Investors Increasingly Concerned With Climate Change Risks

Would a BP style disaster happen to a company you invest in? That’s a question increasingly asked by Canadian investors. A range of proposals and resolutions has been filed in the past two years by shareholders to management of Canadian companies in various industries. What do shareholders want? How does management respond? What are the trends? Let’s take a look.

While disasters in BP scale are unlikely to happen to other companies—BP’s investors have lost a staggering $70 billion since the oil spill—investors are increasingly concerned how their investment may be affected by risks related to climate change, environment, and sustainability. They want to see that management has evaluated those risks. Management needs to respond appropriately to keep attracting capital.

According to guidance (PDF) from Chartered Accountants of Canada, investors want management to:

• have business strategy for climate change in place
• have risk strategy for climate change in place, including physical risks, regulatory risks, reputational risks, and litigation risks
• measure and disclose past and present greenhouse gas emissions and anticipate future emissions
• disclose financial aspects for all of the above

The Ontario Securities Commission Staff Notice 51-716 (PDF) provides guidance on what public companies should be disclosing regarding environmental matters. The notice came after the OSC reviewed a sample of public companies and found environmental disclosure inadequate. The OSC reaffirmed that environmental risks are material to investors and that audit committees have fiduciary responsibility to review such disclosures while providing oversight of the underlying risk control framework.

The following are highlights of recent shareholder to management proposals and resolutions related to climate change, environment, and sustainability issues. The information is sourced from Canadian Securities Administrators SEDAR database, Ethical Funds, and the individual company’s web sites.

Suncor Energy (TSX:SU, NYSE:SU)
Industry: Oil & Gas (producer of synthetic crude oil from oil sands)
Headquarters: Calgary, Alberta, Canada
Shareholder Proposal: While Suncor has indicated that a price for carbon is incorporated into economic modelling for projects, the company has not disclosed the details of this analysis to investors and whether Suncor looks at a range of potential carbon prices. Suncor’s absolute GHG emissions have increased 250% from 1990 to 2008 and will continue to increase. Suncor is requested to disclose greenhouse gas data for its operations and carbon price scenario planning for future projects.
Proposal Filing Date: 2009-01-28
Status: Suncor agreed to disclose projected greenhouse gas data for each current operation and actual carbon scenario planning for future projects. A report will be provided to shareholders by October 2010 that details how the company has incorporated the potential costs of carbon into long-term business planning, including details on the range of carbon costs used in scenario planning and the potential impacts of these costs. The shareholder resolution was withdrawn.

Encana (TSX:ECA, NYSE:ECA)
Industry: Oil & Gas (natural gas producer)
Headquarters: Calgary, Alberta, Canada
Shareholder Proposal: Encana is requested to address the legal, regulatory and license to operate risks associated with unconventional gas exploration, and plans to mitigate these risks.
Proposal Filing Date: 2009-12-11
Status: Shareholder resolution withdrawn after Encana met with shareholder representitives and agreed to disclose more information in their upcoming CSR report and plans to mitigate the related risks.

Great-West Life (TSX:GWO)
Industry: Financial Services (insurance)
Headquarters: Winnipeg, Manitoba, Canada
Shareholder Proposal: While Manulife and Sun Life responded to the Carbon Disclosure Project, Great-West Life declined to participate for the sixth year in a row. In 2009, shareholders asked for increased disclosure on climate change as over one-third of non-controlling shareholders voted in favour of an identical proposal. Great-West Life is requested to describe how it is assessing the impact of climate change, its plans to disclose this assessment to shareholders, and, if applicable, the rationale for not disclosing such information through annual reporting mechanisms such as the Carbon Disclosure Project.
Proposal Filing Date: 2009-11-25
Status: The shareholder resolution was submitted for a vote at the AGM in May 2010. The vote received 9.8% support, which means 51% of shares not controlled by insiders voted against the management.

Potash (TSX:POT, NYSE:POT)
Industry: Materials (potash, nitrogen, phosphate producer)
Headquarters: Saskatoon, Saskatchewan, Canada
Shareholder Proposal: Potash has not published a water strategy to drive the more efficient use of water resources. There is no disclosure on water as a risk to the company’s operations and how those risks are mitigated. Potash is requested to disclose these risks.
Proposal Filing Date: 2009-11-21
Status: Shareholder resolution withdrawn after Potash met with shareholder representitives and agreed to disclose how Potash is assessing the physical, regulatory and reputational risks associated with water.

Viterra (TSX:VT, ASX:VTA)
Industry: Agriculture (producer of feed for dairy and beef cattle, poultry)
Headquarters: Regina, Saskatchewan, Canada
Shareholder Proposal: Viterra is requested to provide a report to shareholders by September 2010, describing how Viterra is assessing the impact of climate change, its plans to disclose this assessment to shareholders, and, if applicable, the rationale for not disclosing such information through annual reporting mechanisms such as the Carbon Disclosure Project.
Proposal Filing Date: 2009-11-03
Status: Viterra met with shareholder representitives to discuss the proposal but were unable to commit to timelines for addressing climate risk. The shareholder resolution was submitted for a vote at the AGM in March 2010. 23% of shareholders supported the proposal.

Agrium (TSX:AGU, NYSE:AGU)
Industry: Agriculture (supplier of agricultural products and services)
Headquarters: Calgary, Alberta, Canada
Shareholder Proposal: Agrium is requested to report annually on environmental, social and governance performance, instead of such information being reported every two years.
Proposal Filing Date: 2009-12-22
Status: Shareholder resolution withdrawn after Agrium met with shareholder representitives and agreed to report annually on environmental, social and governance performance, including climate change risks and opportunities, or to disclose why these issues are not material enough to warrant annual reporting.

The companies above are not alone. Other Canadian companies that shareholders have approached management on climate change related issues since 2009 include Canadian Natural Resources, Canadian Oil Sands Trust, Enbridge, Husky Energy, Intact Financial, Nexen Energy, Petro-Canada, Brookfield Asset Management, Crombie Real Estate Investment Trust, RioCan Real Estate Investment Trust, Saputo, Sherritt International, Talisman Energy, Teck, and Rogers Communications.

The trend from investors is that sustainability is more than a moral issue. It is also a financial issue. According to Jennifer Coulson, Manager of Corporate Engagement at Northwest & Ethical Investments, “investors are increasingly concerned that environmental, social, and governance issues are material to the financial bottom line.” Since the United Nations Environment Program launched its Principles for Responsible Investment in 2006, more individual investors are using the UN framework to team up with other investors to resolve their common concerns.

When approached, most Canadian companies are very receptive, according to Coulson. Most CEOs and board of directors are aware that climate change related risks are potentially large. It is best to evaluate these risks properly and put appropriate business strategy in place. This is good for shareholders relation, good for attracting investment capital, and good for peace of mind. Afterall, no CEO wants their company to be the next BP.