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March 09, 2012

Investors Continue Pressure for Fracking Disclosure
    by Robert Kropp

Two guides for investors and companies engaged in hydraulic fracturing have been published in recent months, and four of ten shareowner resolutions calling for increased disclosure of risks have been withdrawn.

SocialFunds.com -- As much as any of the issues currently addressed by sustainable investors, hydraulic fracturing involves a wide range of environmental, social, and corporate governance (ESG) considerations. Shareowner resolutions that came to a vote during last year's proxy season gained an unprecedented 40% support. Resolutions filed during the past two proxy seasons with companies engaged in fracking addressed issues such as the contamination by toxic chemicals of community drinking water supplies, the disposal of massive volumes of wastewater, and increased air emissions.

This year, many of the resolutions filed by members of the Interfaith Center on Corporate Responsibility (ICCR) address the community impacts of fracking, calling for "improved measurement and reporting of the community impacts of hydraulic fracturing," according to Laura Berry, ICCR's Executive Director. Failing to address such impacts, the shareowners argue, threatens the social license to operate of companies engaged in the practice.

Shareowner concerns have prompted the recent publication of two reports on hydraulic fracturing. In December, ICCR and the Investor Environmental Health Network (IEHN) published an Investor Guide. The document, which grew out of bilateral discussions between investors and companies, provides key performance indicators relating to board level transparency and disclosure of all chemicals used in the process, mitigation of environmental impacts, compliance throughout the supply chain, and securing the consent of all key stakeholders in communities.

In a webinar held yesterday, the IRRC Institute and the Sustainable Investments Institute (Si2) announced the publication of the second report, entitled Discovering Shale Gas: An Investor Guide to Hydraulic Fracturing.

"An influx of domestic natural gas could lead the country toward greater energy independence, enhanced national security and a greener energy future," the report states. However, "the key question for investors is how much of this natural gas can be extracted and delivered to the market at a profit while having minimal impact on the environment."

Public concern over contamination of freshwater drinking supplies and disposal of the millions of gallons of wastewater produced by the fracking process has led investors and others to questions whether companies engaged in the practice are prepared for potential regulatory action affecting their operations. And as the report points out, many communities in which fracking takes place are unprepared for the influx of heavy industry into traditionally rural areas.

At yesterday's webinar, Si2 executive director Heidi Welsh touched upon another important issue, saying, "Developing these huge shale gas reserves raises the question also of whether our reliance on fossil fuels will be extended for too long. We may be putting off conversion to widespread use of renewable energy like solar and wind, which we will need to control climate change in the long run."

A recent study authored by former Microsoft Chief Technology Officer Nathan Myhrvold and Ken Caldeira of the Carnegie Institution for Science found that even if every coal-fired power plant in existence were converted to natural gas, it "cannot yield substantial temperature reductions this century."

Jon Lukomnik, IRRC Institute executive director, said, "The good news is that significant technological advancements have enabled companies to access a plentiful domestic energy source. The bad news is that shale gas is found in communities unfamiliar with petrochemical development where a regulatory patchwork does not always fully protect community interests. This places the onus on corporations to manage and negotiate through environmental and social issues on a community by community basis."

"That is a huge managerial challenge, so regulators, investors, community groups and environmentalists are correct to distinguish amongst the companies engaging in hydraulic fracturing so as to judge managerial quality." Lukomnik continued.

The report states, "An industry-wide commitment to transparency, best practices and continuous improvement, rather than mere compliance with existing regulations, is essential to reducing environmental and social risks. While such an industry commitment may raise near-term costs, lack of such a commitment could severely limit or curtail domestic shale gas drilling and lead to higher long-term costs."

While many companies engaged in fracking have responded to environmental concerns through such initiatives as the recycling of often toxic fracking fluids, the social impacts on communities of shale gas development are more difficult to quantify, the report found. Also, successful shale gas development has contributed to a dramatic decrease in the price of natural gas, and the absorption by companies of costs associated with reducing environmental impacts has become more difficult.

"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," the report states. "Given the public scrutiny, a few bad actors may put the entire industry's license to operate at risk."

Examples of successful shareowner engagement this year suggest that many companies are listening to the concerns of stakeholders. Miller/Howard Investments announced this week that it had withdrawn resolutions filed with PennVirginia and Stone Energy when the companies agreed "to provide increased transparency not only on the impacts of their operations but on their risk reduction practices," according to Director of Shareholder Advocacy Luan Steinhilber.

And Green Century Capital Management withdrew proposals from EOG and Noble Energy. Larisa Ruoff, Director of Shareholder Advocacy for Green Century, said, "We are pleased to see that momentum is building and companies are responding to the growing chorus calling for increased disclosure. We encourage the other companies which received resolutions to follow suit."

Resolutions filed with another six companies are expected to be voted on at this year's annual general meetings.

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