Unresolved ESG issues persist in the Canadian oil sands industry

As the west increasingly looks to reduce its dependency on Middle Eastern Oil imports, greater emphasis has been placed on home grown sources of energy. Canada’s oil sands operations in the Alberta region appear to be a godsend for the Canadian government. However, critics question the environmental impact the industry is having on the surrounding region. During a recent visit to Canada for the annual UN PRI signatory conference, I took the opportunity together with other investors to visit the oil sands operations in the Alberta region. What I heard and saw there made me realise that the Canadian oil sands industry needs stronger regulations to successfully address unresolved environmental, social and governance (ESG) issues. The Economist called the strip mining of oil sands in the forests of Alberta, Canada “one big scar on the landscape” and “one of the bleakest scenes of man-made destruction”. According to Global Forest Watch Canada (GFWC), Canada has surpassed Brazil as the new “global leader” on deforestation. After Venezuela and Saudi Arabia, Canada has the third largest oil reserves in the world with 97% of these located in oil sands. Oil sands are a natural mixture of sand, water, clay and bitumen. The oil sands industry plays an important role in Canada’s economy, in terms of job creation and growing economic activity. However, this growth has come at a cost to society. Oil sands have a significantly higher carbon intensity than conventional oil. As a consequence, the industry already accounts for 8.7% of Canada’s greenhouse gas emissions and this number is increasing rapidly. But that is not all. The industry is also facing other serious ESG challenges, such as those relating to land disturbances, environmental damage, water usage and impact on local communities.
What struck me the most was that the impact of the industry on the environment and the health of communities seems much larger than anticipated. So far, only a small percentage of the disturbed land has been reclaimed. The whole process can take decades. A conifer tree, for example, needs approximately 80 years to grow to maturity. Moreover, a large portion of thedisturbed area are wetlands, which are complex ecosystems and practically impossible to reconstruct. The health impacts are also a serious concern amongst local (indigenous) communities. They believe that their health is being impacted by air and water contamination from the oil sands industry affecting their food chain and feel that the authorities are not putting enough effort investigating reported adverse health impacts. The pace of improvement in the ESG space has been slow as the government has failed to provide the necessary incentives for oil sands producers to change their methods. To be fair, some progress has been made to improve ESG credentials. For example, greenhouse gas emissions were reduced by 28% (on a per barrel base) between 1990 and 2012 and 80-95% of the water they use is now being recycled. But much more needs to be done to successfully address the negative environmental and health impacts, especially given that the industry is rapidly growing. Canada’s oil sands output is likely to double by 2020, according to the Canadian Association of Petroleum Producers (CAPP).
On a positive note, Canada’s Oil Sands Innovation Alliance (COSIA) is committed to steering developments in the right direction. They have already taken some steps to improve technology and knowledge sharing in the industry. We, of course, welcome these steps, but also believe more investment should be directed towards energy efficiency and renewables. The government and regulators also have a role to play in this, to ensure enforceable regulations are in place for producers that exceed greenhouse gas emissions. We, as investors, have an important role to play as well and ING IM will continue to engage with companies in the oil sands industry regarding the ESG aspects. By taking a proactive approach as investors we can ensure that investment is directed in an ethical and transparent way that does not jeopardize the environment for future generations. It is also important to stress that this needn’t be a zero-sum game: higher investment standards will, in the long-term, save taxpayers money and lead to higher valuations for companies as liabilities for future costs are reduced.

Nina Hodzic is Senior ESG Specialist at ING Investment Management