Fight over how to measure carbon risks is pitting the energy industry against the finance world
CALGARY — A fight over how to measure an oil company’s environmental footprint and social performance has pit members of the energy industry against the financial services industry, with even the Bank of Canada weighing in with a call for more disclosure on carbon emissions.
Climate change was one of the six largest vulnerabilities to the Canadian economy, the Bank of Canada said in a report published Thursday, noting that “better transparency” on carbon emissions and environmental disclosures from companies in the resources sector could help alleviate the risk of ‘unexploited’ oil and gas reserves.
“Investor and consumer preferences are shifting towards lower-carbon sources and production processes, suggesting that the move to a low-carbon economy is underway,” the central bank stated in its 2019 Financial System Review.
“Transition costs will be felt most in carbon-intensive sectors, such as the oil and gas sector. If some fossil fuel reserves remain unexploited, assets in the sector may become stranded, losing much of their value,” the review noted.
The Bank of Canada is not alone in incorporating carbon risk in its assessment of the Canadian economy.
On May 7, Moody’s Investors Services published its proposed framework for assessing carbon risk across industrial sectors. The credit ratings agency has hired 12 analysts to conduct carbon transition risk assessments and will issue reports in the future that assign a value to a company’s carbon risk.
“In the case of companies with big carbon transition exposure, this is going to be a bigger weight in the ESG type of risks,” said John Thieroff, a senior member of Moody’s oil and gas team. He added that customer-facing businesses such as retailers face greater social risks to their business than commodity-based companies.
Thieroff noted that the carbon risk assessment is not the same thing as a credit score and even though carbon risk does affect a company’s credit score, it’s part of a wider consideration. For example, Texas super-major Exxon Mobil Corp. still holds a AAA credit rating though it’s involved in all types of oil and gas extraction, refining and distribution.
A new generation of analysts at a growing number of Canadian banks such as Canadian Imperial Bank of Commerce and Bank of Montreal, major credit ratings agencies and investment houses are developing tools to evaluate environmental risk and also social and governance performance – broadly called ESG metrics.
While CIBC’s carbon tracker is focused on emissions, a recent BMO report called for a broader approach to ESG issues. “We feel a more constructive approach is to look at who within the industry can lead the global push for a more environmentally and socially conscious supply chain,” the banks analysts wrote in the Feb. 2019 report.
But the growing field of ESG analysis has also led, in some cases, to a tug of war between companies in the energy sector and in the financial sector over what data is most relevant in their models and how the evaluations are conducted.
“There’s going to be buy-side accounts that only buy companies with certain ESG scores,” said Tamarack Valley Energy Ltd. president and CEO Brian Schmidt. “You want as many buy-side names into your company as you can get.”
Right now, Schmidt said most of the pressure on ESG performance is focused on large-cap players such as Royal Dutch Shell Plc and Suncor Energy Inc., but he expects the same pressure is coming to small- and mid-sized companies like his soon.
“I rarely get questions from my investors but it’s one of those things where I know it’s coming. It’s a competitive advantage if you can get out in front of it,” he said.
Tamarack Valley committed last week to deliver a report on ESG next year in a move to join its significantly larger peers who already publish such reports.
“The Canadian industry needs to start to present themselves that way internationally,” said Mac Van Wielingen, a founder and partner with Calgary-based private equity giant ARC Financial Corp. and chair of Viewpoint Investment Partners Corp.
Van Wielingen, who was also the chair of AIMCo, an institutional investor with $100 billion in assets under management, said that in his experience drumming up international investment in Canadian energy companies, ESG considerations provide a checklist for many institutional investors, but they also want to ensure they earn a return.
“For international investors, it’s like receiving a checkmark for those fundamentals but it’s insufficient for them,” Van Wielingen said, adding the Canadian industry is still having a tough time raising money because of a lack of pipelines, regardless of their ESG scores.
Institutional investors, equity analysts, ESG specialist firms such as The Netherlands-based Sustainalytics and now credit ratings agencies are demanding those types of reports and data.
Still, many in the Canadian industry believe focusing on carbon risk alone doesn’t capture a company’s overall performance.
“There is a disproportionate focus on the environmental component of ESG,” said Ben Brunnen, vice-president of oilsands at the Canadian Association of Petroleum Producers, adding the other two components are equally important. “We have one of the best stories there is on the broad scope of E, S and G.”
“We’re looking at this narrowly focused risk. It is a risk, you’re right. But on the other hand, it’s not balanced in the broader context,” Brunnen said. “Until that frame is brought into context with the balance of factors, these frameworks will be deficient.”
Alberta’s new United Conservative Party government has publicly discussed advocating for the Canadian energy industry to push for a broader-based analysis of oil companies performance that extends to social issues rather than focusing solely on the environment.
“One of the key platform promises was to set up a war room. Part of the war room function is to talk about all the good things that the energy sector does,” Alberta Energy Minister Sonya Savage said in an interview on ESG metrics.
Part of the problem with ESG evaluations is it’s difficult to apply the same standards across industries and across countries with different levels of government-related risk.
“Are you going to get a perfect formula that works for everyone? I wouldn’t take that bet,” said Ian Dundas, president and CEO of Enerplus Corp., adding that consumer products or financial services companies would likely be graded differently on energy use than natural resources companies.
However, he said, some issues such as board diversity and workforce inclusivity “transcend industries” and there could be more universal scores on those types of measurements.
Dundas said Enerplus is providing data and information to the growing number of analysts that want to score the company on ESG because, in many cases, it reflects good business practices generally. “Having a broad perspective on an inclusive workforce and engagement in the community is just Business 101. It’s critical,” he said.
“Institutional investors are getting this from their investors. The question they’ve had historically is do you have to do this at the expense of returns? It’s good business and it will drive better returns,” he said.