The transformational shift in corporate strategy towards sustainability and low-carbon initiatives is crucial for Canadian energy companies to remain competitive and attract investment. 

Gone are the days when solid financial performance is considered the primary key performance indicator. Investors also evaluate organizations on their environmental, social and governance (ESG) factors in determining responsible investments.

ESG first appeared in the 2006 UN Principles for Responsible Investment (PRI) report. The report created responsible investment standards and opined that companies should not merely exist purely for profit: long-term value creation enhances returns, manages risks, and benefits both society and the environment.

In 2015, the United Nations released 17 sustainable development goals (SDG) promoting health and education, reducing poverty, stimulating economic growth and protecting the environment. Each SDG mirrors ESG philosophy: to create long-term profitability and sustainability for shareholders, while fostering a better environment, healthier communities, and responsible corporate governance.

Three Pillars of ESG

• Environment: Companies should evaluate how their operations affect the environment and create a strategy to mitigate any adverse impacts.

• Social: Organizations should look at how their operations impact health and safety, Indigenous communities and meet the need for diversity and inclusion. Creating social sustainability is of great importance.

• Governance: Responsible governance integrates corporate and sustainable goals to ensure long-term prosperity. To reach the environmental and social goals, a company must be ethical and be accountable for its actions. 

ESG Driven Demographics

In 2016, Millennials became the largest generation in the labour force, and Gen Zers, born between 1995 and 2010, will soon come of age. As younger generations enter the professional world, their values and politics will begin to drive investment.

ESG generates immense awareness. Investors increasingly want to be part of what the business is doing and understand where it stands in terms of its social and environmental policies.

“ESG is better business,” says Matt Toohey, VP, ESG & Sustainable Business Practice at Modern West Advisory. “When businesses create a purpose, as in solving a problem or providing an essential service, that’s when people can get behind it and feel empowered.” 

The biggest challenges facing Canadian energy companies are climate change and the mounting pressures to transition to clean energy. Environmental stewardship needs to be a priority, both for the preservation of the ecosystem, biodiversity (life on earth), and future profitability.

Economic Instability

Decarbonization presents economic issues across the value chain, so it’s no surprise when organizations have difficulty integrating ESG principles into their business strategy. The ESG journey can be difficult, so having a guide is essential because — like a ski guide — they can identify blind spots that aren’t easily recognizable. 

Before 2016, TransAlta was heavily invested in coal-fired electricity. When federal legislation planned to phase out traditional coal power plants, TransAlta’s shares plummeted.

After a hard lesson learned, TransAlta focused its attention on transitioning from coal to natural gas plants and increased ESG disclosure. ESG programs act like a risk management department: they forecast future risk and mitigate present danger.

Effective ESG begins with future-focused planning. “If you adopt leading ESG principles, ESG disclosure and an integrated purpose, we are increasingly seeing these factors linked to less risk, a lower cost of capital and better performance,” says Toohey.

While low-carbon initiatives and social programs address growing investor concerns about sustainability, they can’t occur without good governance.

In another example, ExxonMobil touted themselves as being impervious to commodity fluctuation. Exxon incurred a $22 billion loss in 2020, due to COVID-19 obliterating the global fuel demand.

While pandemics are impossible to forecast, their downbeat performance associated with poor ESG failed to insulate Exxon and its shareholders. 

Exxon’s recent losses provided an opportunity for a climate activist hedge fund called Engine No.1. Interested in pushing a sustainability agenda, Engine No.1 nominated four Board candidates at Exxon’s annual general meeting.  

“No public company in the history of oil and gas has been more influential than ExxonMobil, and yet the Company has failed to evolve with the industry’s transition, resulting in significant underperformance to the detriment of shareholders,” said Engine No.1 in a statement. “We believe that for ExxonMobil to avoid the fate of other once-iconic American companies, it must better position itself for long-term, sustainable value creation.”

Causing a noticeable shift in power, three of Engine No.1’s nominations were voted to Exxon’s board. As shareholders continually demand more sustainability disclosure, the importance of ESG leadership becomes ever more tied to profitability.

ESG Leadership

Modern West Advisory, in Calgary, AB, specializes in emissions reduction strategies through ESG leadership. Modern West is future-proofing the Canadian energy sector by helping companies identify their social and environmental impact, investor demands, and mandated emissions requirements.

In a demonstration of their ESG strategy, Modern West is launching the “1 Million Tonnes  Club” initiative. 

“We’ve set a corporate objective over the next two years to support the reduction of CO2 emissions from the atmosphere by a million tonnes in the work that we support,” said Modern West president Jackson Hegland in a podcast interview. 

Modern West plans to create accountability, with third-party verification, to measure emissions reductions. Accountability in the oil and gas industry is vital because there is a direct link between trust and responsible investment.

