investors care deeply about their portfolio companies
drilling habits. London-based investor network Principles for
Responsible Investment found that out recently when it kicked
off an initiative to improve the oil and gas industrys
disclosure around hydraulic fracturing.
In the eight years since PRI launched, the United
Nationsbacked group has never seen more
investor interest in a single topic. As of last month 39
institutions, representing some $6 trillion in assets, had
pledged to talk with portfolio companies that practice
fracking, a controversial method of extracting natural gas that
involves breaking up shale rock by injecting liquid far
Theres so much unknown about fracking, and there
are so many concerns about its safety, says PRI managing
director Fiona Reynolds. Theres been an explosion
in fracking recently, particularly in the U.S., and I think
thats why theres been such a great
For participants the PRI effort is tapping a curiosity about
frackings risks to the environment the process has
been linked to chemical contamination of groundwater, methane
leaks and excessive water usage and risks to its
practitioners, given potential blows to their reputations and
share prices. In late 2012, 158 billion
($219 billion) Dutch asset manager PGGM sent several
representatives to Texas and Oklahoma for tours of the shale
gas wells of Royal Dutch Shell and other major energy players
in the firms portfolio. Like other investors, we
were caught on the back foot with the shale gas boom in the
U.S., and the first thing we wanted to understand was what was
happening there, says Piet Klop, senior adviser for
responsible investment at PGGM, which manages the assets of
seven Dutch pension funds from its offices in the central
Netherlands town of Zeist.
Boston Common Asset Management, another signatory of the PRI
initiative, got an earlier start. In July 2010 the Boston-based
socially responsibleinvestment manager began a series of
roundtable discussions that saw it and firms such as Morgan
Stanley and T. Rowe Price chat with engineers from
Houston-based oil and gas explorer Apache Corp. and other
companies. Steven Heim, $2.1 billion Boston Commons
director of environmental, social and governance research and
shareholder engagement, says he organized the meetings to share
information about how fracking works and investor concerns over
lack of transparency.
In 2010 the $183 billion California State
Teachers Retirement System started sending letters to
portfolio companies with fracking operations to set up
conversations about risk management and safety procedures, says
Brian Rice, portfolio manager and lead investment officer on
sustainability issues in the corporate governance department.
Sacramento-based CalSTRS followed up last year, when Rice and
his colleagues noticed a spate of stories about frackings
environmental dangers. Now the second-largest U.S. pension
fund has signed on to the PRI engagement. This wont
go away for us any time soon, Rice says.
Targeting 37 companies, the PRI program will focus on the
disclosure of fracking-related risks in the areas of
governance, water quality and use, air quality and community
relations. For the first 18 months, investors will gather
information. After that, PRI and its partners will conduct new
analysis to see if transparency has improved and decide what
action to take, managing director Reynolds says.
Several recent studies conclude that disclosure by companies
involved in fracking is inadequate. In a March report on water
management by shale energy producers, French bank
Société Générale found that
overall, there is poor industry performance on water
disclosure. Last September, London-based corporate
responsibility research firm AccountAbility published a
PRI-commissioned examination of reporting by 56 publicly traded
oil and gas companies with exposure to fracking. Companies
scored an average of 21 percent on best-practices indicators
designed by the authors.
Although PRI leaves it up to investors to make any portfolio
tweaks, excluding companies or reducing stakes in them for
inadequate disclosure is on the table, PGGMs Klop says.
The next step is engagement as an improvement
effort, he explains. If that fails, weve got
ways to get rid of companies that are laggards.
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