Oil Sands Update: Corporate Engagement

n e x t s t e p s Oil Sands Update: Corporate Engagement

NEI will continue in-depth dialogues on company-specific ESG risks. Our engagement efforts over the past five years have produced significant results from both the leaders and the lag- gards, and we anticipate further progress. As disclosure improves, we will concentrate increas- REDUCING INVESTOR RISK ingly on performance issues. We are currently engaging the board compensation committees of all the oil sands companies T HROUGH ENGAGEMENT owned by our funds on the linkage of executive compensation to environmental and social fall 2010 performance. We have shared our research analysis and expectations and will push for improvement. We expect to see the results of our work reflected in next year’s proxy circulars. As the worldwide hunt for oil becomes ever more challenging, increasing attention will focus Policy Engagement on Alberta’s oil sands, which already account for over 50% of Canadian production—and rising. Not every oil sands issue can be dealt with at the level of the individual company. Strategic The industry is starting to acknowledge its significant footprint, but much remains to be done action is needed to deal with the cumulative impacts of development - which can wipe out to manage environmental and social risks. Informed corporate engagement can help. the effect of performance improvements by individual companies, and increase risk for all. In a context of major projects with high development costs and long investment horizons, lack of certainty about regulation of operational aspects— including greenhouse gas emissions, tailings management and water use—makes corporate decision-making more difficult and Five Years of Advancing Change in the Oil Sands increases investor uncertainty. A massive energy resource in a safe, stable, accessible jurisdiction: not surprising that almost every major Canadian We will build on our long-standing engagement with policy stakeholders (including regulators, and international oil company is involved in the Alberta oil sands, or plans to be. But the industry has attracted standards agencies, industry associations and companies) to explain how good policy criticism because of its significant footprint, which poses a complex set of environmental, social and governance can support the mitigation of investor risks—and how poor policy and weak implementation (ESG) risks for investors. To advance ESG risk mitigation across whole sectors, NEI Sustainable Investing Services can increase risk. pursues a comprehensive strategy combining research, corporate evaluations, engagement and policy work. Over the past five years, we have applied this approach to our work in the oil sands.

In order to be truly attractive to long-term investors, oil sands companies must increase their ef- 2006 Step 1: Identify the emerging ESG issue. forts to manage the environmental and social challenges of the industry. Action is also required at Who’s In The Oil Sands? Already in dialogue with oil sands companies as part of our the policy level to address cumulative impacts and eliminate uncertainties. Investor engagement is wider corporate engagement program, we began to engage a c t i v e t o d a y : p l a n n i n g t o e n t e r : critical—but engaging effectively on this complex topic demands a strategic, comprehensive ap- with the policy makers, submitting investor perspectives to Canadian Natural Athabasca Oil Sands Resources Ltd Corporation proach based on industry knowledge, established relationships and sound research. the Alberta Oil Sands Commission. Canadian Oil Sands Blackpearl Resources 2007 Step 2: Research risks and refine questions Cenovus Energy BP through dialogue. Chevron Chinese National Offshore Connacher Oil and Gas Oil Corporation Contact Us Our research on climate risk in the oil and gas sector was ConocoPhillips Enerplus Resources published as a report, Head In The Oil Sands. Devon Energy Exxon For information on NEI Sustainable Investing Services contact: Husky Energy Korea National Oil 2008 We published Unconventional Risks—a comprehensive Corporation Bob Walker, Vice-President Sustainability at [email protected] Imperial Oil overview of oil sands ESG issues. We explored the risks with Ivanhoe Energy Japan Petroleum For more information on Ethical Funds, contact your NEI Sales Representative at 1.888.809.3333. oil sands companies through intensive dialogue. Exploration Paramount Resources Marathon Oil Pengrowth Energy Trust To obtain the report Lines In The Sands: Oil Sands Sector Benchmarking contact: [email protected] 2009 Step 3: Establish metrics and benchmark performance. MEG Energy PetroChina We undertook a major research project to benchmark Murphy Oil Teck NEI is a registered trademark of Northwest & Ethical Investments L.P. Funds managed by NEI may or may not hold securities issued by the corporations discussed in this report. companies on oil sands ESG themes. We released highlights Nexen Inc. Funds managed by NEI will, in making investments in the sector discussed in this report, choose securities that in the view of the managers of the fund making the investment as a report, Lines In The Sands. Nippon Oil Exploration present the best investment opportunity, regardless of whether the issuer of those securities was included in this report. The information and opinions contained in this report Oilsands Quest 2010 Step 4: Drive performance improvement through OPTI Canada have been compiled or arrived at from sources believed reliable as of the date hereof, but no representation or warranty, express or implied, is made as to their accuracy or engagement and policy work. completeness. In some cases, information and opinions provided in this report have been obtained from or arrived at from other sources. In expressing opinions and provid- Petrobank Energy ing this information, NEI relies upon sources believed to be reliable as of the date thereof, no representation or warranty, express or implied, is made as to their accuracy or We continue to engage the oil sands companies on specific Shell completeness. While based primarily on publicly-available information or information provided to the authors in private meetings and communications, the report also includes risks, as well as pressing policy-makers on disclosure require- Sinopec Statoil the authors’ personal views. This report and all the information, opinions and conclusions contained herein are protected by copyright. This report may not be reproduced or Cert no. XXX-XXX-XXX ments and strategy. We are beginning to see results and distributed in whole or in part without the express consent in writing of NEI. increasing acknowledgment of the need for change. Suncor Energy Total