Rebranding Oil and Gas in Calgary

Deeply rooted stereotypes associated with the old business model brand oil and gas as dirty fuel. To foster Canada’s transformation as a clean technology and ESG leadership hub, Modern West is starting a non-profit Clean Energy & ESG Leadership Centre (CEEL).

The CEEL Centre is where collaboration and education will rebrand oil and gas as an ESG leadership-focused energy and technology sector. Also, CEEL will be an inclusive space ideal for addressing important ESG issues, such as diversity and Indigenous consultation.

By holding regular events to advance technology and ESG innovation in Calgary, CEEL will lead Canada’s energy transformation. The collaborative sharing of thoughts and ideas is an opportunity to position Canada as a global ESG leader and attract more clean energy-focused investment.

ESG Reporting

ESG reporting is an opportunity to be proud about the work being done and challenges still facing the company. People aren’t perfect and neither are companies. It is necessary to build trust with your audience through transparency.

Think about yearly sustainability reports as a reputation management tool to convey corporate values and demonstrate the organizations commitment to society.

“ESG is about figuring out your business model and storyline,” says Toohey. “Our society evolved through oration and storytelling — we’re wired to tell stories.”

When immersive storytelling is used to explain how social or environmental problems are solved, it’s like putting a “Buy Now” button on your website. “There is scientific evidence that oxytocin and dopamine are connected to storytelling,” says Toohey quoting Holly Ransom.

Storytelling is everything these days, because people become intimately connected to stories, so don’t miss out — your audience wants to hear from you. 

ESG Disclosure: How can it Benefit the Energy and Technology Sector?

Driving sustainability is crucial as investors seek increased corporate disclosure. Even though ESG is mainly unregulated and self-reported, transparency lets investors decide what investments are socially responsible.

The first of its kind in Canada, Telus raised $750 million with a new Sustainability-Linked Bond Framework. Telus plans to reduce its greenhouse gas emissions by 46 per cent by 2030. If they fall short of that goal, the interest rate increases by 1 per cent per annum, and Telus stands to lose a considerable amount of money.

The bond framework demonstrates Telus’ financial creativity and commitment to carbon neutrality. By integrating ESG goals with finances, Telus built a credible framework where ESG disclosure will lead to greater profitability. Telus’ progress will be closely monitored by an independent auditor, and will be reported in their yearly Sustainability Report.

“The link is still emerging, and there’s lots of debate, but if you adopt leading ESG principles, and integrate purpose with ESG disclosure, then you have less risk,” says Toohey. “When you have less risk, investors are far more willing to lend you money.”

As ESG’s emerging business model pushes businesses to solve problems, innovative ideas like Modern West’s CEEL Centre provide an opportunity for Calgary business leaders to advance ESG and clean energy leadership collaboratively.

ESG Frameworks and Building Strategy

The advantage of using ESG consultants like Modern West Advisory is their experience implementing frameworks and leading strategies like the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD) and the Value Reporting Foundation (VRF).

SASB standards guide the disclosure of financially material sustainability information from companies to their investors. 

TCFD improves and increases reporting of climate-related financial information.

VRF is a merging of the Integrated Reporting Framework and the SASB Standards. The Value Reporting Foundation makes it easier for businesses to communicate their long-term strategy and provide a comprehensive view of business performance to investors.

When building an ESG strategy, it’s helpful to take the materiality assessment — which is sometimes exceptionally large — and narrow the scope. This does not mean dropping ESG indicators from the report; rather, the ESG strategy becomes focused on addressing the key issues.

“The key is building five materiality issues to integrate across the business model and report on those metrics,” says Toohey. The five-strategy forming issues may include Indigenous consultation, climate change, diversity, health and safety, and governance issues. 

Companies need to complete strength, weakness, opportunity, and threat analyses (SWOT) to develop winning strategies. Furthermore, the governing policies must be in place to ensure a successful implementation.

Conclusion:

ESG is far from being a trend, it is quickly becoming the better business standard. Industries aren’t pushing the transformation either, it’s the investors who are driving social capitalism. People are increasingly invested in supporting social equity and environmental causes, which demands good governance for a solid execution. 

The Alberta oil and gas industry has proved its resilience after facing two recessions and a global meltdown in the last 15 years. As strong as Albertan’s are, vacancy in Calgary’s downtown core is currently above 30 per cent.

The circumstances might not be ideal, but this is an opportunity for business leaders to push forward and innovate. Modern West and the Clean Energy, ESG Leadership Centre are committed to developing Calgary into a collaborative community that solves complex problems. 

Albertans have the power to generate new ideas, build relationships and revitalize Calgary’s downtown core by leading the clean energy transformation. ESG has the power to create a sustainable future for all generations to profit from.

It’s time to turn the page and write the story you want people to hear. Afterall, there is nothing more inspiring than a successful transformation.