2021 Top Operators Report: ESG factors becoming integrated into financial risk management

Editor’s note: Last year, when assembling the 2020 Top Operators Report, the COVID-19 pandemic had shuttered the global economy. Oil demand had been reduced by over 20 million bbls/d and prices were at lows not seen in decades.

The mood of the Canadian industry was grim. After five years of being rocked by wild price volatility the pandemic hit like a knockout punch.

The 2021 Top Operators Report looks back at how Canada’s oil and gas leaders pivoted to meet the challenges of 2020, and how they are positioning their organizations for future success.

Once again, we have tapped into the experience of professional services firm KPMG in Canada to provide insight into what strategies operators could pursue to thrive in the current environment.

The report also features a broad swath of the insights and opinions from industry leaders gleaned from Daily Oil Bulletin coverage, along with commentary from data providers Evaluate Energy and CanOils.

Download the report here.

Environmental, social, and governance (ESG) factors are rapidly being integrated into corporate financial risk management as investors, regulators and the public look for operators to better understand and manage non-traditional risks to their company’s long-term sustainability.

“The last 12-18 months have been an almost watershed moment for ESG,” said Atin Prakash, senior manager, Sustainability Services, KPMG in Canada. “It has become mainstream. It has expanded from what used to be a niche area for a few highly impacted industries and socially driven companies to something adopted across industries and geographies.”

There are a number of drivers for this mainstream acceptance of ESG, said Prakash. The current focus on climate change and the growing divesture movement targeting companies with high-emissions intensity, or a lack of strategy to deal with those emissions, are significant factors. Concerns about social issues like inequality, diversity and inclusion are also driving ESG integration. The COVID-19 pandemic has also brought external risks to the forefront.

“The biggest reason is investors and companies are realizing how vulnerable they are to these external changes and they are starting to see them as financial risks,” said Prakash. “Insurance companies are getting a lot of claims related to extreme weather events which they can no longer absorb. They are seeing their profitability decrease and the models they use are being disrupted by ESG topics.”

“Climate change is the one most strongly focused on because its potential financial impacts are the greatest,” he added. “There is also an increasingly keen focus on diversity and inclusion. It is seen as a better approach to building companies. Gender, age, race, experience are all different aspects of diversity. Companies with a more diverse workforce are typically better governed, better at decision-making, and more adaptive and nimble.”

If COVID-19 has shown anything, according to Martha Hall Findlay, chief sustainability officer for Suncor Energy Inc., globally it has enhanced the recognition that the ‘S’ and the ‘G’ — the ‘social’ and ‘governance’— in ESG are really important.

However, she noted, as Canadian energy producers continue to tackle emissions, it only makes overall what they have to offer that much more competitive. In Suncor’s case, the company has committed to reducing its emissions intensity by 30 per cent from 2014 levels by 2030.

“The more we are working towards that kind of a goal, which we are, our view is that ESG is fantastic for us,” Hall Findlay said.

“And so, 10 per cent of our whole procurement in products and services — and we’re a big company — is with Indigenous communities. And that just builds in terms of economic activity, independence, and now we have various tank farm equity arrangements.”

Enbridge Inc. president and chief executive Al Monaco said setting performance targets is an important part of his company’s ESG reports.

These targets are tied to compensation programs and supported by hard-backed plans, said Monaco. “This isn’t really something new for us. I know it has been a focus of the market recently, but this is really about how we do business. The way we look at ESG is as a multi-stakeholder measure of trusting what we do. As you know, people must trust us these days in order for us to get things done.”

The “harsh reality” is that low-cost, reliable energy will always drive the economy, suggested the CEO, and as the demand for energy increases by 20-25 per cent over the next two to three decades to meet the needs of the developing world, all supplies will be required for the future. “The bottom line of all that is that oil is going to be critical for many years to come. It’s critical for transportation. We know that EV penetration will increase, but it’s going to take time.”

Fortunately, Monaco said, western Canadian producers have done a tremendous job at reducing emissions, while organizations are adopting net-zero strategies, and Canada boasts an “aggressive or advanced, depending on how you look at it,” carbon-pricing framework.

"Enbridge has committed to reduce the intensity of GHG emissions from our operations by 35 per cent. We plan to get there with an aggressive strategy of modernization, innovation and “greening the grid” initiatives including our solar self-power projects.”

From an oil and gas perspective, ESG is not something new, said Prakash. Certain aspects like health, safety and environmental management are well established. Companies also have a long history of strong governance, employee relations, and working with local communities.

“What’s happening now is ESG is giving structure and putting a framework to policies that already existed,” he said. “ESG is sort of a catch-all term. When most people think ESG they think of planting trees or making donations, but that’s really CSR (corporate social responsibility). ESG is different. It looks at topics that can have an impact on companies or business rather than just focusing on topics stakeholders care about. It’s an evolution of CSR being made relevant for companies rather than only for the community at large.”

How companies tell their ESG story is also evolving, said Prakash.

“Investors are making demands on companies for data-driven ESG disclosure. It’s not just storytelling. Their expectation is ESG reporting backed with numbers, data and initiatives around material topics that may impact financial performance.”

Investors are also looking for performance, he added. Companies are identifying material topics and setting targets and strategies to reach those targets. These include topics like GHG emissions, water use, or diversity targets.

“Investors have expectations to see such targets and performance against these targets.”

The frameworks being used to disclose performance are also evolving as ESG becomes mainstream. In North America, the investment community is converging around SASB standards for reporting all ESG factors, and the TCFD framework for climate related disclosures.

“Financial regulators are also getting involved and putting out guidance,” he added, including the Canadian stock exchanges. “So we’re starting to see some convergence but it is important to remember financial accounting standards are over 100-years-old and there are still different approaches and frameworks.”

While transparent ESG disclosure demonstrating performance improvements is important for companies, Hall Findlay told a recent DBRS Morningstar webinar that the securities regulators should not be the ones enforcing this. An increasingly ESG-conscious investment community will demand compliance.

“I think the people who are doing the investing are already causing it to happen. It doesn’t need to be regulated. It’s being regulated in the market already. If people are not disclosing, then they’re going to pay for it eventually. If they’re disclosing but they’re not showing improvement in their performance, then they’re going to pay for it.”

Prakash said many Canadian companies are well positioned to get ahead of the curve when it comes to ESG, but the industry must continue adapting to external trends that could impact their business.

“It requires companies to quickly adapt to trends happening globally and in Canada at a much quicker pace.”

To stay ahead, Canada must recognize ESG practices must trickle down across the energy supply chain, he added.

“ESG is no longer a leading practice but a market expectation everyone must reach. We saw it first in large companies and it’s now happening in mid-tier and smaller operators. Investors are now focusing on service companies in the energy sector. We know anecdotally that service companies are now getting requests on ESG. Large upstream companies are now moving ESG out into their supply chains.”

What is becomingly increasingly clear in the ESG space is the importance of “data integrity” — that is, recognition that for data to be an effective element of the ESG reporting process, its source should be separated where possible from a company’s internal processes, noted Bill Whitelaw, managing director of strategy and sustainability at geoLOGIC systems ltd. and JWN Energy.

“For stakeholders to trust data, they want to know that it has been curated effectively, [and] that it comes from a place of third-party integrity and validation,” noted Whitelaw. “Companies need to find ways and means of ensuring the data they use cannot be questioned as to its credibility. Companies are typically caretakers of their own data; what they need is independently curated data. There is a major distinction between caretaking and curating in terms of the value associated with the processes of producing sound data.”

Download the report here.

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