By Michael Clarfeld, CFA
Climate Change is one of the most pressing challenges facing the world today and a key consideration in ESG investing. Renewable energy’s rapid growth is critical to reducing CO2 emissions and meeting long-term climate objectives, but renewable energy still supplies less than 20% of global energy and is roughly 10% of energy consumed in the U.S. Governments, nonprofits and corporations are increasingly pushing more aggressive emission reductions programs (the UK recently passed a bill for net zero emissions by 2050 and several U.S. states have similar targets), but even with these programs, carbon-intensive energy sources will continue to play a significant role for many years to come.
ClearBridge’s approach to integrating ESG considerations into our investment process supports and promotes ESG best practices through active ownership across all sectors. When choosing dividend-paying investments in the energy sector, we seek to mirror the transition we are seeing in the world: we seek to grow renewable energy while thoughtfully and responsibly managing the transition away from fossil fuels. In practice, this means looking for more renewable energy investments while critically building out our non-renewable exposure.
Within the traditional energy sector, we emphasize investments in natural gas, as it is the cleanest of the fossil fuels and instrumental in lowering the world’s carbon emissions. Natural gas generates substantially less air pollution than coal or oil and compared to other fossil fuels releases far less CO2 on an energy-equivalent basis (Exhibit 1).
Exhibit 1: Natural Gas Emits Least Carbon of Fuel Options
|Fuel||Pounds of CO2 per Million BTU||Excess Carbon Emissions Compared to Gas|
Source: EIA. BTU: British thermal unit.
With the advent of energy production from shale, the production and usage of natural gas in the United States has grown dramatically, particularly in the power generation sector (Exhibit 2).
Exhibit 2: Natural Gas Share of Electricity Generation
Source: EIA, Monthly Energy Review. May 29, 2019. Table 7.2a.
Because natural gas emits so much less CO2 than coal, the growth in natural-gas-fired power generation has materially reduced CO2 emissions from the power sector in the U.S. (Exhibit 3). This reduction in CO2 from the power sector has driven a meaningful reduction in overall greenhouse gas emissions (Exhibit 4).
Exhibit 3: U.S. Power Sector Emissions on Decline
Source: EIA, Monthly Energy Review. May 29, 2019. Table 12.6.
Exhibit 4: U.S. Greenhouse Gas Emissions
Source: U.S. EPA’s Inventory of Greenhouse Gas Emissions and Sinks: 1990–2017.
Given the far better emissions profile of natural gas compared to other hydrocarbons, it is clear that natural gas can play a role in reducing emissions as the world transitions to a renewable power future. But gas does have one drawback that competing fossil fuels do not have and that must be tightly managed in order to deliver on its promise of greenhouse gas benefits: fugitive methane. Fugitive methane is natural gas that escapes into the atmosphere somewhere between the well and the burner tip. As a greenhouse gas methane is dozens of times more potent than CO2 so it is critical that fugitive methane be minimized.
As actively engaged ESG investors, ClearBridge works with portfolio energy infrastructure companies to understand their approach to emissions reductions. The natural-gas-focused energy companies we have chosen to invest in have committed to meaningful guidelines for the minimization of fugitive methane emissions (generally less than 1% of leakage across the entire supply chain). These companies have a strong economic incentive to minimize fugitive emissions, increasing operational efficiency. Our approach to engagements also includes working with portfolio companies on disclosures and on best practices in publishing sustainability reports.
We look forward to a time when the world reaches the point of being net carbon neutral. Unfortunately, even with the most aggressive targets the scale of the challenge dictates that it will take many years to reach that point. Advancing toward that goal will require the use of many different tools: improvements in energy efficiency, increased penetration of renewables, a better mix of hydrocarbons and conservation. While natural gas is not the ultimate solution, it can play a meaningful role in accelerating the change the world needs.
Disclosure: I am/we are long KMI, WMB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.