress.

This will allow investors to better determine which companies may constitute riskier investments and will allow communities to distinguish companies that might be better neighbors from those that might not.

Oil well image by Nightman1965 via Shutterstock.

More on this topic