By Cam Bailey
The Alberta government recently released a statement that Alberta’s public inquiry into whether foreign money is bankrolling anti-oil protests in Canada is going to take longer and need additional funding.
Earlier Premier Jason Kenney said that it “has seen foreign special interests secretively spending tens of millions of dollars to thwart Alberta’s economic development by landlocking our energy – but it stops now” which inspired the creation of the Canadian Energy Centre, aka War Room.
The real impact these groups have had is not the foreign funding of public protest of energy projects, but rather the negative affects these groups have had quietly defunding the energy industry by affecting flows of capital for energy development. The results have been staggering.
The group gofossilfree.org sites 1,237 Institution and $14.1 trillion of investment being diverted from investment in fossil fuels.
From city councils to sports teams, many have made the declaration of “climate emergencies” and pledged the immediate need to divest from fossil fuels. The most striking exclusion was announced by the world’s largest sovereign wealth fund Norges Bank Investment Management divested from four Canadian oilsands companies over concerns about carbon emissions, following which shares in Suncor Energy Inc., Canadian Natural Resources Ltd., Imperial Oil Ltd., and Cenovus Energy Inc. all tumbled between 5 and 7%.
Ironically, the divestment movement is focused on the wrong targets. Independent oil companies (IOCs) currently only produce about 10% of the world’s oil and Alberta’s energy industry is being made up almost entirely of IOCs. The rest of the world’s production is from national oil companies (NOCs) – state-owned entities such as Saudi Aramco, National Iranian Oil Company, China National Petroleum Corporation, and Petroleos de Venezuela, located mostly in low- and middle-income countries.
While global demand for natural gas and oil continues to increase, divestment pressures from environmental activists are unlikely to impact the business plans of NOCs. Instead of reducing global fossil fuel production, the divestment movement will simply force IOCs to give up market share to NOCs where the carbon intensity of NOCs per unit of fuel produced is larger than those of IOCs. Canadian energy companies and IOCs are also generally better placed and more willing than are NOCs to reduce the carbon intensity and support the transition to lower-carbon energy.
The campaign to assist the Alberta energy industry needs to be taken directly to the investors that are influenced by environmental activists promoting fossil fuel divestment. To win back their interest, investors need to hear much more than good intentions and progressive plans about the environment through the recent trend of energy companies’ ESG reports, but rather require material, standardized, accurate, verifiable, and auditable data. In the absence of that, investors are subjected to the vagaries of the environmental activists’ influences over broad investment decisions like energy investing.
Right now, data quality and comparability are huge obstacles for an investor looking to create ESG viable investment strategies. State Street a behemoth with $3.4 trillion under management, found that the data correlation across four major ESG data providers: Sustainalytics MSCI, RoecoSAM, and Bloomberg was only 0.48 meaning wide variability between the firms, compared to a correlation of one (1) being perfectly corelated for credit ratings assign by two competing rating agencies Moody’s and Standard and Poor’s
State Street also cited a large gap in the confidence of data quality between issues and investors. A study completed by PWC indicated that while issuers had 100% confidence in the quality of their disclosed ESG data, investors had a 29% confidence level in the same data. A separate study by EY indicated that only 7% of investors were satisfied by the disclosure level of ESG data, and only 8% of investors believed there was the ease of comparability between companies.
The Alberta energy industry can rely on the evolution of voluntary disclosure and the larger companies with sufficient resources will likely recognize the need for fulsome ESG reporting with hopes to sway investor interest back into the sector over time. Alternatively, the Alberta government can do one of two things to speed the much-needed process along with i) regulate and standardize ESG reporting, or ii) compel companies to provide ESG disclosure with financial incentives.
The idea of an Alberta Green Bond to tap the ESG conditioned financing is a capital market product that could do just that. The Green Bond market has matured to the point where the issues in 2020 will exceed $300 billion. An Alberta Green Bond is likely to be one of the best performing Green Bonds to hit the market considering the impact it could have on Alberta energy companies and their ability to reduce GHG emissions and water consumption. Tied to the funding with an Alberta Green Bond would be the fulsome reporting requirements and verification process being demanded by institutional investors. An Alberta Green Bond would distinguish the Alberta energy industry with this as validation, from the rest of the world as the most environmentally, socially responsible producer in the world. This would be a step towards unlocking capital markets and move it from an “exclusionary” investment to “best in class” investment.
The environmental activists, regardless of how they have been funded, have been effective at disrupting flows of capital in the Canadian energy industry. The energy industry must be proactive to deliver what investors need to allow them to continue to invest in the sector.
Cam Bailey is energy capital markets expert and formerly CEO of an oil field service company