The full environmental impact of shale gas extraction is not known, so investors must engage with companies to make sure they are acting responsibly, says Nina Röhrbein

Following investor engagements with traditional energy companies over tar sands and deepwater drilling in recent years, shale gas has become the latest controversy on the shareholder menu. Shale gas is produced using hydraulic fracturing - or fracking - which involves pumping water and chemicals into shale formations to force out the oil and gas.

The full environmental impact of shale gas extraction - which is mainly a US phenomenon - is still unknown. Fracking uses a lot of water and leaves many contaminants. “However, if done properly, fracking should not result in leakage into the water-table,” says Craig Mackenzie, head of sustainability at Scottish Widows Investment Partnership (SWIP). “Water scarcity is certainly an issue in arid regions but compared to the profitability of running an oil or gas well, the input costs of water are relatively small.”

Larisa Ruoff, director of shareholder advocacy at Green Century Capital Management, says: “Another risk emerging in the US is that these industrial operations can be socially disruptive. They bring with them more roads, increased truck traffic and skyrocketing rents, which creates tension in local communities.”

Shale gas is a concern for investors mainly at an equity level. Energy companies might have reserves in shale gas but may not be able to execute a long-term extraction plan because of community resistance or moratoriums. Litigation and enforcement actions are also a concern.

Dayna Linley, senior analyst at ESG research firm Sustainalytics, says: “Part of the issue is that there are more operators with very different standards in shale gas and fewer barriers to entry than, for example, in oil sands.”

For some, the biggest problem with shale gas is the large amount of methane it produces. While switching to gas reduces global warming in the long term, it does not help much for several decades, according to the analysis of recent peer research by SWIP - although energy companies have been dismissive of studies showing large methane emissions, most notably Robert Howarth’s study ‘Venting and Leaking of Methane from Shale Gas Development’.

The University of Texas is working on a study which Mackenzie hopes will reveal exactly how much methane is leaking through fracking. “If the shale gas industry fixes the fugitive methane problem, it could play a strong part in addressing climate change by enabling rapid coal-gas switching in the US and potentially China, as gas power stations produce 40-50% less carbon emissions than those that run on coal,” says Mackenzie. “In Europe where gas is already eliminating coal, the question is whether the continent should not be phasing out its gas production because, after a 30-year window in which gas can play a role in replacing coal, global emission targets mean that we have to start replacing gas or use it in combination with carbon capture and storage.”

As the growth in the energy sector is largely in the unconventionals, such as shale gas, deepwater drilling and oil sands, the practice will continue regardless of any concerns. Linley says: “Investors can put pressure on companies to implement best practices, such as base-line water testing, contractor management and the reduction of methane emissions, and reporting.”

Green Century and the Investor Environmental Health Network (IEHN) have been co-ordinating investor work on shale gas since 2009.

“Initially nearly all companies said there were no valid concerns and that they could not disclose the chemicals used in the fracturing process for proprietary reasons,” says Ruoff. “But now they recognise they need to engage in good faith dialogue with investors. We also see an improvement in disclosure and adoption of best practice, but companies still have more work to do.”

Since 2009, US investors have filed 31 shareholder proposals on shale gas with nearly 20 different companies. In 2009, the proposals that went to vote had an average support of 30%. By 2011, that increased to about 40%, while the votes for the current voting season average around 30%. “Those are strong votes and shareholder resolutions require a much lower threshold than that to have an impact and get the company’s attention,” says Ruoff.

In 2012, 10 resolutions were proposed and seven of them were withdrawn because companies reached agreements with the shareholder.

“Shale gas is a management rather than a technological issue and investors can determine which companies manage it better,” says Susan Williams, author of ‘Discovering Shale Gas: An Investor Guide to Hydraulic Fracturing’ funded by the Investor Responsibility Research Centre Institute. “The primary avenues of contamination have been the same avenues of contamination that the conventional gas industry has encountered for years, such as faulty well casings and accidental spills on the surface. Investors should be looking for companies that implement consistent best practice standards across their operations. As states provide primary government oversight in the US, regulation is highly uneven and fragmented, which is why companies tend to only meet the minimal state requirements as they go from shale location to location.”

However, transparent and comparable information is needed to evaluate a company, which is difficult to obtain. This is why Green Century focuses on disclosure and mitigation of risks.

SWIP engages with oil and gas companies on fugitive methane. “Companies give you answers to the threat to water - whether it is pollution or scarcity,” says Mackenzie. “Fugitive emissions is a relatively new topic, although with an expected cost of $20,000 (€15,850), existing solutions to capture methane are a minor expense compared to the $5-8m that it costs to drill a well.”

Dutch asset manager APG has visited a US fracking site, engaged with the management of various companies, spoke with industry service providers about new innovative technologies and talked with US and EU policymakers about the lack of regulation. It has also voted on shareholder proposals and supports the ICCR’s and IEHN’s investor guidance to disclosing risk.

Between 2010 and 2011, Boston Common Asset Management met with major oil and gas companies such as Apache, Chesapeake Energy, Southwestern Energy, Chevron, Halliburton, Baker Hughes and Williams to identify best practices in fracking and probe their portfolio companies. “We believe this engagement encouraged Apache to take several actions,” says Steven Heim, managing director and director of ESG research and shareholder engagement at Boston Common Asset Management.

Apache supported the development and launch of the voluntary FracFocus.org website for chemical disclosure in 2011, helped lobby for a strong fracking chemical disclosure bill in the Texas legislature in 2011, published a peer reviewed paper on estimating environmental risks from fracking, and gave seminars for industry and investors in 2012.

“In the future, investors will be looking for more systematic reporting so that comparisons among company practices can more readily be made,” says Richard Liroff, executive director at IEHN. “Several companies have begun to produce short statements of their principles and practices, indicating their intent to report on them, including Shell, Talisman and BG Group.”

European pension funds can use the various existing guidelines - such as the IEHN’s ‘Extracting the Facts: An Investor Guide to Disclosing Risks from Hydraulic Fracturing Operations’, the ‘Golden Rules for a Golden Age of Gas on Responsible Hydraulic Fracking’ by the International Energy Agency and the IIRC’s ‘Discovering Shale Gas: an Investor Guide to Hydraulic Fracturing’ - to guide their engagement in the area.

APG walked away from an investment in a shale gas operator last year because of high risks, a poor track record and limits to management engagement. “Engagement with companies is our preferred option,” says Erik-Jan Stork, senior sustainability specialist at Dutch asset manager APG. “If companies apply innovative techniques and best-practice standards there can be a future for the shale gas industry. This is why we use our stake in companies to challenge them to do more.”