Transcript: Investing in Energy with an ESG Lens

Runtime: 3:59

Brian See
Portfolio Manager, Global Equities, CIBC Asset Management

When we're looking at ESG as it pertains to an energy fund, there might be some contradictions, but there are also aspects that we key in on specifically toward energy resources.

[Text reads: ESG stands for Environmental, Social and Governance factors]

[Title reads: Environment]

If we look at the environment from a short-term and a long-term perspective. So, in the short term, there's no getting around the fact that we still use oil today, and we'll do so for the immediate future. And so, there we're assessing companies which are the best in relation to their universe. So an example of that is Canadian oil sands. When we look at this subsector group, they used to be one of the bottom quartile in terms of greenhouse gas emissions and carbon footprint ten years ago.

[Images: Mountains surrounding oil sands, followed by an Alberta oil refinery]

But since that time, they've made tremendous strides in terms of reducing their carbon footprint by solvent usage, technologies such as autonomous haul trucks, and reducing their tailings management, as well. And they continue to improve as technology further increases.

[Images: Haul trucks drive on dirt roads.]

So we think that relative comparison over the years is an important aspect. If we transition to the long-term nature of the environment aspect, fossil fuel generation is going to be on the decline in the long term, whether that's 15, 20, 30 or 35 years from now.

[Images: Oil derricks working away at sunset.]

We are going to be moving to a world where renewables such as wind and solar continue to take significant market share from traditional fuels such as oil and natural gas.

[Images: Wind turbines spin at dawn, followed by a drone shot of a field of solar panels, followed by a close up of crude oil bubbling, and then a close up of a gas burner igniting.]

It's about two-thirds of our energy usage today is fossil fuels, and one-third is renewables.

[Text reads: Today 2/3 of power & electricity use from fossil fuels, 1/3 from renewable energy sources]

As we get out into the long term—and we defined that by around 2050—those numbers actually reverse, where it's two-thirds renewables and one-third fossil fuels. So, it's important to start thinking about and making certain investments with companies that are on that long-term trend in order to invest through the entire commodity cycle.

[Text reads: By 2050 2/3 of power & electricity use likely from renewable energy, and 1/3 from fossil fuels]

[Title reads: Social]

The S is a very important part of the ESG component as well for energy companies. Specifically, this relates to human rights or community relations. Oftentimes, a company will be extracting fossil fuels or building a pipeline through sensitive areas and this is important because it affects people in those regions.

[Images: A pipeline being constructed through a forest and beside a river, followed by a woman with her back to camera staring at an oil refinery billowing smoke]

So what we do is we assist companies to ensure that they're doing their projects in a safe, reliable and fair manner, where it's important, not just for the companies, but for First Nations and all stakeholders involved. And we think this actually leads to profitability and a better outcome for everybody.

[Title reads: Governance]

So when we look at governance in an ESG perspective, what we elect to home-in on is board composition and diversity, but also management comp and incentive compensation.

[Images: A diverse board meeting is being held in a large boardroom]

Now, why that's important is in the past the energy industry was effectively growing production and reserves, while delivering zero return on invested capital to shareholders. Since that time, commodity prices have weakened, and companies have had to adjust by reducing their costs.

[Images: A row of oil derricks at mid-day, followed by an oil refinery on water seen from above]

But at the same time, investors, such as ourselves and other participants, have put pressure on re-aligning incentive comp to better reflect the new commodity paradigm that we're in.

[Images: In a series of images we see a man walk with a briefcase. A pen signing a piece of paper. A woman in a hard hat gazing at an oil derrick at dusk. A field of solar panels. A manger and employee shaking hands in front of an oil derrick.]

And so, what that involves is actually lining up management in incentive comp to more shareholder friendly initiatives such as free cash flow, return on invested capital, and dividend payments, versus tying it to top line production growth.

[Title reads: Why is ESG important?]

It's a combination of qualitative factors and quantitative factors. The important aspect is we can measure it by the carbon footprint that these companies are actually putting out. So that's one. But the qualitative assessments are important, too, because it is something where companies have to be assessed from the things that they're actually doing, such as implementing water management systems, addressing their board, or dealing with community relations.

[Images: A tailings pond seen from above. A man shaking a vile of water. A diverse board meeting. A crowded urban square. A group of young, diverse volunteers cleaning up a forest.]

I think the important aspect, if companies are actually taking steps to address these issues, we think that's an actually important thing and leads to the long-term success of these companies.

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