By Hope Crystal
Investment-grade energy companies face material financial risk from the energy transition, driving our engagement to assess their positioning.
We view the energy transition as a material financial risk for the investment-grade energy sector, as additional costs and increased regulatory action may result if transition risks are not properly managed.
Therefore, we regularly engage with companies to communicate our belief that issuers should provide robust environmental disclosures and set both short- and long-term emission-reduction targets.
We have taken a broad-based approach in our engagement efforts with the investment grade midstream sector in particular, as these companies have lagged their energy sector peers in terms of emissions reporting and reduction targets.
The midstream sector owns the infrastructure – including pipelines, processing facilities and storage assets – that links energy supply and demand. As we engage with midstream issuers, we leverage our long-term relationships to encourage incremental progress in their climate risk-management strategy.
We believe that the first important step for companies is to generate consistent and robust environmental disclosures that provide transparency for credit investors.
After a company has met this objective, we encourage them to set science-based emissions-reduction targets and develop detailed transition plans. This provides important information that we use to assess an issuer’s credit risk and informs our portfolio positioning.
We have held over 100 engagement meetings with investment-grade midstream issuers over the last five years, and while it has lagged other energy sectors, there has been incremental progress in relation to our engagement objectives.
All midstream companies within our investment-grade coverage now provide some environmental information, and several companies have emissions-reduction targets.
We view this progress favorably, although the lack of consistent reporting standards creates a challenge for investors.
For those with targets, we think that it is important to evaluate if those targets involve technology that is available today or will require technological advances in the future.
We continue to see areas for improvement that provide opportunities to engage with issuers. In the near term, we would like to see the sector coalesce around a consistent reporting framework that captures all material emissions scopes.
Next, we think it will be important for companies to provide detailed strategies as to how they plan to manage climate-transition risk, including setting short- and long-term emissions-reduction targets. In our view, these efforts should reduce credit risks over time.
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