Reducing oil sands investment risks

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Courtesy of GLOBE SERIES

Too much development too fast in Alberta’s oil sands is creating negative environmental and social impacts that bring risks to energy companies and their investors, says The Ethical Funds Company in its latest white paper: 'Unconventional Risks: An Investor response to Canada’s Oil Sands'.

The paper, issued today in Whistler at the international socially responsible investing conference 'SRI in the Rockies', says solutions that could reduce or even eliminate some risks are emerging, but project development has outpaced the implementation of land use planning and emerging technologies. The paper analyzes the situation in the oil sands and proposes a strategy for institutional investors to reduce the risks to the companies they own.

'We are proposing that institutional investors join us and call on oil sands companies to suspend new oil sands development pending the introduction of a comprehensive land use plan, while at the same time speeding up the development and introduction of potential solutions that could improve environmental and social performance,' says Robert Walker, Vice President, Sustainability, The Ethical Funds Company. 'We believe this is the most effective and constructive action institutional investors can take to reduce portfolio risk.'

Alberta’s oil sands contain 173 billion barrels of established reserves, the second largest oil reserve in the world next to Saudi Arabia. Canadian oil sands have been under development for decades, but new technology, rising oil prices, shrinking conventional reserves and voracious demand have fuelled a modern-day development rush to rival the gold rushes of the past.

'Recent market volatility has slowed the pace of development,' says Walker. 'This presents an opportunity to take a breath and implement better oil sands development practices.'

Too much development too fast has created a complex set of significantly adverse environmental and social impacts. These impacts introduce a heady mix of litigious, liability, regulatory, and reputational risks to oil sands companies. These risks have the potential to impact company valuations and thus the performance of investment portfolios. Institutional investors are taking note, expressing particular concern about the carbon intensity of unconventional oil. Some call for better disclosure, while others call for divestment.

Ethical Funds has identified four categories of risk associated with the current pace of oil sands development: litigation risk, related to First Nations; asset retirement obligations; regulatory risk related to the environmental and social costs of the oil sands; and the risks associated with the social license to operate. Ethical Funds is calling on institutional investors to apply pressure to take the necessary time to address these risks.

Ethical Funds wants institutional investors to ask oil sands companies what they are doing to evaluate and implement technologies that reduce energy use, capture and store greenhouse gases, and reduce air pollution. They also want to ensure that all affected First Nations consent to and benefit from development that is occurring in their communities. Stewardship of the Athabasca River and groundwater is also a priority.

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