Canada's Environmental, Social, Governance (ESG) Leadership
Canada’s natural resource sector already enjoys a world-leading record for overall environmental, social and governance (ESG) performance. However, resource companies involved in natural resource production have recognized that merely doing the right thing is no longer enough.
Actions taken on improving ESG need to be coupled with the documentation that shows these companies are making a continuous improvement on sustainability while providing evidence that those practices are being delivered on the ground. Many natural resource companies in Canada are now in the midst of building or improving on these assurance systems.
With strong ESG reporting, Canadian resource companies can maintain their production in an increasingly competitive global trading system while growing their market share and becoming suppliers of choice for those wanting to source goods from a sustainable, responsible source.
Canada’s ESG Rankings: Facts
Canada ranks high among the world’s top 20 oil producing nations on ESG criteria:
- 2nd in Governance – Worldwide Governance Indicators
- 2nd in Social Progress – Social Progress Index
- 4th in Environment – Environmental Performance Index
Canadian oil sands companies are industry leaders in ESG initiatives:
- Oil sands companies are comparable with the likes of some European majors who are continually praised for their sustainability. Oddly, oil sands producers don’t receive similar praise for their concerted efforts to improve on ESG criteria
- They have collectively reduced GHG emission intensity per barrel of oil produced by 28% between 2000 and 2017, with another expected 16-23% reduction by 2030
- Canada’s forestry sector reduced total GHG emissions by 49% between 2005-2015 by switching to more renewable electricity generation
- Mining companies are following the forestry sector in reducing GHG emissions by using renewables. For example, a major Canadian mining company secured 118 megawatts of renewable power generation in 2019, helping them reduce their carbon footprint by 800,000 tonnes of CO2 annually, equivalent to removing 170,000 combustion engine passenger vehicles off the road per year
What is ESG About?
Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that global investors are increasingly using to screen potential investments.
- Environmental criteria consider how a company performs as a steward of nature
- Social criteria examine company relationships with employees, suppliers, customers, and the communities in or near operations
- Governance relates to the overall leadership, executive pay, audits, internal controls, and shareholder rights of a company
ESG indicators are used to create a score based on a multitude of subjective factors determined by ratings agencies. In practice, some reports put more weight on carbon emissions, while others use equal weighting for all three ESG indicators.
Responsible investing now accounts for over 50.6% of Canadian assets under management, up from 37.8% a few years prior. This growing market share shows Canadian investors increasingly view these factors as important components of investment decisions and means that this ESG-conscientious way of investing is here to stay.
Why is ESG growing?
- ESG investing allows investors to express their own values and to ensure their savings and investments reflect their preferences, without compromising on returns
- An increasingly apparent threat from climate change has also played a big role also in these decisions
- Demographic trends contribute as well, like the emergence of a more socially conscious millennial generation, or retiring baby boomers who can now afford to choose where they invest
- The rise of technological transparency, which is here to stay. Gathering and processing data to determine ESG scores will become ever easier and cheaper to record
- Environmental challenges, like climate change for example, are placing a growing premium on good stewardship and low carbon practices as natural assets will appreciate in value over time
What are Some Issues with ESG?
1 - Individual agencies’ ESG ratings can vary dramatically
An individual company can carry vastly divergent ratings from different agencies simultaneously due to differences in methodology, subjective interpretation, or agenda.
Inherent biases also exist: from market cap size, to location, to industry or sector — all rooted in a lack of uniform disclosure.
2 - There are no standardized rules for environmental and social disclosures...
…nor is there a disclosure auditing process to verify reported data. Instead, agencies must apply assumptions, only adding to the subjective nature of ESG ratings.
3 - Analyzing ESG factors involves a fair degree of subjectivity
It’s possible to measure a company’s carbon footprint, but much harder to assess its social impact or business ethics.
It’s also hard to bundle such different and complex issues together, or work out which is the most important.
4 - There is a risk that ESG scores are manipulated or diluted
It doesn’t help that there is no obligation on companies to provide intelligible or standardized reports – though lobby groups are encouraging better disclosure.
5 - Private or state-owned companies are often excluded from ratings…
…and do not disclose critical non-financial data, yet these companies play a vital role in the global market.
The absence of these companies from rating agencies’ measurement of ESG performance serves to distort the marketplace and its corresponding impact on investors.
6 - Companies without a policy for a given ESG criteria may receive a score of zero, regardless of whether it is relevant
For example, some Canadian Energy companies operating solely in Alberta and Saskatchewan were given scores of 0 for their Offshore Safety Policies, among others, resulting in lower (and misleading) overall ESG ratings.
So while ESG is a growing trend there are clearly many issues that need to be improved on to make this process more credible, reliable and consistent.
Canadian resource companies are ESG leaders. They know there’s a fine balance between the economy and the environment and that it's in their best interests to participate in sustainable, responsible development of Canada's natural resources now and in the future.
It’s time that Canadians from coast-to-coast stand up in support of our ESG-leading natural resource sector that provides more than 1.7 million direct and indirect jobs for Canadians and accounts for nearly one-fifth of our nation’s economy. We hope you join us!
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