Northwest & Ethical Investments l.p. NEI INVESTMENTS OIL SANDS UPDATE: REDUCING INVESTOR RISK THROUGH ENGAGEMENT

ENGAGEMENT CREATES RESULTS RESEARCH FOCUS: For our 2009 report Lines In The Sands, we researched 13 oil sands companies on a comprehensive ARE OIL SANDS EXECUTIVES PAID TO MITIGATE RISK? set of ESG themes—aboriginal rights, climate change and air pollution, land use, biodiversity, Sometimes the best solution to getting something done is the simplest—pay someone to do it. water—and corporate readiness to address risks. Based on our ﬁndings, we engaged the compa- Increasingly, oil sands companies say they need to address environmental and social risk. If they are nies on speciﬁc disclosure and performance issues. What are some of the results from the past year? serious about this, it would be logical to link top executives’ compensation with their progress in meeting that objective over the long term.

Biodiversity Monitoring: REINVENTING THE OIL SANDS? Now Everyone Pays Their Way What We Looked For—Evidence Of Linkage In our reports Unconventional Risks and Managing oil sands risk requires understanding of the baseline Lines in the Sands, we highlighted the As part of our research into executive compensation form part of the criteria for executive compensation? And if situation and the cumulative impacts of development on the potential for emerging technologies to practice in the oil and gas sector, we studied the disclosure so, is there evidence that good—or bad—ES performance environment. The Alberta Biodiversity Monitoring Institute (ABMI) is reduce the environmental impacts of oil of 12 companies currently active in the oil sands. Our had any real impact on take-home pay? an independent initiative to monitor over 2000 species and habitats, sands production. But we criticized the questions: Did environmental and social (ES) indicators in support of science-based land use decision-making. To continue apparently low levels of R&D spending at its mission, ABMI depends on government and company funding oil sands companies and the sluggish pace —but we found that only seven of 13 companies were offering at which new technologies are being WHO'S LINKING PAY TO PERFORMANCE? support. In our engagement dialogues, we highlighted ABMI commercialized. and recommended that all oil sands companies should pay their In the past year, Suncor and Shell unveiled CANADIAN OIL SANDS share. One year later, every company we engaged has signed up No evidence that ES issues are considered technologies that could speed up the to fund ABMI. CONNACHER tailings drying process at oil sands mines HUSKY from decades to weeks, while Cenovus Boilerplate reference to ES issues Pricing In Future Carbon Regulations announced its intent to build the first TOTAL Disclosure is essential for investors to assess the risks and opportuni- commercial solvent-assisted in situ oil CANADIAN NATURAL sands project, potentially reducing water Discuss ES performance, but no context on metrics, ties facing the companies they own. Suncor Energy’s disclosures did CENOVUS targets, or impact on actual pay and energy needs. These announcements not reassure us that the company had incorporated potential carbon CONOCOPHILLIPS are significant because the companies are costs into project economics—leaving investors open to huge risks NEXEN should the price of carbon rise. Having successfully engaged Encana attempting to tackle some of the industry’s Disclose how performance against defined biggest challenges on a commercial scale. DEVON ES metrics impacts annual pay No companies on this topic in 2008, we raised it with Suncor in 2009. As a direct tie long-term result of our dialogue, Suncor has agreed to provide details of carbon We will continue to make innovation a key IMPERIAL compensation to costing for all new projects—including the range of prices used in the topic in our oil sands dialogues. SUNCOR ES performance sensitivity analysis. The company also agreed to provide detailed SHELL five-year greenhouse gas emissions forecasts so analysts can determine exposure to current and future carbon regulations. WEAK ES PERFORMANCE /PAY LINKAGE STRONG

