By Rick Peterson
If you think Monday’s oil price collapse was bad, hang on. More bad news could be on its way in the weeks ahead in corporate annual general meetings across North America. Two unregulated, U.S.-based proxy advisory firms are influencing the voting decisions of Canada’s largest institutional investors with elaborate environmental, social and governance (ESG) screens that are the object of lobbying by radical environmental groups. And they’re doing it with the indirect support of the Alberta and Ontario governments.
San Francisco-based proxy adviser Glass Lewis is jointly owned by the Ontario Teachers’ Pension Plan and the Alberta Investment Management Corp (AIMCO), the crown corporation that manages the pensions of the province’s public workers. Institutional Shareholder Services (ISS) is the largest player in the global proxy advisory market. Legal scholars accuse it of having outsized power in the selection of CEOs of major U.S. corporations.
If you want to know how these two firms harm the Alberta energy sector, ask Cam Bailey, a Calgary-based oil and gas executive and investment banker. “These ESG screens are essentially ‘black boxes’ skewed by environmental activists,” he says. “As a result, the cost of capital for energy sector companies is much higher.” Bailey’s voice is one of a small but growing number of critics who are looking behind the curtains at ESG screens and raising red flags as a wave of ESG-driven products washes over the global financial sector.
In a June 2018 paper for a Harvard Law School forum, lawyers David M. Silk, David A. Katz, and Sabastian V. Niles warned corporate boards to be prepared for the 300+ questions on ISS’s “Environmental & Social Quality Score” request. “Some of these entities seek to impose, on public companies, the burden of providing data for third-party subscription-based services,” they wrote. “The products and any asserted benefits of ESG-ratings services should be assessed carefully, especially those that fail to demonstrate consistent quality and accuracy. Management should be selective when allocating resources towards such services, including as to error-checking, and should consider whether increased investment in the company, improved positioning or other benefits will in fact result.”
This might help explain why Cenovus Energy’s annual ESG report is 65 pages long, while its 2019 financial statements are only 56 pages. “The problem we see all the time here,” says Bailey, “(is that) to achieve better cost of capital you must be compliant to the screens, but it is nearly impossible to understand how voluminous reporting turns into higher ratings.”
A 2018 report from the American Council for Capital Formation (ACCF), a U.S. think-tank, also red-flagged ESG screens that it says are “fraught with problems, from inconsistent metrics to ratings which continually fail to account for different regulatory regimes.”
ACCF found that different metrics, weighting and definitions of what constitutes ESG can produce widely varying scores. For example, Tesla has scored far below Volkswagen’s ranking in ESG screens from Sustainalytics, a global ESG research firm, despite VW being embroiled in an emissions-control scandal. Some biases appear to emerge mainly from which industry a firm operates in, rather than anything it has done. ACCF called for greater oversight and reform of the ratings system, arguing that agencies need to disclose how they reach their decisions.
At the moment, ISS and Glass Lewis have no such disclosure obligations. So, pity the poor oil and gas company that is coerced into full disclosure of water use, fuel use, GHG emissions, toxic chemical use and disposal, but has no idea how that data is being used to determine its environmental ratings.
How do proxy advisers make their recommendations? They call on the services of the more than 200 ESG ratings organizations worldwide, all of which are under pressure from lobbying by such advocacy organizations as the Sierra Club, World Wildlife Fund, Greenpeace, David Suzuki Foundation and Climate Action Network.
In other words, Canada’s energy companies are browbeaten into full disclosure to proxy advisers that are unregulated, have no disclosure requirements, use ESG screens that are subject to intense environmental lobbying and adopt a “black box” approach to determining their voting recommendations to their fee-paying institutional clients.
With the energy sector hung out to dry and with Ontario Teachers and AIMCO sitting in the catbird seat, what’s the answer? “We have to fight back,” says Bailey. “It’s a mistake to simply comply with vague disclosure standards. We need solutions that profile and contrast the high ESG standards Canadian energy companies maintain relative to other jurisdictions.”
Fight back. We hear that a lot in Alberta. It sounds like there’s more to come.
Rick Peterson is president of Peterson Capital and founder of Suits and Boots, a not-for-profit group supporting Western Canada’s resource sector.