Sustainable finance, ESG and Canada’s role as a clean hydrocarbon supplier for the future

CAPP’s Jonathan Stringham discusses the realities of the energy transition and how Canada can turn cleantech investments into a competitive advantage.

As we move to update our energy systems for a low-carbon future, what does that mean for Canada’s natural gas and oil industry?

Fiscal and economic policy analyst Jonathan Stringham with the Canadian Association of Petroleum Producers discusses the realities of energy transition, and the continuing importance of hydrocarbon energy sources to meet global energy demand. He delves into how Canadian producers can maintain a competitive advantage as cleantech leaders, as well as what’s needed in terms of sustainable finance, environment, social and governance (ESG) monitoring, and a sound policy and business environment that encourages innovation.

Transcript of Podcast

Leighton: Hello and welcome to another edition of the Energy Examined podcast, the podcast that discusses the issues facing Canada’s oil and natural gas sector with the insiders in the know. I’m Leighton Klassen. Today, I’m joined by Jonathan Stringham. He’s manager of fiscal and economic policy at the Canadian Association of Petroleum Producers. He was recently on a panel presenting to members of the St. John’s chapter of Financial Management Institute on the topics of energy transition, sustainable finance and the future of the offshore industry. Welcome to the show, Jonathan.

Jonathan: Thanks for having me, Leighton.

Leighton: Yeah, great that you’re on. So, the panel you were recently on was titled Industry’s Perspectives on Energy Transition and Sustainable Finance. What were some of the main messages you wanted attendees to walk away with?

Jonathan: It’s a great question. You know, we had a robust discussion. It was a lively group. It was at 5:30 a.m. our time, so it was definitely an early morning. But I think that the first, I think key point that I think that surprised people and I think is very important is that as much as we hear about an energy transition, when you actually look at the hard numbers, we will not be off fossil fuels in my lifetime and possibly even my children’s lifetime. Now, that’s not to say that a climate emergency isn’t important and everything else. We can get into that. But when you run the numbers, at 100 million barrels a day of oil consumed, we just don’t see a path of being completely off of oil and gas by 2050. So, that, I think, was very important. And I think the second point is, is alongside a climate emergency, we also have a huge obligation to ensure that the developing world is able to progress and develop similar to how we have here in Canada.

Leighton: Yes, so that’s interesting. Can you talk a little bit more about, you know, how you can’t see us moving off fossil fuels in our lifetimes?

Jonathan: Yeah, sure. J.P. Morgan teamed up with Vaclav Smil, who is a professor emeritus in the kind-of the global expert on energy, energy systems, and they have an interesting quote. They say, you know, how is the global energy transition going? And they say taken together, the aggregate impact of nuclear, hydroelectric and solar wind generation reduced global lines of fossil fuels from 95 per cent of primary energy in 1975 to 85 per cent in 2020. In other words, energy transitions take a long time. And, you know, in 40 years, we’ve essentially moved 10 per cent off of hydrocarbons. We’ve reduced our hydrocarbon demand by 10 per cent since 1975.

And so, this isn’t to be pessimistic, but it does take a tremendous amount of time, money and willpower to move off of these fossil fuels. And I think the thing that I think we really need to focus on is that we’re looking at a global population growing to nine billion people. But when you dial into that, I think what’s more important is you see a global middle class, according to Brookings Institute, growing to 5.3 billion people by 2030. And that may not seem substantial, but when you start thinking about where people’s energy demands grow from and if you kind-of look at the IEA statistics, you know, if you go from low to middle income, you know, on an annualized basis, they’re 2,000, you know, effectively 2,000 kilowatts per capita, moving to somewhere around 9,000 to 10,000 kilowatts per capita.

And so, a lot of that energy is still being provided by hydrocarbons, and we see that. We see renewables growing at an exponential pace. But to keep pace with that growing population and that growing middle class that wants to have a similar standard of living to what you and I enjoy, there’s going to be a lot of energy that’s going to be required for that and a big portion of that is still going to be coming from hydrocarbons.

Leighton: Let’s dive into some of the topics. Sustainable finance was something that you addressed. So, what is it and what isn’t it?

