Highlights from Exploration & Production
Patrick J. O'Rourke, CFA 403-539-8615
We are publishing our inaugural ESG analysis and ratings for the 26 E&P companies under our coverage. Our analytical framework is based on the Sustainability Accounting Standards Board (SASB) standards, but it also incorporates additional ATBesg analysis to better align with our analytical perspective and improve comparability across companies.
ESG Analysis – the WHY?
Over the past several years, ESG (Environmental, Social, Governance) has increasingly become a part of the investment landscape, in many ways replacing the concept of ‘non-financial’ risk in investor nomenclature. ESG funds continue to be among the fastest growing pockets of capital, and a simple look at Google search trends reveals 493% growth for ESG as a search term globally over the past five years. ATB Canadian Upstream and Integrated clearly recognizes this, with 24 of 26 companies under coverage now formally publishing Sustainability Reports. In general, we believe that Canadian oil producers are committed to being good corporate citizens and also recognize the broader industry implications in terms of access to capital of not ensuring the industry as a whole acts in a responsible manner. But, at the end of the day we also clearly recognize that the role of the corporation and the goal of investors is to maximize return on capital on a risk-adjusted basis. To that effect, we have chosen to approach our ESG analysis with a framework that seeks to marry the quantification of non-financial risk data with clear financial and enterprise value risks. We look to view ESG from a holistic approach that incorporates Environmental, Social and Governance factors, along with the many components that make up these broader categories – put simply, while broader ESG analysis has focussed on emissions data (and we clearly recognize the financial importance of the industry reducing emissions, given a codified Canadian Carbon Tax framework that escalates from now through 2030), we also believe that ‘E’ needs to incorporate much more than just GHG emissions and ESG analysis shouldn’t solely focus on the environment. Overall, we believe that Canadian producers can be positioned as global leaders in the broader energy value chain and favourably exposed to developing unique solutions that help meet environmental goals (see ‘Pathways’) while also providing substantial social and economic benefits.
The ATBesg Approach
Our approach utilizes the Sustainability Accounting Standards Board (SASB) as the standardized framework to evaluate our coverage on an ESG basis. However, given limitations in the SASB analysis, and our desire to add our own sector expertise to the analysis, we have incorporated an ATB component, called ATBesg. We further breakdown performance into best-in-class (BiC) and best-in-momentum (BiM) scoring systems. We recognize differences in the nature of assets (conventional, fracked, thermal, mining, cold heavy, etc.) can make it challenging to directly compare companies on a given metric - we believe that given the tight global supply situation, Canadian energy is essential for the broader supply mix and that we should not blindly punish producers that take on more environmentally challenging assets – rather we want environmentally challenging assets in the hands of the best operators, which have the ability to improve the ESG performance of assets.
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