Head in the Oil Sands

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Head in the Oil Sands? Climate Risk in the Oil
and Gas Sector May 29, 2007 Robert Walker Vice
President, Sustainability
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The Ethical Funds Company
Launched in 1992 Fifteen retail mutual funds
in our family 2.4 billion in assets
Headquartered in Vancouver
Serving the institutional market via Guardian
Ethical Management
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Sustainable Investing Program
Risk-based model - identifies companies capable
of integrating environmental, social, and
governance factors into strategy and operations
Use the tools of shareholder action to improve
ESG performance manage portfolio risk
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Canadas Oil and Gas Sector

• Oil gas continue to represent a major portion
  of the publicly-traded companies in Canada
• 431 oil gas companies on TSX and TSX-V (Dec
  2006)
• Total market cap at 526.9 billion
• 30 of the total TSX and TSX-V market cap
• Oil sands production will triple by 2015
• Oil and gas companies will operate under more
  risky and possibly hostile business operations
• Whos prepared and whos not?

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The Risks of Climate Change

• Scientific certainty of climate change
• Range of threats
• Environment
• Human health
• Global economy
• Increasing risks apply to institutions that
  invest in oil gas companies
• Investors need to assess risks and encourage
  companies taking steps to prepare for a
  carbon-constrained world

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Head in the Oil Sands?

• We have evaluated how Canadas oil gas sector
  is responding to the challenges of climate change
• Informs our Corporate Sustainability Scorecard
• Helps direct our Shareholder Action Program
• Study is available at www.ethicalfunds.com

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Risks to Oil Gas Companies

• Regulatory Risk
• Regulation of greenhouse gases is likely to have
  financial impact with cost placed on emissions
• Demand Risk
• Retail operations may face consumer boycotts for
  inaction against climate change
• Physical Risk
• Rising temperatures melting permafrost ice
  roads will shorten drilling seasons
• Extreme weather events such as Hurricane Katrina
  have shut down refineries

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Risks to Oil Gas Companies

• Litigation Risk
• Potential for lawsuits similar to tobacco
  asbestos
• Disclosure Risk
• Accounting rules securities laws requirements
• Social License to Operate Risk
• Potential community opposition to companies with
  reputation for inaction on climate change
• Human Resources Risk
• Negative reputations may reduce moral and
  increase employee turnover

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Research Methodology

• Universe
• 48 Canadian oil gas companies on TSX Composite
  Index plus BP and Shell
• Metrics
• 2006 Ceres Corporate Governance and Climate
  Change
• Goldman Sachs GSEES Climate Change Index
• Carbon Disclosure Project
• Sources
• Public disclosures
• Specialized reports
• Carbon Disclosure Project
• Lexis-Nexis searches

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Climate Risk Matrix

• Management Systems
• Policy, oversight, compensation
• Action Plans
• Inventory, targets, pathways and strategies for
  reduction
• Performance
• Emissions reductions, investment in renewables,
  price of carbon in capital decision-making,
  carbon offsets, energy efficiency, carbon trading
• Transparency
• Disclosure in sustainability reports, annual
  reports, and MDA

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Research Results

• Only two of the forty-eight Canadian companies
  assessed have responded appropriately to climate
  change risks
• Shell Canada
• Suncor

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(No Transcript)
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Results Overview
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Results Overview
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Good News Bad News

• Good
• Majority of companies have begun to put in place
  management systems necessary to assess the risks
  and take action
• Bad
• Action plans to reduce emissions are the
  exception, not the rule

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Good News Bad News

• Good
• Seven companies in our universe have been able to
  achieve absolute emissions reductions
• Three of these achieved the reductions while
  still increasing production
• Bad
• Emissions intensity is the preferred unit of
  measurement
• Vast majority of Canadian oil gas companies
  have failed to take action to reduce emissions

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Good News Bad News

• Good
• Thirteen Canadian companies are developing carbon
  capture and storage technologies
• Bad
• Only seven companies are factoring the cost of
  carbon into capital allocation decisions
• Energy trusts perform very poorly

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Good News Bad News

• Good
• Two companies have made significant commercial
  investments with renewable energy production
• Bad
• Only two companies have made significant
  commercial investments with renewable energy
  production

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Good News Bad News

• Bad
• Public disclosure of GHG emissions is
  underwhelming
• Outside of the top performers, companies have
  failed to conduct inventories of greenhouse gas
  emissions

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Recommendations

• Companies need to take action specific to their
  risk status
• Extreme risk companies are in urgent need of some
  basic building blocks necessary to strategically
  address the issue
• Moderate risk companies can begin to manage
  impacts and performance in a meaningful way
• Low risk companies have opportunity to lead
  sector along a path to sustainability

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Recommendations

• Extreme Risk Companies should
• Make a corporate policy commitment to climate
  change
• Establish clear lines of oversight and
  accountability
• Establish a baseline for measuring GHG
  performance
• Set GHG emission intensity targets
• Expand public reporting on climate change

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Recommendations

• Moderate Risk Companies should
• Set absolute GHG emission reductions targets
• Develop renewable energy investments as a
  distinct business unit
• Expand research development budgets to drive
  innovation and efficiencies
• Participate in multi-stakeholder collaborative
  initiatives to affect change
• Examine the role of offsets in the company
  climate change strategy

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Recommendations

• Low Risk Companies should
• Invest aggressively in carbon capture and
  sequestration research and technology
• Lobby the federal government for progressive
  climate change policy
• Work towards carbon neutrality
• Account for emissions relating to product use

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Questions?