Jonathan: Yeah. So, sustainable finance is a tranche of finance. It’s very focused on very specific goals in incenting behaviours that are deemed sustainable. And we’re largely very supportive of the notion in the oil and gas sector. Where it does get a little murky for us is when it becomes the taxonomy or the standard that is being used for sustainable finance becomes so exclusive that it’s excluding projects, oil and gas projects that actually have some of the best carbon intensities for oil and gas projects in the world. And so, we are currently working with the organizations around Canada to develop a sustainable finance taxonomy, working with the banks, working with the investment community to look at what behaviours would be incented because in Canada in particular, the oil and gas sector, however you look at it, is going to be a big partner in reducing emissions in this country. And sustainable finance is a massive carrot in terms of incentivizing the right behaviours for oil or gas companies to move toward reducing their own emissions.

Leighton: So, let’s talk about energy transition. It’s a big buzzword right now. So, what does it look like from an oil and natural gas perspective?

Jonathan: I think energy transition often is confused with the idea that we’re moving from, off of traditional energy sources like oil and gas to non-hydrocarbon sources of energy. And I think that’s certainly a part of it. But I think the broader picture is the transition from high emissions to low emissions. And I think when you start looking from that perspective, you started actually getting to the kind-of the core of the problem. The problem isn’t really one energy source or another. The problem is, is that we have growing emissions globally that are causing obviously the earth to heat. And to be sustainable, we need to be sort-of pulling those emissions out. We need to be reducing those emissions such that, you know, the world doesn’t heat beyond a 1.5C, one-point-five-degree Celsius scenario. And so, the oil and gas sector is looking at that quite extensively saying, ‘well, okay, we’re part of the problem, but we also can be a big part of the solution.’ And how do they, how do we do that? Well, we invest in clean tech, we invest in renewables and we continue to track and reduce our own emissions in the sector and we can get into some of the technologies that are being developed to do that. But I think it’s an exciting opportunity for the sector. 

Leighton: Now, backing up to sustainable finance. In your presentation, you address sustainable finance compared to cancel culture. Tell us about that concept.

Jonathan: Yeah, so I mean, I think we’ve seen comments from activists similar, you know, activists like Bill McKibben of that have effectively said things like we need to absolutely end, we need to revoke the social license of the fossil fuel industry. And we don’t see it that way. I mean, we see ourselves as part of the solution. And if you look at what the sustainable finance, the expert panel that was created on Sustainable Finance, a joint initiative between the Department of Finance and the Department of Environment Canada and Climate Change, they came up with the finding that sustainable finance is viewed as capital flows as reflected in lending and investment; risk management activities such as insurance and risk assessment; and financial processes that assimilate environmental and social factors as a means promoting sustainable economic growth and the long-term stability of the financial system.

And so, as a sector, we agree with that and we want to be part of that. In fact, the panel went on to say that Canada actually needs to create its own sustainable finance taxonomy, given the unique nature of its economy. So, it’s not simply just cancelling a number of sectors and saying, ‘Hey, this is — job well done, it’s over,’ but rather going into the different sectors, incentivizing behaviours that will lower emissions, that will promote a number of factors that are important to Canadians as a whole.

Leighton: Yeah. OK. Now environment, social and corporate governance, known as ESG, also another hot term these days. Can you explain for our listeners what it is and how it relates to the energy sector?

Jonathan: Yeah. I mean, ESG is generally synonymous with good governance, you know, and good governance generally drives positive environmental, social and business performance. Canada, Canadian companies, including the oil and gas sector, consistently are some of the highest in international ESG rankings, and ESG as a whole is really just a way to kind-of look beyond the financial metrics of the balance sheet, the income statement, the cash flow statement to look at what are companies doing to either incentivize better behaviours or what are they doing that potentially is damaging the environment, damaging their trade, damaging gender promotion.

Leighton: So, Jonathan, in your presentation, you talk about ESG and the importance of disclosure of a company’s ESG initiatives, but it’s a bit complex. Tell me about that.

Jonathan: Yeah, we’re in a very difficult time right now in terms of companies sort-of navigating the space in that some of these things are becoming mandatory and other things are still voluntary. And so, I think companies are really looking at this in terms of voluntary climate disclosure versus what they report versus what’s required to be reported. And how does that sort-of compare to their peers? And so, analysts are also looking at this and saying, ‘well, you know, it’s interesting that you’re reporting that, but your peers are reporting this’ and they’re being compared in that context. And so, there’s a number of initiatives underway from the IFRS, TCFD, the CSA to sort-of look at what could be standardized from a climate disclosure perspective.

