 “It is hard to fail, but it is worse to never have tried to succeed.” In this report we have collected our thoughts, analysis, and metrics on ESG for the first time. We do not think about this as the end all and be all of ESG. Rather we think about ESG as a journey and an iterative process. We suspect this will be the first version of this report, and we hope to make annual updates. In that vein, any and all feedback is deeply appreciated.

 “Complaining about a problem without posing a solution is called whining.”

Solving the ESG challenge for oil and gas is a non-trivial issue. We live in a world that needs hydrocarbons and will need hydrocarbons for decades to come.

Nonetheless, reducing climate impacts is critical over time. There is no magic bullet that will fix the environmental impact of the industry. Nonetheless, addressing the relatively low hanging fruit of methane emissions and flaring is a very important and meaningful first step. From there, targeted investments in carbon capture, carbon offsets, and renewable projects will help either reduce outright carbon emissions or at least reduce carbon intensity by widening the denominator. Regardless, all of these factors should be viewed through a prism of incremental as opposed to revolutionary change. Companies will successfully reduce carbon intensity. They will not get carbon intensity to zero without unforeseen technological improvements.

 “Do what you can, with what you have, where you are.” The simple challenges of measurement and standardization are very real. Company reporting remains incomplete, and the scope of reporting is at times inconsistent. We suspect that will change and improve over time. Ultimately, getting reporting onto the same standards is important not only for absolute benchmarking but also for tracking improvement over time—which we think ultimately is what investors care the most about.

 “Comparison is the thief of joy.” We have benchmarked our coverage universe on total GHG emissions, methane emissions, and relative intensity of both. This is of course our first journey down this path, data remains sparse, and we had to make many assumptions to standardize reporting. Nonetheless, we think all companies that publicly provide enough information to be included in our benchmarking should be rewarded.

 “Speak softly and carry a big stick; you will go far.” Every single investor we speak to cares about ESG. And nearly every major high yield investor includes a substantial comment about ESG in their investing process and/or marketing materials. One positive note is that the US is headed to a much more “ESG integrative” approach than the more exclusionary approach in Europe. But despite the constant and likely growing buzz on ESG (and a major proxy fight), we see little actual market evidence of an ESG impact on Energy spread levels or issuance (which is poised to set a record this year). Again this is all early days and is likely to change over time. We think ESG engagement is critically important for issuers. Our concern is less about the creation of an “ESG beta” in US HY Energy and more about the sector successfully doing enough to improve itself to avoid outright exclusion as has befallen thermal coal. There are a lot of things the industry can do to improve itself and engage with stakeholders. Over time we believe investors will be rewarded by focusing on those companies that are ahead of the curve.