Financial players grapple with whether to divest from Alberta's oilsands
Some investment firms are divesting from the oilpatch, while others see reasons to have a seat at the table
When the New York State Pension Fund recently decided to pull the plug on its investments in Alberta's oilsands, one major player remained in its portfolio.
The fund — the third largest public pension in the United States — said in December it would transition its financial portfolio to net-zero friendly investments by 2040. It announced last month it was selling off securities in seven Canadian oilsands companies and would not make future investments in them because they don't have viable plans to adapt to a "low-carbon future."
Canadian Natural Resources and Cenovus Energy were among the companies on the blacklist, but Suncor Energy was noticeably absent. The fund decided the Calgary-based company still had the pension fund's support, for now, and would be reviewed again next year.
The organization pulled more than $7 million US out of the oilsands after evaluating companies based their transition strategies, capital expenditures, and environmental targets, among other factors.
Still, while some environmental groups applauded the fund for its divestment from the oilsands, the majority of the pension fund's support for the oilsands remains unchanged as it sticks with Suncor. It held more than than $19 million in Suncor shares as of the end of 2020.The company shows signs of being a player in a low-carbon economic transition, in part by investing in wind farms and cleaner forms of energy.
The fund's divestment on its own doesn't represent a lot of money for a sector worth billions of dollars. But it sends a powerful signal. The announcement highlights how investors are increasingly focused on climate change and comes as the effort to reduce financial support for fossil fuels shows no signs of abating.
At the same time, it also shows how some large financial players still see some value in backing the oilpatch.
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The divestment movement is not new, but has grown from having community groups, such as churches, deciding to no longer invest in oil and coal companies to having major global financial players, such as Blackrock and the Rockefeller Brothers Fund, follow a similar path.
The money pipeline
In the last decade, environmental groups have targeted the construction of new oil and gas pipelines as a way to stifle growth of oil production. They're now applying pressure on the financial community to choke off support to the industry.
"There's actually a global movement to try and cut off the money pipeline to sort of the big banks and big pension funds to sort of say, 'You guys have got to get out of fossil fuels,'" said Keith Stewart, senior energy strategist with Greenpeace Canada.
Banks are going to face the same kind of pressure in the next decade as oil companies have experienced over the last decade, he said.
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When one financial player pulls its support of the oilpatch, the impact is minimal. However, as more groups decide to divest, the financial consequences begin to be felt more and more by fossil fuel companies as the pool of potential investors gets smaller.
"It's having an impact, but part of the thing is, I think that the world is kind of realizing that, 'OK, this is way more complicated,'" said Mark Little, Suncor's chief executive, in an interview.
Further innovation is required to reduce emissions, he said, especially in energy-intensive sectors such as steel and cement production and long-haul aviation.
"The wind farm can't be the solution to every problem. It's not. So we need to find innovative solutions," said Little.
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Others say there are geopolitical risks if investors continue to turn their backs on North American oil companies, which may only benefit countries such as Russia and Saudi Arabia.
"The divestment movement has just taken capital out of the most transparent and, arguably, most environmentally responsible segments of the global oil and gas industry," said Peter Tertzakian, an economist and deputy director of the ARC Energy Research Institute.
Around the globe, more than 1,300 groups have divested from fossil fuels in recent years, according to 350.org, an international environmental group based in the U.S. More than two dozen banks and other large financial institutions have specifically divested from the oilsands.
Still, the precise number of firms and how much investment has been pulled from the sector is difficult to quantify. Some firms decide to divest from the entire industry, while others have certain stipulations, such as still supporting some companies with a limited amount of their oil and gas production in the oilsands.
On Tuesday, the International Energy Agency released a report detailing how the global energy industry can bring carbon dioxide emissions to net zero by 2050 and give the world a chance of limiting the global temperature rise to 1.5 C. Besides projects already in development, it said there are "no new oil and gas fields approved for development in our pathway,."
The pressure facing big banks and the financial community will only intensify as the next UN climate summit, known as COP 26, approaches.
Former Bank of Canada governor Mark Carney is advising the U.K. government as it prepares to host the November event. He has said part of the meeting will focus on how the private financial sector can "retool" so that investors take climate change into account when making financial decisions.
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Pressure on banks
Canada's big banks have recently faced more scrutiny about their financial backing of the oilpatch.
RBC, Canada's largest bank, declined an interview, instead pointing to chief executive David McKay's recent comments at its annual general meeting in April.
"When we do finance responsible energy projects, they must be approved within the laws, the regulations and the policies of the jurisdictions within which they operate," he said. "I would say they must also be evaluated against international standards and our own enhanced due diligence frameworks and our human rights statement."
The oil and gas industry represents 1.6 per cent of RBC's total credit exposure, said McKay. The figure has since dropped to 1.1 per cent, a spokesperson said. RBC's loan exposure to the oilpatch is above $7 billion.
Instead of divestment, some investors try to work with companies to improve environmental performance. The strategies can even be complimentary, rather than opposing tactics.
A major investor can put a company on notice and push for change. If that doesn't work, the investor can take out the money and leave. That's how divestment can strengthen the position of investors that continue to use their influence through active ownership, said Jackie Cook, the Vancouver-based director of investment stewardship research at Morningstar, an American financial services firm.
"Divesting from the oilpatch sends a very loud and clear message," Cook said.
She acknowledged there's also a case for having a seat at the table — but that "there's a danger that keeping a seat at the table just means you are carrying on with business as usual."
Cook points to Legal and General Investment Management, the U.K.'s largest asset manager, as an example of a firm that uses both strategies.
In the past, the firm divested from ExxonMobil because it was considered a climate laggard, but also praised another U.S. oil producer, Occidental Petroleum, for disclosing its total carbon emissions and setting reduction targets.
Voice at the table
In 2018, the Intergovernmental Panel on Climate Change galvanized global concern over climate change as its report showed the world would need to halve emissions over the next decade to stand a chance of meeting the temperature goals in the 2015 Paris Agreement.
The oilsands are responsible for about 11 per cent of Canada's total emissions, according to 2018 data from the federal government.
"Anybody in the investment management world right now probably has clients asking about this issue," said Alex Letko, a Montreal-based partner with Letko Brosseau, which manages $19 billion in assets.
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The investment firm recently reviewed whether to continue investing in the oilpatch.
It looked at electric vehicle trends and forecasts for the amount of oil used in many industries, such as marine shipping and plastic production. At the same time, the group considered the ethics as climate change is an urgent problem.
In the end, it decided to stay the course, at least for now.
"We believe that actually having a voice at the table is more conducive to positive change than not," said Letko.
"Further down the line, there will be realities that perhaps will have to be reckoned with."
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