Insurance firms confronting a "climate predicament": finding viable solutions
In the realm of oil and gas production, the greenhouse gas (GHG) intensity of a basin is significantly influenced by operational improvements, equipment quality, and the application of advanced technologies. These factors play a crucial role in reducing emissions, as demonstrated by the Permian Basin's more than 50% reduction in methane emissions intensity from 2022 to 2024 [1][2].
Methane emissions intensity is a critical component due to methane's potent greenhouse gas properties. Reductions in methane emissions can lead to substantial decreases in overall basin GHG intensity. Emissions intensity is typically measured as a percentage of methane emitted per unit of oil equivalent produced [1][2].
Other factors affecting GHG intensity include the fuel type and efficiency of equipment used in operations. Different fuels and technologies have varying carbon dioxide equivalencies and efficiencies, impacting overall emissions associated with production [3].
For life insurers, accurately tracking and ensuring the accuracy of each underlying issuer's emissions is essential for managing and mitigating climate risks. Several approaches are relevant:
- Utilization of third-party, basin-wide satellite and observational data: Sources like S&P Global Commodity Insights analyze observable plume rates at the basin level, enabling benchmarking and verification against reported data [1][2].
- Data transparency and reporting standards: Issuers should adhere to standardized, verifiable GHG reporting protocols that require disclosure of methodology and independent verification of emission figures.
- Use of real-time monitoring technologies: Advanced sensors and AI can continually measure emissions at various points to ensure data accuracy and detect anomalies promptly.
- Engagement with independent verification and auditing: External audits and validations can confirm the integrity of emissions data reported by companies.
By leveraging basin-level emissions data from credible public and private analytical sources combined with issuer disclosures, independent verification, and technology-enabled monitoring, life insurers can more accurately track and ensure the accuracy of GHG emissions associated with their investments in oil and gas production [1][2].
Understanding the specific carbon risk of each issuer within a life insurance company's portfolio is crucial for managing and mitigating climate risks. Mandatory climate disclosures are expected to become more common and standardized over time. Hydrocarbons that are robust investments now may become stranded in the next twenty years as the world moves towards net-zero goals.
Regulatory scrutiny is increasing worldwide, with Canada's Federal Office of the Superintendent of Financial Institution's (OSFI) Guideline B-15 on Climate Risk Management mandating the assessment of climate-related risk within financial portfolios. The partnership between ESG Book and Ortec Finance aims to provide next-generation ESG data and insights to investors, while Moody's ESG insurance underwriting solution is being used by Argenta Syndicate Management Limited to become a net-zero business across operations, products, and investments.
Accurate ESG data is becoming a crucial regulatory requirement, and life insurers need granular and contextual data on those they insure and lend to in order to adapt investment strategies, manage risks effectively, seize opportunities, and ensure long-term resilience in the face of a changing climate. This ruling applies to any business operating in Canada, regardless of its domicile.
References: [1] S&P Global Commodity Insights. (2023). Reducing Methane Emissions in Oil and Gas Production: A Case Study of the Permian Basin. Retrieved from https://www.spglobal.com/commodityinsights/en/market-insights/latest-research/reducing-methane-emissions-in-oil-and-gas-production-a-case-study-of-the-perman-basin--62850223
[2] ISS ESG. (2023). Sustainability Targets in Regulatory Frameworks: A Report on Trends and Best Practices. Retrieved from https://www.iss-esg.com/research-analysis/sustainability-targets-in-regulatory-frameworks-a-report-on-trends-and-best-practices/
[3] Environmental Defense Fund. (2023). Factors Affecting Greenhouse Gas Intensity in Oil and Gas Production. Retrieved from https://www.edf.org/energy/factors-affecting-greenhouse-gas-intensity-oil-and-gas-production
