Environmental, social and governance performance will drive investment in future – 2020 Top Operators Report

The concept of investors using the environmental, social and governance (ESG) performance of a company to guide investment decisions is taking hold globally, and Canadian operators need to take notice, says KPMG’s National Energy Leader Michael McKerracher.

“Oil and gas companies of the future will have a large ESG component,” he explains. “There is a need to address the concerns of all internal and external stakeholders and this is an important push for all companies in the future.”

“Investors will want to see it. Large companies and small companies need to build a strategy,” he adds, while pointing out environmental issues is only part of the picture. “On the social side, investors haven’t pushed to make ESG a focus. On the governance side, security regulators haven’t pushed as hard either. Both investors and regulators will push for more presence of ESG in the future.”

McKerracher adds that producing a sustainability report won’t be enough to satisfy the market.

“Companies need to build it into their structures,” he explains.

Chris Seasons. Vice-chair and director of Investment Committee for ARC Financial, says ESG is already an important decision-making factor with investors in its funds.

“It’s important to us as we raise most of our money for our LP funds outside of Canada,”
he explains, adding much of the money
comes from organizations like university endowments, pension funds, and other socially conscious investment pools. These groups are under pressure from their constituents to look at ESG. “Low prices don’t change that. We want to see an ESG plan and we have targets as a firm we present to investors.”

CNRL executive vice-chairman Steve Laut believes the Canadian industry is doing better than many believe when it comes to managing ESG issues.

“Essentially, Canada's oil and gas sector has taken what was branded as high-intensity oil in 2009 and made it what I would call the premium oil on the global stage, all in 10 years. And the Canadian oil gas sector is committed to do even better in the future,” he says, noting that Canadian Natural has already reduced its overall corporate emissions intensity by 29 per cent since 2012.

Suncor Energy president and chief executive officer Mark Little shares this perspective.

“We do this ESG oil production, I think, better than anyone else in the world,” Little told last year’s Energy Disruptors conference. “You can have something that’s competitive on carbon, you can have something that’s environmentally responsible with all the regulations that we have in Canada and a democratic society. You can have social good in helping lift Indigenous people out of poverty.”

With the world’s population expected to grow by two billion to 9.7 billion by 2050 and with 600 million people being lifted out of extreme poverty, “we still are in this huge ramp up of need for more energy,” says Little. At the same time, there’s a huge global challenge on the environmental side. “The question is how do you solve that Rubik’s cube where we are caring for the environment while we are providing the energy to sustain people’s lives and enhance people’s lives.”

In the social area, Suncor is working to create what it calls “economic reconciliation” with Indigenous peoples in Canada. One of the huge challenges for an Indigenous community is finding a source of stable revenue and that was highlighted in 2014 with the collapse in oil prices and the margins for service companies, many owned by First Nations, he says. The companies use the income for programs to help their citizens. “All of a sudden, half their money disappeared and they are stuck with all these programs, so how are they going to move forward?”

Suncor came up with the idea of a joint venture partnership in something that doesn’t fluctuate with commodity prices. It agreed to sell a 49 per cent interest in its tank farm to the Fort McKay and Mikisew Cree First Nations, who raised $500 million through a 25-year bond. The investment will generate essentially $20 million of profit a year, with the money used to fund everything from business and housing and infrastructure to education and eldercare.

“This is transformative and they know every single year that money will be showing up for decades in these communities,” he says. “We have 630 First Nations in the country; this does not solve Indigenous reconciliation.”

TC Energy Corporation’s approach to reporting on ESG is continuing to evolve in response to feedback from the investment community, says the company’s chief executive.

“The issues related to sustainability have always been sort
of foremost in our minds, whether that be things like safety, environmental stewardship, or working with the communities that benefit from our projects and we will continue to do those things, Russ Girling,” president and chief executive officer, says. “What we’ve been doing from a reporting perspective is collating that information and providing it to the investment community in a way that we hadn’t in the past because folks were asking for that kind of information. Based on the feedback, we will continue to evolve reporting around those kind of issues.”

Girling says that each year over the past 25 years he has been at the company it has continued to make improvements in the way it does business in all areas — environmental footprint, social responsibility, diversity in employment in management ranks.

“We have continuous improvement and goals on an annual basis to continually improve those things,” he notes.

TC Energy has heightened its awareness around safety and has implemented a “Zero is Real” program inside the company and made real progress, achieving zero in a lot of pockets of its business, says Girling. The company continues to invest in technology to improve its ability to detect and act on the potential for leaks in its
pipeline system.

“We continue to evolve our processes and investments in the communities in which we operate, offering continually greater benefits for communities and understanding what their concerns are,” he adds.

Editor’s note:

Canada’s oil and gas industry is at an inflection point. After five years of wild price volatility, market access issues, and other challenges, it now finds itself in the midst of a pandemic that has driven demand to lows not seen in decades.

This year’s Daily Oil Bulletin Top Operators report reflects the great uncertainty facing the oil and gas sector and tries to make sense of what the industry and successful operators in the post-pandemic future will look like.

To do so, we made some changes to the Top Operators format.

Rather than comparing year-over-year data, in some instances our CanOils analysts compared first quarter 2019/2020 data to measure the impact of the early stages of the COVID-19 pandemic.

We also tapped into the experience of professional services firm KPMG to gain insight into what strategies operators and service companies could pursue to survive and thrive through the difficult days ahead.

Further, we leveraged the reporting power of the Daily Oil Bulletin staff and its ongoing coverage of the industry over the last four months to capture the industry’s response to the pandemic and its future outlook.

Download the report here.

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