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April 13, 2013

Climate Principles Issues Best Practices for Hydraulic Fracturing
    by Robert Kropp

Guidelines for financiers of hydraulic fracturing published by the European Climate Principles add to calls for greater transparency by companies engaged in the practice.

SocialFunds.com -- The Climate Principles was launched in 2008 by the UK-based Climate Group and six global financial institutions, with the goal of "actively managing climate change across the full range of financial products and services."

Earlier in 2008, the similarly named Carbon Principles was launched by US financial institutions, "to evaluate and address carbon risks in the financing of electric power projects;" yet, included among the signatories are four banks—JPMorgan Chase, Citigroup, Bank of America, and Morgan Stanley—that continue to lead the world in the financing of environmentally destructive coal-fired power plants.

Apparently, development of the Climate Principles featured its own set of challenges. It was reported that as many as 20 financial institutions were involved in drafting the Principles; however, when it came time to commit to them, only six institutions became signatories.

And in a 2009 paper entitled Meek Principles for a Tough Climate, BankTrack observed, "Both the Climate Principles and the Carbon Principles are deeply disappointing."

BankTrack itself offered a more stringent set of principles for financial institutions in 2007 which included phasing out the financing of fossil fuel extraction and delivery and all coal-fired power plants.

Nevertheless, the signatories to the Climate Principles have issued useful guidelines for a number of business practices, most recently addressing hydraulic fracturing. Shale gas exploration and production provides "guidance to financiers seeking to understand the key issues associated with shale gas exploration and production, and to assist in identifying the types of responsible business practices that might be reasonably expected from companies operating in this arena."

The guidance addresses a number of issues that have become familiar to stakeholders concerned by the controversial practice. Fugitive methane is the subject of three shareowner resolutions filed with fracking companies this year by Trillium Asset Management. Methane has far greater impact on climate change than does carbon. But as the guidance points out, "low cost commercially available technologies do exist to capture methane at various points along the gas production and distribution system."

Nevertheless, as Natasha Lamb of Trillium said, "Given the high short-term climate impact of methane emissions, it is now an open question whether natural gas can serve as a bridge fuel to a more sustainable energy future." Furthermore, the guidance states, "Renewable energy is needed to address climate change…care is needed to ensure that policy commitments and investments in renewables do not become a victim of the dash for gas."

Drilling a horizontal shale well requires up to eight million gallons of water as well as thousands of gallons of potentially toxic chemicals, and water depletion and groundwater contamination are significant concerns. Given the concerns, it is astonishing to contemplate that a 2005 amendment to the Safe Drinking Water Act exempts companies engaged in fracking operations from having to disclose the chemicals used in the process.

The impacts on traditional communities of large-scale fracking operations, as well as drastically increased truck traffic, are significant concerns as well.

For sustainable investors and other stakeholders in the US, the issues addressed by the Principles should be familiar. Many of them, after all, can be found in two reports issued by investor organizations. An Investor Guide published by the the Interfaith Center on Corporate Responsibility (ICCR) and the Investor Environmental Health Network (IEHN) in 2011 led to the formation of an coalition of institutional investors calling for the adoption by companies of best practices to address environmental and social concerns.

A second report, published in 2012 by the IRRC Institute and the Sustainable Investments Institute (Si2), stated, "How companies respond to further calls for transparency and adherence to best practices will influence whether the operating environment will improve or whether future rounds of even more stringent regulation or outright bans on drilling will ensue. Given the public scrutiny, a few bad actors may put the entire industry's license to operate at risk."

"The guidelines are the latest in a series of recommendations from government agencies, government advisors and the investment community over the last 15 months calling for much more detailed, quantitative data on environmental and social risk management," Richard Liroff of IEHN wrote.

"The growing chorus of voices calling for quantitative reporting," Liroff continued, "makes clear that if they are to ensure their 'social license to operate,' companies need to report concrete measures of their goals and progress."

"This will allow investors to better determine which companies may constitute riskier investments and will allow communities to distinguish companies that might be better neighbors from those that might not."

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