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What Do Energy Investors Want?

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Calgary by Jordi Marcé-Nogué — Flickr. (CC BY-NC-SA 2.0)

What do energy investors want? It’s an age-old question, one that energy executives, bankers, MLAs and their staffers ask frequently. Anyone concerned with the course of Alberta’s economy will inevitably consider the views of those who invest in it.

Canadian oil and gas companies prefer to work with intensity targets — reductions in GHGs per unit of production. It’s their current approach. In this framework, absolute emissions are free to climb. If that sounds familiar, it should. It’s the approach our oil and gas companies have always taken, with support from Alberta Governments as far back as Ralph Klein.

This approach is increasingly out of step, however, with what climate science demands, and the growing trend in the informed investment community. Prominent global initiatives including the Science Based Targets Initiative (SBTi), the Institutional Investors Group on Climate Change (IIGCC) and the Climate Action 100+ (CA 100+), are urging the implementation of substantive action in line with the 1.5℃ target, requiring 45 per cent emissions reductions by 2030. Indeed, this is the guidance these experts are providing the financial community.

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This new approach urges a comprehensive scope towards emissions reduction, including:

  • Scope 1 — emissions from a company’s own operations
  • Scope 2 — emissions from their supply chain
  • Scope 3 — emissions coming from the end use of the product

Scope 3 is where the lion’s share of fossil fuel emissions lie, and any serious discussion of a company’s or a jurisdiction’s GHG targets must include them.

What Institutional Investors Think About the Future of Oil and Gas, a recent survey of 250 institutional investors by the Boston Consulting Group, showed only 30 per cent who believe their portfolios will increase their proportion of oil and gas in the next decade, while almost 60 per cent of investors surveyed say they feel pressure from their clients to divest from fossil fuels. Divestment has already reached $40.48 trillion USD globally, with 1,550 institutions divesting.

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Financial oversight also increasingly includes an assessment of climate risk. At the beginning of 2022, the Bank of Canada and Canada’s Office of the Superintendent of Financial Institutions (OSFI) released a pilot study on the preparedness of Canada’s financial institutions in terms of understanding and managing climate change risks.

Writing in the National Post, Bob Ascah analyzed the study, painting a picture of falling creditworthiness for oilsands producers and borrowers alike:

 The study found that the creditworthiness of oilsands producers will fall dramatically over the next three decades…  Financial regulators — including the Financial Stability Board, the international umbrella group of central banks and banking supervisors, and the newly formed Network for Greening the Financial System, which comprises 31 central banks and regulators from around the world — are becoming increasingly concerned about the creditworthiness of borrowers exposed to the risks of climate change. These regulators worry that as climate change worsens the financial system may become more unstable.

Looking at this year’s extreme weather, it’s hard not to see harbingers of increasing instability — a widespread heat wave in China, and their largest freshwater lake drying up. Horrific floods in Pakistan, with over 1,000 dead. An unprecedented heat wave in Europe, with major rivers drying up.

What is more, the science behind climate change is well known and widely accepted. Even the Alberta Government says “97 per cent of climate scientists now agree that human activity is responsible for most temperature increases over the past 250 years.”

Which leaders and governments in these countries reeling from extreme weather events will now say “Meh. We’re going to double down on fossil fuels”? Which investors will bet that governments, financial regulators, businesses, and consumers will cling to outmoded technologies, especially when renewables, electric vehicles, heat pumps and the like grow cheaper by the day?

All signs point to rising global climate ambition. Those who fail to take climate risk seriously will find themselves holding stranded assets.

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