Author: Michael Laitkep, Senior Research
Analyst, Alerian
Summary
- ESG reporting has continued to
gain traction in midstream with seven more constituents of the Alerian Midstream Energy Dividend
Index (AEDW), the underlying index of our midstream energy ETF, publishing their inaugural sustainability reports since August.
Overall, 21 of 31 AEDW
constituents provide sustainability reports.
- Energy infrastructure has made
notable improvements in ESG reporting and performance.
- Going forward, midstream
companies should continue to adopt comprehensive and transparent sustainability
reporting and strive to improve their safety, emissions, and governance metrics.
One of the most popular trends in investing
over the last few years has been the rise of environmental, social, and
governance (ESG) investment considerations. Energy infrastructure may not be
the first sector that comes to mind when thinking of ESG-friendly investments,
but adoption of sustainability reporting has become more commonplace among
midstream companies. Although midstream certainly still has a way to go in its
efforts to cater to ESG considerations, there have been notable improvements since
Alerian’s ESG white paper, First Steps: Introducing ESG Issues in Midstream, was published in October 2019.
This piece examines developments in sustainability reporting and performance in
the space and discusses the next steps for the industry, focusing on the Alerian Midstream Energy Dividend Index (AEDW).
ESG reporting continues to gain traction
in midstream.
Even against the backdrop of a challenging
and noisy macro environment for energy this year, ESG has remained in focus for
investors and midstream management teams alike. Since August, seven more energy infrastructure companies
have published their inaugural sustainability reports, bringing the total
across constituents of the AEDW Index to 21. This excludes Phillips 66
Partners (PSXP), whose parent publishes ESG data for the MLP. Overall, Canadian corporations tend to be
leading the way in terms of ESG reporting in midstream with the large US
C-Corps also providing sustainability reports. MLPs as a group have shown improvement in recent months
as some of the largest MLPs, including Energy Transfer (ET), Enterprise
Products Partners (EPD), and Magellan Midstream Partners (MMP) have released
sustainability reports, while EPD and others have integrated ESG into broader
investor materials. As an example, a recent presentation from EPD included a dedicated sustainability section that
highlighted the role US energy will play in improving quality of life around
the world. A handful of companies have also updated their sustainability
reports in the last year to include additional data or a more comprehensive
discussion of their operations, demonstrating the industry’s ongoing commitment
to ESG reporting.
With sustainability and ESG considerations
increasingly on the minds of investors, ESG should similarly be a focus for
midstream management teams trying to attract new investors to the space. The
momentum around ESG-minded investing continues to grow, especially among
younger investors, and midstream should be responsive to this trend. For
midstream, ESG reporting is likely a prerequisite for attracting generalist
investors with ESG sensitivities. Additionally, ESG adoption could benefit
midstream as greater public scrutiny is placed on energy infrastructure
projects. Pipelines tend to receive criticism from environmental groups, but in
reality, they are the safest method of oil and natural gas transportation. Transparent
data around worker safety, pipeline spills, and emissions may help reassure
stakeholders that companies operate in a safe and effective manner.
Midstream shows improvement in key ESG metrics
and increases transparency.
In our initial analysis of ESG in midstream,
linked above, we noted that the first steps for energy infrastructure companies
would be to engage with investors, increase disclosures, and promote uniformity
and transparency in those disclosures. Based on recently published
sustainability reports, it seems that the space is in the process of taking these
steps. The increase in reporting has made it easier for investors to compare
the ESG performance of individual companies and gauge an operator’s standing
among the industry. While there is still some variability in the metrics
disclosed, most sustainability reports tend to include common key data points. The
widespread adoption of a reporting framework, such as those offered by the Global
Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB),
could help further improve uniformity across the industry. Many midstream
companies already utilize one or both of these frameworks in sustainability
reporting.
Recent sustainability reports also show
improvement in key metrics in recent years, particularly in regard to safety. Given
the nature of the midstream business, sustainability reports often place a
strong emphasis on safe operations, which has only been amplified by the
ongoing pandemic. A key example of this among AEDW constituents is Crestwood
Equity Partners (CEQP), which ties 20% of company compensation to five safety
metrics, such as Total Recordable Incident Rate (TRIR). TRIR, a measure of
work-related injuries or illnesses, is included in each sustainability report
of the 21 constituents
providing them except for
International Seaways (INSW), which reports lost time incident rate alone.
For the companies reporting, TRIR fell by 11.0% on average on a year-over-year basis as of
the most recent reporting period. Several companies even provide TRIR goals. Gibson
Energy (GEI) and ONEOK (OKE), after seeing declines in their injury rates in
2019, stated targets for further reducing TRIR in 2020.
Greenhouse gas emissions are another key
component of sustainability reporting and will likely be a primary
consideration for ESG-focused investors going forward. While emissions metrics
continue to vary from company to company, each midstream sustainability report
provided some data detailing the company’s environmental impact. The majority
of reports even mention the threat that climate change poses to both the environment
and their businesses, with Enbridge (ENB), TC Energy (TRP), and Williams (WMB) each
including more extensive sections on climate change in their reports. In late
August, WMB announced
the goal of reducing greenhouse gas emissions by 56% from 2005 levels by 2030
as the company targets net zero carbon emissions by 2050. WMB is investing $400
million in solar projects to power company facilities in nine states.
