Unconventional energy: potential source of ESG risks

03-07-2014 | Engage | Sylvia van Waveren

RobecoSAM has recently closed an engagement with oil and gas companies on the ESG investment risks related to the exploration of unconventional energy sources, such as oil sands and shale gas. As investors, it is important for us to monitor these risks, as unconventional energy sources carry new operational challenges that need to be tackled efficiently, and companies involved in the extraction of unconventional energy sources are exposed to reputational risk.

Making companies aware of the risks
Canadian oil sands are one of the world’s largest crude-oil reserves and are expected to become an important part of the global energy supply mix. In addition, rapid technological developments have led to the discovery of new energy sources, such as shale gas and oil, tight gas or coal bed methane. Shale gas & liquids are becoming a very popular source in the USA where natural gas is now extracted from shale. Shale layers in the crust are being cracked ('fracking') through horizontal drilling and chemicals are added to water and sand to release the natural gas. This form of mining is expected to be an important part of the global energy supply. However, the development of these unconventional energy sources does involve environmental and social risks. As asset managers we have a fiduciary responsibility to protect shareholder value, and have therefore engaged with oil & gas companies to make them aware of these risks.
In 2012 we started a three-year engagement with 19 companies from Australia, Canada, the United States, the United Kingdom, France and Norway, including oil majors such as ExxonMobil, BP and Shell. Within our engagement, we focused on four objectives: carbon emissions, local community policy, sustainable development and water policy.

Tackling CO2 emissions
As for the first objective – carbon emissions – we requested the companies to state the results of measures they are taking to tackle the higher CO2 intensity associated with the exploitation of unconventional energy sources. The extraction of shale oil and gas, for example, is alleged to release large amounts of methane. During the first twenty years, the fracking process is said to potentially release more greenhouse gases into the atmosphere than the exploitation of oil, coal or conventional natural gas. Companies like Marathon Oil, Canadian Natural Resources and Chevron scored very well on this objective. They have either disclosed or will disclose a specific climate-change policy for unconventional energy sources. Furthermore, all of them have both a long-term and a short-term climate-change strategy. Still, we see that carbon emissions remain a challenge for most companies and we have recommended that the companies disclose more carbon emission figures and set future targets for specific unconventional energy sources.

"Carbon emissions remain a challenge for most companies."

Engagement with local communities is improving
Communities located near the operating areas are increasingly suffering from the effects of pollution, deforestation and degradation of the natural environment. In addition to the costs of lawsuits initiated by the local population, there is also considerable reputational risk for the companies involved. The companies should therefore be able to demonstrate that they are consulting with local communities in order to take their rights into account. For most companies we closed the engagement successfully on this topic. Canadian Natural Resources, for example, has a very good local community policy. The company engages with the stakeholders, invests in the local communities and has a specific Aboriginal relations strategy. It supports education and has many Aboriginal employees. Overall, we see a trend towards better local community strategies. The companies are experiencing increased pressure to engage with local communities, and are aware of the reputational risk involved in failing to make progress on this objective.

Sustainable development not yet embedded in company strategies
This objective concerns a range of issues, including the publication of air-quality targets, the limitation of the risk of earthquakes and the reduction and disclosure of the toxic chemicals used for fracturing. Most companies score the lowest on this objective. We see that sustainable development is often a section on the website; yet most companies do not fully integrate sustainability throughout their strategy. Most of them still do not have a specific unconventional energy sustainable development strategy.

Water: a trending topic
The use of water is an extremely important element in the exploration of unconventional energy sources. Not only are vast volumes of water required for the extraction and production of oil sands and shale gas, both processes also generate large amounts of wastewater that need to be treated. Therefore, we expect companies to have a policy in place to limit their freshwater withdrawals and improve their wastewater treatment. Most companies scored very well on the water policy objective. All of them made progress during our engagement. We see a major improvement in the attention that companies are devoting to water. Water is a trending topic in the energy sector.

Water tops the agenda
During the course of our engagement we noticed that most companies showed improvement in their approach to unconventional energy risks, particularly in the area of their water policies and local community engagements. Out of the four objectives, the biggest improvement concerned companies’ water policies. Water efficiency is high on the agenda of unconventional energy companies and we have observed this trend in both the companies’ CSR policies and in our direct contacts with them. As we expect issues related to water scarcity and pollution to become even more pressing in the future, we perceive this progress on water strategies as very promising.

sylvia-van-waverenSylvia van Waveren

Engagement Specialist
RobecoSAM Governance & Active Ownership

"Sustainable development is often a section on the website; yet most companies not fully integrate sustainability throughout their strategy."


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sylvia-van-waverenSylvia van Waveren
Senior Engagement Specialist RobecoSAM Governance & Active Ownership