Oil sands: a policy engagement role for responsible investors

An incomplete or uncertain regulatory environment can increase risk for both companies and investors.

In August, 43 investment institutions representing assets of over C$ 1.6 trillion (U.S. $1.7 trillion) joined us in writing to the Canadian Federal and Alberta provincial governments, encouraging them to work together for rapid implementation of a world-class environmental monitoring system for the Alberta oil sands region. At NEI Investments we believe institutional investors have an important role to play in addressing environmental and social risk in the oil sands – not only through dialogue with companies, but also through engagement with policy-makers. An incomplete or uncertain regulatory environment can increase risk for both companies and investors. Recognizing the reality that the oil sands are being developed, for over five years we have been calling for that development to be undertaken as responsibly as possible. We have been engaging policy-makers as part of a wider oil sands strategy incorporating dialogue with companies on environmental, social and governance (ESG) disclosure and performance, and participation in initiatives that bring together stakeholders to seek solutions. Over the past year, expert panels tasked to explore the regulation, monitoring and performance of the oil sands industry have released a series of critical reports, putting pressure on decision-makers, and a range of policy initiatives are now under development. This presents a significant opportunity for investors to promote actionthat would contribute to ESG risk mitigation. In September, we published a short report, Getting The Framework Right, highlighting a number of key oil sands policy issues that should be addressed to create an enabling environment for improved corporate performance. As we outline in the following examples, although progress has been made in some areas, important gaps remain to be addressed. Over time individual companies have reduced the per-barrel impact of oil sands product, but these gains have been negated by the increase in production. The oil sands region needs a comprehensive land use plan that meets conservation needs, sets limits on cumulative impacts, encourages efficiency, and respects Aboriginal rights. We have long questioned the wisdom of continued leasing for new projects before planning is complete, pointing to the uncertainty this creates for companies, investors and other stakeholders. In 2009 the province began developing a strategic land use plan for the Lower Athabasca Region (LARP) – the heart of both the oil sands industry and Alberta’s Boreal forest region. We have provided ESG investor-perspective comments at successive stages of public consultation. While early commitments to cumulative effects management and improved impact monitoring were welcome, we saw cause for concern in other areas, including delays in finalization of land disturbance limits and biodiversity management frameworks, questions over

the effectiveness of the proposed protected area network, and an absence of strategies to address climate change. More positively, a progressive reclamation reporting regime has already been introduced, answering calls from stakeholders for regulation to render more transparent how much disturbed land is at each stage of reclamation – and shedding more light on the extent of the liabilities facing oil sands companies. The new LARP draft, published in August, represents both gains and steps backward from an ESG perspective: for example, the language acknowledging Aboriginal rights has strengthened, but some conservation-related provisions appeared to have been weakened. Next, the plan moves into the political approval stage. Conflicting views about the environmental impacts of the oil sands industry continue to create uncertainty. Expert reports have concluded that, while current monitoring efforts are significant, they are not well integrated and do not provide insight into the overall impacts of development. Furthermore, some initiatives have not been run in a way that has inspired confidence among stakeholders. A truly “world-class” monitoring system is needed to track and allow management of cumulative impacts to land, air and water. Summer saw publication of the results of two initiatives in this area: the Alberta Environmental Monitoring Panel released a strong report on monitoring system governance in June, while in July a Federal scientific panel provided a detailed set of technical recommendations on the data that should collected. The next step is implementation. This can be a challenge in Canada, where the division of responsibility between Federal and provincial governments in environmental matters is not always clear: hence our initiative to organize a letter to both levels of government, to demonstrate investor awareness and interest in theoutcomes of the monitoring enhancement work. We would tend to disagree with those who single out the oil sands as the biggest threat to the global climate – shutting down the oil sands industry would not resolve the climate problem. But we do advocate for stronger regulations and a meaningful price on emissions that will let the market decide what role fossil fuels will play in our future low carbon economy. Alberta deserves some credit for being one of the first jurisdictions in North America to regulate carbon. But the scheme’s intensity-based approach, combined with a lack of direction on climate policy from the Federal government, means Canada will have enormous difficulty meeting its international reduction commitments. As explained earlier, as well as engaging with policy-makers, naturally we are also engaging oil sands companies on ESG performance and disclosure improvements. We want them to accelerate innovation, reduce emissions, and deal with the tailings pond legacy. At the same time, we are calling on them to improve standards of consultation with Aboriginal peoples and to adopt the principle of free, prior and informed consent (FPIC). To demonstrate that expressions of commitment to change are not just talk, we have been asking oil sands companies to link their compensation structure to progressive ESG indicators. Closing the circle, we also engage them on their own engagement in the policy process. We want them to be transparent about lobbying activities so we can judge if they are sending out consistent messages. We are also concerned when we see major companies take a progressive public stand on an issue only to have industry associations lobby for something weaker. For example, when the multi-stakeholder Alberta Water Council made recommendations for a provincial wetland policy that would include “no net loss” provisions to
preserve ecologically-important wetlands, there were only two dissenting voices – the Alberta Chamber of Resources and the Canadian Association of Petroleum Producers. Their position on “no net loss” seemed to contradict what we had been hearing from leading members of both organizations. This led us to initiate corporate dialogue on the need for companies to ensure that industry associations do not advocate for positions that undermine their own commitments.Recently the International Corporate Governance Network has been debating guidelines for appropriate policy engagement by companies. But what constitutes appropriate policy engagement by investors? We believe the same principles apply that guide effective corporate engagement efforts – know the topic, explain the investor perspective, be constructive and always remain open to a two-way conversation with your dialogue partner.

Michelle de Cordova is Manager, Public Policy & Research at Canada’s NEI Investments. NEI has authored or co-authored a series of reports on ESG risks in the oil sands, available at: Link