Similarly, in November, ENB announced
a net zero emissions goal for 2050 alongside additional ESG targets for the
coming years. As WMB and ENB exemplify, ESG considerations and midstream can be
compatible.
Furthermore,
midstream can help facilitate a transition to cleaner natural gas in the US and
around the world through exports of liquefied natural gas. Approximately 63% of the constituents
in the AEDW Index by weighting are primarily focused on transporting and
processing natural gas, which has been widely touted as the bridge fuel of the
energy transition. Until renewable power becomes more widely available or
reliable, natural gas is going to play an important role in providing
affordable, cleaner power, especially relative to coal.
Governance factors are a major component of
the ESG discussion for midstream. The table below provides an update on the
governance metrics for constituents of AEDW, some of which are holdings in our midstream energy ETF. Note that Plains GP Holdings
(PAGP) is excluded given its overlap with Plains All American (PAA). In terms
of board independence, 20
of 31 companies analyzed have a majority independent board. No company
has a board that is majority female, and three companies do not have a female board member
at all. Since August, board dynamics and management teams’ skin in the game have
not broadly changed. However, many of the names listed below, namely CEQP and Genesis
Energy (GEL), saw skin in the game tick up earlier this year as midstream insiders
took advantage of the sell-off in 1Q20 to purchase significant amounts of their
company’s shares on the open market, better aligning their financial interests
with those of their shareholders (read more).

Another notable governance improvement that
has continued over the last year has been the elimination of incentive
distribution rights (IDRs) by MLPs. IDRs have widely fallen out of favor with
investors, and their removal helps lower an MLP’s cost of capital while better
aligning the interests of the general and limited partners (read more). Since October 2019, DCP Midstream (DCP), Noble Midstream Partners
(NBLX), and Shell Midstream Partners (SHLX) have all closed IDR elimination
transactions. As shown in the chart below, 95.4% of AEDW by weighting no longer has IDRs, a
notable improvement from 60.9% at the end of 2016. Going forward, the portion
of the MLP universe with IDRs is expected to continue to shrink.

What are the next steps for ESG in
midstream?
Midstream has begun to take its first steps
in advancing its sustainability profile through general improvements in ESG
reporting and metrics, but where does the space go from here? First and
foremost, the measures adopted by the companies highlighted in this report need
to be embraced by the rest of the energy infrastructure universe. The
improvement in the overall number of companies issuing sustainability reports has been notable in recent
months and now represents the majority of names in the index. However, 10 companies still do
not issue these informative reports. Additionally, when companies do
address ESG considerations, it should be in a comprehensive and transparent
manner, preferably with a standardized reporting framework for investors to
easily compare. Finally, management teams should continue to prioritize ESG
issues by emphasizing safety, reducing emissions, committing to diversity, and
aligning their interests with those of shareholders. Alternative energy
projects, such as investment in wind or solar energy, could represent an
opportunity for midstream operators to improve their emissions profiles while potentially
diversifying their revenue streams. Though the industry clearly has a way to
go, the strides made within the last several months should provide investors
with confidence that the ESG focus within energy infrastructure is here to
stay.
Bottom Line
Growing investor focus on ESG
considerations has required companies across industries to address related
concerns, including midstream. While midstream makes money by transporting,
storing, and processing hydrocarbons, the nature of the business does not make
ESG concerns irrelevant, and on the other extreme, it does not preclude any
investors with ESG sensitivities from investing in midstream. ESG investing can
encompass midstream investing if midstream companies continue to provide
transparent and comparable sustainability reports and demonstrate improvements
in ESG metrics over time.
About Alerian Midstream Energy Dividend UCITS ETF
Our Midstream energy ETF is a UCITS compliant Exchange
Traded Fund domiciled in Ireland. The fund seeks to provide diversified
exposure to energy companies involved in the processing, transportation and
storage of oil, natural gas and natural gas liquids in the US and Canadian
market. The fund tracks a dividend-weighted index based on the liquid,
dividend-paying portion of the US and Canadian energy infrastructure market and
includes MLPs and C-Corps.
When you trade ETFs, your capital is at
risk.
Alerian Midstream Energy Dividend UCITS ETF Product Information:
Exchange |
Bloomberg Code |
RIC |
ISIN |
SEDOL |
Currency |
TER |
London Stock Exchange |
MMLP LN
|
MMLP.L
|
IE00BKPTXQ89
|
BMVFZ02
|
USD
|
0.40%
|
London Stock Exchange
|
PMLP LN
|
PMLP.L
|
IE00BKPTXQ89
|
BL96TT7
|
GBP
|
0.40%
|
Borsa Italiana
|
MMLP IM
|
MMLP.MI
|
IE00BKPTXQ89
|
BMHVZQ0
|
EUR
|
0.40%
|
Deutsche Boerse Xetra
|
JMLP GY
|
JMLP.DE
|
IE00BKPTXQ89
|
BMHVZP9
|
EUR
|
0.40%
|
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