Shareholders of Suncor Energy Inc. will soon know more about the costs of carbon in the company’s business. Owners of EnCana Corp. stock will learn about risks from an industry practice known as hydraulic fracturing. Enbridge Inc. will provide additional disclosure about its Northern Gateway oil-pipeline project.
These Calgary companies didn’t reach these decisions independently, however. In each case, the commitment to expanded disclosure about environmental issues came after talks with executives at Ethical Funds Co., an institutional investor with social responsibility as part of its core mission.
The efforts of Ethical Funds illustrate a growing place for environmental concerns in the corporate governance movement. For years, shareholder proposals have focused on executive compensation or board-of-director issues. Now activist institutional investors are asking to bring carbon costs and water quality to the annual shareholder ballot.
The proposals from Vancouver-based Ethical Funds, which is a part of Northwest & Ethical Investments LP, don’t make specific operational demands of the companies, such as asking for a reduction in emissions by a certain date. Instead, the firm asks for increased disclosure of environmental practices and risks. Once the companies get beyond their worries about revealing competitive information, they frequently agree.
The current push came after Ethical Funds surveyed its investors and found “environmental issues tend to rise to the top,” says Robert Walker, vice-president for sustainability. The proposals “try to put companies on notice that shareholders are concerned about these issues.”
In three cases, Ethical Funds and major Canadian energy companies reached agreement and the fund managers withdrew the shareholder proposals before they could be voted on at annual meetings this spring.
“We’re very careful about approaching companies well in advance of the proxy,” Mr. Walker said. “In general, we don’t seek to embarrass the company and we don’t use the annual meeting as an opportunity for political theatre. The shareholder resolution is just one of the tools in the toolbox.”
Here’s a look at what Ethical Funds had proposed and what the companies have agreed to do as a result.
Suncor Energy
Ethical Funds asked for a report to Suncor shareholders by October of 2010 that details “how the company has incorporated the potential costs of carbon into long-term business planning.”
Suncor faces carbon regulations only in Alberta ($15 a tonne beyond the regulatory limit), and Ethical Funds believes successful greenhouse-gas-reduction efforts in Canada and elsewhere will create a cost higher than that from taxation or cap-and-trade systems. “We felt it was a significant enough risk and [Suncor] should disclose it – and they’ve agreed,” Mr. Walker said.
It is not as if Suncor has been a blank slate on the matter. Gordon Lambert, the firm’s vice-president of sustainable development, said it has participated in the Carbon Disclosure Project, a 10-year-old, shareholder-based non-profit organization, since its beginning. The CDP says it works on behalf of 534 institutional investors holding $64-trillion (U.S.) in assets under management.
Yet Suncor’s answers to the Carbon Disclosure Project’s questions on cost have not been detailed enough to satisfy Ethical Funds. Mr. Walker said the fund company could not estimate future exposure to costs or be assured that Suncor had incorporated it into its capital planning.
A remaining concern, Suncor’s Mr. Lambert said, is the prognostication required to put this into place. In Alberta, “it’s very clear what the cost” of carbon emissions is. In other provinces and United States, “carbon policy is not in place.”
EnCana
Ethical Funds asked EnCana’s board to prepare a report on risks associated with “unconventional gas exploration,” specifically the use of hydraulic fracturing, a process used to extract natural gas from shale reservoirs.
