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Friday, November 8, 2013

Fracking report card: Industry gets an “F” on risk disclosure to investors

How is the industry doing on the latter point?  According to a new analysis, not so well.

Four investor groups have released a superb analysis of 24 oil and gas companies which finds that they are failing to adequately report on their efforts to reduce environmental and community impacts from hydraulic fracturing operations.

The report says: 
Since 2009, institutional investors have been pressing oil and gas companies to be more transparent in reporting how they manage and mitigate the environmental risks and community impacts of their hydraulic fracturing operations. Measurement and disclosure of best management practices and impacts are the primary means by which investors gauge how companies are addressing the business risks of their operations. The results of the scorecard demonstrate a widespread industry trend of underperformance in disclosure of key performance metrics. Companies, nearly across the board, are failing to provide investors and the public with sufficient quantitative information to adequately understand and compare the risks and opportunities these companies present within their hydraulic fracturing operations. 
The report’s four key findings: 
  1. Company disclosures remain mostly qualitative and narrative in form, making it difficult for investors to rigorously assess and compare company performance…(N)arrative reporting does not give investors and other stakeholders the information necessary to determine if individual companies are sufficiently managing the risks inherent to their operations across their multiple plays.
  2. The highest scoring company in this review…provided disclosures on only 14 of the [recommended] 32 indicators. [The lowest-scoring company] provided disclosures on only 1 of 32 indicators…
  3. The most commonly reported survey indicators were: executive compensation tied to health, environment, and safety performance (71% of companies surveyed); the use of pipelines to transport water in lieu of diesel trucks to lower air emissions (62%); and company policy on the use of non-potable versus fresh water (46%).
  4. Companies scored worst on their disclosure of how community concerns are tracked and responded to…While certain companies may be addressing local community impacts, no company is systematically reporting company successes and failures in accommodating community concerns...
These four investor groups are calling on the industry to heed an old adage in business: “You can’t manage what you don’t measure.”  Pretty sage advice, in my view.

The report concludes: 
At the time of this publication, company disclosures are insufficient to meet the needs of investors seeking to evaluate how companies are reducing the potential health and environmental risks of natural gas and oil operations using hydraulic fracturing in the United States and Canada. We believe companies implementing current best practices in operations and providing thoroughly transparent information will reduce regulatory and reputational risks; enhance their likelihood of securing and maintaining their social license to operate; reduce liabilities associated with poor performance, spills, contamination, and lawsuits; and thereby increase their access to capital. [Emphasis mine.] Although companies still have a long way to go, disclosure in the oil and gas industry has improved during the four years since investor engagements began. Increased disclosure has been driven not only by companies’ constructive conversations with investors and community members, but also by their own recognition that repeated assurances of safe operations are not sufficient to address the high-profile environmental and social challenges associated with hydraulic fracturing operations. Where companies are implementing but not disclosing their own use of best management practices and how they learn from on-the-ground failures, they are missing an opportunity to publicly demonstrate industry leadership and address investor and community concerns. [Emphasis again mine.] 
If oil and gas companies have a positive story to tell about their environmental and community impacts, they are not telling it. They need to in order to ensure their social license to operate.  If they don't have a positive story to tell, that obviously demands a much stronger investor – and regulatory – response.

1 comment:

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