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What is ESG?

The evolution of sustainable reporting, to the explosion of ESG

The global investment community is abuzz with new jargon such as “sustainability”, “socially responsible investing”, and “ESG”.

If you aren’t familiar with these terms, now is the time to learn what they mean. “Climate emergency” was Oxford English Dictionary’s 2019 word of the year. The discussion around climate, sustainability, and the human impact to the environment isn’t merely a fad; it’s here to stay. Consumers and investors want businesses to show they are serious about mitigating their impacts on the climate and environment.

These aren’t only words in the dictionary; they’re concepts investors expect to be in practice – for public and private companies - on a global scale.

Oxford defines sustainability as “The property of being environmentally sustainable; the degree to which a process or enterprise is able to be maintained or continued while avoiding the long-term depletion of natural resources”.

ESG, or Environmental, Social, and Governance, is a more complex term. RBC has an easy-to-understand way of explaining it.

Environmental - how does a company act as an environmental steward? It measures how sustainably a company is operating, and includes:

  • level of environmental harm

  • climate change

  • greenhouse gas (GHG) emissions

  • resource depletion, including water

  • waste water treatment

  • waste and pollution

  • deforestation

  • fracking

Social - how does a company treat employees, customers & communities? It’s sort of like the company’s moral compass.

  • working conditions, including slavery and child labour

  • impact on local communities, including indigenous communities

  • conflict

  • health and safety

  • employee relations and diversity – including pay equity

  • product safety

  • supply chain

Governance - how does a company govern itself? This helps the public measure how ethical the company is.

  • executive pay

  • bribery and corruption

  • political lobbying and donations

  • board diversity and structure

  • tax strategy and accounting practices

  • cybersecurity

  • executives’ handling of reported misconduct or discrimination

  • shareholder voting policies

  • acceptance of stakeholder input

The ESG evolution

Starting in the 1970’s, there was a focus on shareholder value, but that limited vision has become outdated. Consumers and investors are embracing Stakeholder Theory, which is broader and focuses on a business’s impact on its stakeholders, not only the financial impacts to shareholders. It is not limited to publicly traded companies that have to report their results. It extends the obligations for responsible business practices to private companies too.

This has led to a shift towards ESG investing as a result of the following drivers:

· Generational trend - millennial investors want to follow their conscience. They will not invest against their beliefs, even if the returns are higher.

· Many investors are interested in including environment-related themes into their portfolios.

· Institutional investors equally want to see a double bottom line: an ROI on their money, while also making the world a more sustainable place, and ESG investing tends to outperform.

· Sources of Information – more and more institutional investors are beginning to use social media to influence their decision-making process.

Does the Canadian oil and gas industry have to embrace ESG?

No, it doesn’t. But if the industry wants to be competitive, if it wants to get access to much-needed capital, and, for public companies, increase its share price, then yes it has to. It’s what the investment world wants with ninety percent of international funds having some focus on ESG. However, it’s what the vast majority of public and private companies’ stakeholders want -- everyone from investors, banks, customers, suppliers, employees, insurance companies, and the list goes on.

Investors have the benefit of mobility and they can invest their capital anywhere in the world; therefore, they want organizations – public and private - to genuinely embrace the philosophy of ESG. They don’t want pandering. They want to invest in companies that authentically do good in the world as a way to feel better about their own personal decisions, and no other industry has been as vilified as fossil fuels for their alleged poor record.

Canada’s oil and gas sector has been leading on environment, social, and governance for decades, and ranks number one on the ESG Global Index compared to the 10 largest energy producing countries. Chances are, your company's sustainability is better than you think.

Canada’s oil and gas regulatory regime, and Alberta’s in particular, is recognized globally as the one to emulate. Additionally, Canada’s oil and gas sector is often in the forefront on technology. It embraced horizontal drilling and fracking that were game-changers. Those who work in it understand that the energy sector is dynamic and it can never be complacent. It has to continue to innovate, grow, and improve to remain competitive, and ESG is no exception.

I encourage all Canadian oil and gas companies to be open and proud about your ESG score, and keep working to improve it. But don’t let anyone else own the narrative about your company or Canada’s energy sector and its contributions to ESG. Oil and gas use is going to continue for decades. Let’s make sure that Canada is the supplier of choice because it has learned how to record and report honest, transparent ESG scores.

This series is specific to the Canadian Oil and Gas Industry and explores how ESG will impact the industry moving forward, how the sector can embrace it, and what reporting tools are available. This is article one of six.

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