ESG and the Canadian Energy Sector
Authors: Marla Orenstein, Dinara Millington and Brendan Cooke
Over the past five years, the rise of Environmental, Social and Governance (ESG) reporting has been meteoric. But whether ESG is more than a fad, whether it is needed to secure investment—and even whether it is particularly useful given that international ESG frameworks and standards do not align well with sector-specific and uniquely Canadian conditions—are some of the questions that require a hard look.
In the Canadian energy sector—among oil and gas companies, pipelines, renewable energy companies and electric utilities—ESG reporting has kicked into high gear. But not across the board, and by no means equally among companies.
All of Canada’s largest oil and gas and electrical utility companies provide ESG reports, but the number drops off substantially among smaller oil and gas producers, renewable energy companies, smaller utilities and pipeline companies. All of the international majors produce a public ESG report, but fewer than half provide any detailed ESG information about their Canadian operations.
Companies also take very different approaches to reporting on specific environmental, social and governance topics. Many topics that are key elements of a company’s sustainability performance (and are included in every major ESG framework) are not consistently reported on by any Canadian energy subsector—including GHG emissions, land use, biodiversity, water use, waste, gender equity, diversity and inclusion and supply chain management. Although Canada’s energy sector is increasingly taking up ESG reporting, confusion clearly remains about how best to approach it.
There is a strong business case for Canadian energy companies to embrace ESG reporting. It may increase access to lower-cost capital, improve the company’s operational and managerial performance, lower material risks and impacts, map a path forward, and enhance brand and reputation. But ESG is a means to an end—not an end itself. The companies that see gains are the ones that do more than tick off boxes in a report, and instead integrate sustainability principles companywide. And legitimate criticisms remain. While more and more capital is being directed by sustainability performance—a whopping $40.5 trillion globally in 2020 alone—a sizeable amount of investment is still made using only financial criteria, absent ESG. Additionally, there is doubt about whether ESG can create a meaningful difference in climate, environmental or social outcomes, or whether ESG reporting focuses on relatively trivial issues and misses the larger picture.
The hype around potential benefits of ESG reporting is intensifying. In some circles, so is the skepticism of what it can actually accomplish. As is often the case, the reality is somewhere in the middle.
Rapid changes are taking place, some of which may help “connect the dots” and resolve some of the confusion—including international efforts to consolidate ESG frameworks, increasing use of third-party assurance of sustainability reporting, guidance being provided by regulatory bodies and stock exchanges, and companies’ own increasing familiarity as to what works and what does not for the audiences they are trying to reach. Governments also have a role in supporting strong ESG performance, through creating policy frameworks such as strong net-zero plans that provide credibility for companies’ own net zero targets, and assembling and publishing objective data that support ESG performance claims.
For industry, there are benefits to embracing ESG, flaws and all. An emphasis on ESG reporting is an opportunity for Canadian energy companies to demonstrate how they intend to build successful businesses in a more sustainable world.