Disclosing the Facts:

Disclosing the Facts 2014 is the third in a series of investor reports intended to promote improved operational practices among oil and gas companies engaged in horizontal drilling and hydraulic fracturing. Hydraulic fracturing operations use high volumes of water and toxic chemicals, release significant levels of greenhouse gas and other emissions, and have the potential to adversely impact local communities when not properly managed. These issues may translate into financial risks to companies and shareholders related to fines, regulations, resource constraints, or threats to their social license to operate. Following the maxim of “what gets measured, gets managed,” this report encourages oil and gas companies to increase disclosures about their use of current best practices to minimize the environmental risks and community impacts of their “fracking” activities. Disclosure of best management practices and associated key performance indicators is the primary means by which investors may gauge how companies are managing the business risks associated with their environmental and community impacts.

This 2014 scorecard benchmarks the public disclosures of 30 oil and gas companies on 35 key performance indicators. It serves to distinguish companies disclosing more about their practices and impacts from those disclosing less. The scorecard assesses five areas of environmental, social, and governance metrics: (1) toxic chemicals; (2) water and waste management; (3) air emissions; (4) community impacts; and (5) management accountability, emphasizing quantitative disclosure on a play-by-play basis. It relies solely on publicly available information companies provide on their websites or in financial statements or other reports linked from their websites.

As was the case with the 2013 scorecard, the results of this year’s scorecard demonstrate a widespread industry trend of underperformance in disclosing key performance metrics. Across the board, companies are failing to provide investors and the public with sufficient quantitative information to adequately understand and compare the risks and opportunities these companies present regarding their shale play operations.

Although industry-wide performance continues to lag investor expectations, several companies have significantly improved their disclosures over the past year. This change is consistent with continued close investor, public, and regulatory scrutiny of hydraulic fracturing activities as well as broader patterns of innovation within the industry, where companies deploy better practices and other companies follow in what we hope is a race to the top for best performance. Investors plan to continue pressing companies to adopt effective practices for managing the risks and impacts, and thus capturing the full value, of their hydraulic fracturing operations.

Core Recommendation: Companies Should Increase Quantitative Reporting

As stated in our previous assessments, narrative reporting—anecdotal reporting of activities in one or two plays—and aggregated company-wide reporting of impacts on a national or company-wide level, do not sufficiently inform investors about how effectively companies are managing the risks or opportunities associated with their operations. Companies should report data associated with their operational impacts using quantitative metrics, on a play-by-play basis, in order for investors to be able to rigorously assess company practices.

Conclusion

As evidenced by continuing controversy over allowing shale energy development to move forward in Colorado, California, New York, Eastern Canada, and elsewhere, energy companies have still not managed to allay public concerns about the risks associated with their operations and continue to face potential loss of their social license to operate. We believe companies implementing current best practices in operations and providing thoroughly transparent information about these efforts will: enhance the likelihood of securing and maintaining their social license to operate; reduce regulatory and reputational risks; reduce liabilities associated with poor performance, spills, contamination, and lawsuits; and thereby increase their access to capital.