Companies operating in Canada's oil sands are facing new pressure to assess and disclose the long-term risks to the value of their crude reserves amid a global effort to address climate change.
In a letter to 45 of the world's top energy companies, a coalition of global institutional investors – including some of the biggest pension funds in the United States – said fossil fuel producers have an obligation to reveal what financial risks they face and how they intend to manage those challenges if world governments adopt aggressive policies to reduce carbon emissions.
"As investors with long-term investment strategies, we would like to understand [the company's] reserve exposure to the risks associated with current and probable future policies for reducing GHG emissions," said the letter, sent last month by two ethical investor groups, Ceres and Carbon Tracker Initiative, on behalf of 70 global money managers.
Among other companies, the group targeted Suncor Energy Inc., Canadian Natural Resources Ltd., Exxon Mobil Corp., Royal Dutch Shell PLC and France's Total SA, all of which have significant oil sands reserves.
Suncor and Shell declined to comment.
"We would also like to understand what options there are for [the company] to manage these risks by, for example, reducing the carbon intensity of its assets, divesting its most carbon intensive assets, diversifying its business by investing in lower carbon energy sources, or returning capital to shareholders," the letter said.
Most oil companies currently produce sustainability reports and use a "shadow carbon price" internally to assess project viability, but they don't fully disclose the risks.
Oil sands companies are particularly susceptible to climate risks because their reserve base is carbon intensive, geared to long-term production, and is among the most expensive in the world to develop, Ceres spokesman Andrew Logan said Thursday. He noted that major brokerage houses like Goldman Sachs Group Inc. and Citigroup Global Markets Inc. have raised warning flags about lower-than-previously-anticipated future demand for crude, due in part to climate concerns.
The Ceres effort is part of an increasing trend to challenge the present value of fossil fuel companies and their long-term reserves, based on the expectation that government policies will force down the demand for the most carbon-intensive energy sources. A report earlier this year from HSBC Securities Inc. said some oil and gas companies could lose 40 to 60 per cent of their market value over the long term because a portion of their reserves would become stranded assets.
The Ceres group includes some of the world's largest institutional investors, including the California Public Employees' Retirement System (Calpers) and the New York State retirement fund. Together, the 70 participants managed $3-trillion in assets.
"A good fiduciary does not not, like a lemming, follow over the cliff," said Anne Simpson, a senior portfolio manager at Calpers, which has broadened its definition of investment risk to include climate change and water shortages. "A good fiduciary is prudent and thinks about risk, and then takes action where it has influence."
Calpers has worked with other institutional investors to press the U.S. Securities and Exchange Commission to require publicly traded companies to assess and disclose climate risk as part of their regular filings. While the SEC adopted such a board rule two years ago, compliance has so far been wildly uneven.
Many of the companies targeted have responded positively, Ms. Simpson said, adding the shareholders will be holding face-to-face meetings with them to pursue the issue.