By Mauricio Samaniego, Alerian

Summary

  • The constituents of the Alerian Midstream Energy Select Index (AMEI), which include midstream MLPs and corporations, continue making strides on the ESG front, supporting the case for midstream as an ESG-conscious investment.
  • The constituents of the AMEI will continue to play a pivotal role in meeting domestic energy needs in the US and Canada, as well as supplementing the energy needs of economies across the globe.
  • Because the energy transition will require development of both existing and emerging technologies, constituents of the AMEI will also play an undisputable role in reducing emissions.

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. While midstream energy infrastructure is not the first sector that comes to mind amid the growing relevance of ESG investing, the constituents of the Alerian Midstream Energy Select Index (AMEI), which include midstream MLPs and corporations, continue making strides on the ESG front, supporting the case for midstream as an ESG-conscious investment. Despite there being no standardized way to measure or quantify ESG criteria, sustainability reporting and the disclosure of ESG-related metrics has become a norm among the constituents of the AMEI, while the pursuit of clean energy projects and the adoption of innovative technologies to reduce emissions continue to gain traction.

Midstream is still the lifeblood of the US economy.

While climate issues are top of mind for investors today, the consensus has long overlooked some of the ESG elements unique to the energy infrastructure space. In particular, the “S” in ESG (i.e., social responsibility) is underwhelmingly ignored despite the fact that midstream energy infrastructure plays a major role in helping reopen—and sustain—economies as COVID-19 restrictions ease, providing essential energy for transportation and millions of homes and businesses. According to the US Energy Information Administration (EIA), petroleum and natural gas accounted for roughly 78% of the energy consumed in the United States in 2020. Notably, even as the world transitions towards net-zero emissions, oil and natural gas will continue to remain relevant within the global energy mix for years to come, making up roughly 48% of total the energy supply in 2030 as renewable energy sources grow and the world transitions away from dirtier energy sources such as coal, according to the Net Zero by 2050 Scenario published by the IEA. Thus, the constituents of the AMEI will continue to play a pivotal role in meeting domestic energy needs in the US and Canada, as well as supplementing the energy needs of economies across the globe (read more here). On the environmental side, contrary to popular belief, pipelines will continue to be the cleanest and safest way to move vast amounts of energy—as opposed to far more carbon emissive methods like rail and truck, which also pose safety hazards by increasing traffic congestion. That said, the midstream space is making progress on the ESG front as well as continuing to fulfill the duty to deliver essential energy as economies reopen today.

Midstream makes strides toward reducing emissions.

Because the energy transition will require development of both existing and emerging technologies, constituents of the AMEI index will also play an undisputable role in reducing emissions. According to the IEA’s Net Zero by 2050 Scenario, carbon capture utilization and storage (CCUS) and hydrogen technologies will make vital contributions to reducing carbon dioxide (CO2) emissions between 2030 and 2050, which will require both building new pipelines and leveraging existing energy infrastructure. Notably, the IEA believes reaching net zero will be virtually impossible without CCUS. On June 17th Pembina Pipeline (PPL CN, 5.00% wgt.) and TC Energy (TRP CN, 5.04% wgt.) announced their plan to jointly develop a large-scale carbon transportation and sequestration system in Alberta to transport more than 20 million tons of CO2 annually, combining PPL’s and TRP’s industry experience and leveraging their existing pipeline network to build the backbone for Alberta’s CCUS industry. The Williams Company (WMB, 5.00% wgt.) announced on June 3rd its collaboration with Microsoft (MSFT) to explore ways in which digital technology and innovation can assist WMB through the energy transition to help asses opportunities around hydrogen, renewable gas, CCUS, and energy storage solutions, as well as evaluate ways in which Microsoft’s offerings can further improve greenhouse gas (GHG) monitoring and reporting. Enlink Midstream (ENLC, 1.21% wgt), announced the formation of the Enlink Carbon Solutions Group on June 6th alongside raising its 2021 guidance. The new segment will serve to identify energy transition opportunities, with a particular focus on CCUS.

ESG Reporting has become the norm for midstream.

On June 10th Cheniere Energy (LNG, 5.12% wgt.) announced its collaboration with natural gas providers and various academic institutions to quantify, monitor, verify, and report GHG emissions through a wide range of technological applications, including ground-based, drone, and satellite technologies. Notably, with the inclusion of LNG, all but one constituent in the AMEI index with a weighting of 1% or more have adopted sustainability reporting or the disclosure of ESG-related metrics, which accounts for roughly 94% of the index by weighting. And while there is still no gold standard delineating how and what ESG criteria should be reported, some constituents are releasing ESG-related reports beyond an annual sustainability report. For example, MPLX (MPLX, 2.84% wgt.) and its parent Marathon Petroleum (MPC), released additional ESG reports in June, providing updated context on their ESG narrative as well as their perspectives on climate related scenarios in 2021. Furthermore, constituents of the AMEI are also aligning the ESG interests of its stakeholders by tying executive compensation to ESG goals. Out of the 22 AMEI constituents that carry a weighting of 1% or more, 15 have incorporated ESG goals into their executive compensation structure, including 8 of the top ten constituents, representing an aggregate 68% of the AMEI index by weighting.

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AMEI index constituents that have weightings less than 1% are not falling behind on the growing ESG reporting trend. For example, Nustar energy (NS, 0.45% wgt.), is expecting to release its first sustainability report in 2021. Genesis Energy (GEL, 0.32% wgt.) is currently working toward publishing an inaugural ESG report, while their website already offers an ESG-dedicated section where they publish relevant ESG information and data. For other companies, like Phillips 66 Partners (PSXP, 0.72% wgt.), Hess Midstream (HESM, 0.43% wgt.), and Rattler Midstream (RTLR, 0.32% weight), their respective parent companies publish sustainability reports, which include ESG data relevant to the midstream assets.

Bottom line:

With the midstream energy infrastructure space increasingly adopting ESG criteria into their business models and strategic objectives, many of the public’s doubts over midstream being an ESG friendly investment are being progressively put to rest, which should accelerate as more progress is made around clean energy projects and emission-reduction initiatives.

AMEI is the underlying index for the Alerian Energy Infrastructure ETF (ENFR).

Originally published by Alerian, 7/6/21