In addition to that, there’s a number of factors that our sector doesn’t actually have control over. These are emissions that are effectively downstream emissions. These are emissions from the consumption of the products that we produce. And as a sector, we are sensitive to those emissions, but we don’t always have control over how people use our products. And so, there is an ongoing discussion amongst the sector and investors and regulators around what’s required in terms of a mandatory climate disclosure release. So, yeah, you’re obviously right, it is a complicated time, for sure.

Leighton: OK, so where do we go from here? What does Canada need to do when it comes to sustainable finance? And I know you mentioned something about in your presentation at Sustainable Finance Action Council. So, tell me about that.

Jonathan: Yeah. So, right now there is a group that’s being developed: the Sustainable Finance Action Council. It’s a number of investors who are getting together to sort-of look at what sort of principles would be included in a sustainable finance taxonomy. It’s picking up on the work that we did at the CSA, the Canadian Standards Association, on developing what a potential sustainable finance taxonomy would look like for Canada. And I think this is an important work. I mean, sustainable finance is a huge tranche of capital coming into this country and we want to be included in that. But we also understand that it would require us to demonstrate real demonstrable reductions in emissions and other ESG factors.

Leighton: OK, well, I did want to ask a little bit — we talked earlier about ESG and how Canada does rank very high on that. What are some tangible examples of what we’re doing in that space?

Jonathan: Yeah, it’s a great question. I mean, you know, it’s one thing to say, ‘hey, we’re doing a lot,’ but you know, for instance, I’ll give you a couple of examples. I mean, oil sands lifecycle emissions, when you look across the board in Saudi Arabia, Russia, Mexico, U.S. Gulf, Iraq, Nigeria, Venezuela and the list goes on and on and on, all of those emissions have grown or remained relatively flat, whereas in mining in SAG-D and mining SEO in the oil sands, we’ve actually seen improvements since 2012 in emission reductions, and this is largely due to technology that’s already being implemented the oil sands seeing that intensity level come down.

We also have carbon capture utilization and storage that’s being developed. This is a huge opportunity to sequester emissions associated with burning fossil fuels. We have the Quest CCS project, the Alberta Carbon Trunk Line. We have a number of opportunities that are going to come together now. CCS is an exciting opportunity, but there’s no question that we’re going to need federal government support in a number of areas to kind-of get this off the ground. We see continued efficiencies of solvents across the oil sands and we see fuel gas and energy efficiencies across some of the conventional players as well.

So, I think the only thing I’d leave you with is that, you know, the energy sector in cleantech spending is among the highest in Canada. Seventy-five per cent of cleantech spending is attributed to the oil and gas sector, so we are putting our money into initiatives that are going to see actionable reductions in emissions. 

Leighton: That’s great. Kind-of building on that and with the last question I’ll ask, is just what are section goals or sector goals rather, when it comes to emission reduction as we move forward now?

Jonathan: So I think you would have seen, obviously Canada’s set a target to be net zero by 2050 and at COP26 announced the emissions cap and further to that we have the 100-megaton emissions cap here on the oil sands. And so, the oil and gas sector has been very proactive as well as reactive to these announcements and is moving aggressively to make cuts in emissions. And we’re seeing a number of operators that are exceeding the timelines that they’ve set or been set for them to reduce their emissions. And we’re seeing emission reductions, you know, 25 to 35 per cent in a number of cases. And so, this is the sector that’s identified opportunities has set aside funding for those opportunities and now is moving to execute on that. And now it’s really just a question of how governments come in and support those emission reduction opportunities.

Leighton: Well, thanks very much, Jonathan, for being on the show. This is some great information.

Jonathan: Great.

Leighton: Jonathan is a manager of fiscal and economic policy at the Canadian Association of Petroleum Producers. Stay tuned for our next Energy Examined podcast, and if you like this one, please share it with a friend and make sure you subscribe on whatever podcast you have. For more stories and interviews on Canada’s energy industry, check out our website,