Efficiency Data We Wanted—And Got What We Found—Cause For Concern • Did executives meet, miss or exceed their ES objectives We asked in situ oil sands producers to disclose one specific indicator for the previous year? As the chart above shows, the results give cause that we were surprised to discover could not be found easily: the • Were the ES compensation criteria relevant for concern. Most companies claim to consider steam-to-oil ratio (SOR). The SOR reveals how efficiently a company and appropriate? uses steam in mobilizing and extracting bitumen from deep deposits. environmental and social performance when setting • Did ES performance have any actual impact on The less steam used, the less energy and water are required per pay—but very few are doing it. compensation? barrel—leading to lower costs and lower environmental impacts. For example, despite reporting on an impressive • To what extent did the compensation committee This year, more companies are providing this information in an 23 individual compensation metrics, Canadian Natural exercise discretion alone in assessing ES performance accessible format. Now that companies are disclosing SOR, did not include a single indicator of ES performance. investors can start asking them about reducing it. and awarding compensation? When companies fail to disclose targets and metrics on Disclosure on these questions would help investors actual performance, investors are left with unanswered determine how serious the companies are about tackling questions: oil sands environmental and social risks. NEI INVESTMENTS OIL SANDS UPDATE: REDUCING INVESTOR RISK THROUGH ENGAGEMENT

Efficiency Data We Wanted—And Got What We Found—Cause For Concern • Did executives meet, miss or exceed their ES objectives We asked in situ oil sands producers to disclose one specific indicator for the previous year? As the chart above shows, the results give cause that we were surprised to discover could not be found easily: the • Were the ES compensation criteria relevant for concern. Most companies claim to consider steam-to-oil ratio (SOR). The SOR reveals how efficiently a company and appropriate? uses steam in mobilizing and extracting bitumen from deep deposits. environmental and social performance when setting • Did ES performance have any actual impact on The less steam used, the less energy and water are required per pay—but very few are doing it. compensation? barrel—leading to lower costs and lower environmental impacts. For example, despite reporting on an impressive • To what extent did the compensation committee This year, more companies are providing this information in an 23 individual compensation metrics, Canadian Natural exercise discretion alone in assessing ES performance accessible format. Now that companies are disclosing SOR, did not include a single indicator of ES performance. investors can start asking them about reducing it. and awarding compensation? When companies fail to disclose targets and metrics on Disclosure on these questions would help investors actual performance, investors are left with unanswered determine how serious the companies are about tackling questions: oil sands environmental and social risks. n e x t s t e p s Oil Sands Update: Corporate Engagement

Northwest & Ethical Investments l.p.