Listed Magazine’s article “Fracking Faces the Future” in which I was interviewed

Here’s a reprint of the article in “Listed Magazine” for which I was recently interviewed by Susan Mohammad.

Few technologies have transformed an industry or become an economic game changer the way advancements in the hydraulic fracturing process, or “fracking” has.

In under a decade, fracking has made vast reserves of natural gas and oil previously uneconomical to access viable—turning the calculus of what’s possible for the industry entirely on its head. The impact has been most dramatic south of the border, where the U.S.—which for decades has fretted about being held hostage to OPEC and foreign energy—is projected to become the world’s biggest oil producer around 2020 and to achieve energy self-sufficiency by 2030. An immediate economic upside: more jobs. North Dakota, for example, has the country’s lowest state unemployment rate, due in large part to fracking-aided shale “tight” oil production in its underlying Bakken formation. To the east, future development of the Marcellus Shale Region—which holds a ridiculously huge 410 trillion cubic feet of gas (more than half the country’s total)—could give Pennsylvania a US$42.4 billion boost annually by 2035 (up from $7.1 billion in 2010), according to financial analytics firm IHS Global Insight.

In Canada, the advent of fracking—which involves high-pressure injecting of water and other chemicals deep into rock, breaking it open to permit feasible extraction of embedded gas and oil—has increased estimated potential gas reserves by a factor of three, four or more. In B.C., 7,300 wells have been fracked since 2005. However, it’s not all great news. Instead of pushing up production, the fracking-induced abundance contributed to a glut that sank prices. Demand from the U.S. has also declined, not surprisingly, resulting in a 16% decline in gas exports to the U.S. over the past five years, according to the National Energy Board. Unconventional gas production continues to increase as a percentage of the total, but overall production is pretty flat. Production of tight oil, on the other hand, is surging—but the totals are small. According to a National Energy Board briefing note, between 2006 and 2011, tight oil production grew to more than 170,000 barrels a day from less than 10,000.  

But as miraculous as fracking technology is for the industry at large and for the economies of energy-rich regions, today it’s also seen as a risky salvation. Supply gluts and depressed prices are an immediate, bottom-line consequence. But among the broader public and other stakeholders, concerns over potential ground water contamination from methane and/or the myriad chemical ingredients in fracking solutions top the list. Gross water consumption is also a problem. Every single well that’s fracked uses millions of litres of water in the process; a 2011 U.S. Environmental Protection Agency report estimated that between 70 and 140 billion gallons of water are now used annually to fracture wells in that country. Fracking has also been known to cause earthquakes, air and water pollution, and contribute significantly to greenhouse gas emissions.

Even the word fracking itself is divisive. It contains enough power to assemble activists fearing environmental catastrophe, and to spur a wild-west development mentality as jurisdictions scramble to make approvals and get projects running before increased regulations and public opposition makes it more difficult, more expensive or impossible. It’s hard not to think of the scale and reach of similar opposition to the oilsands and the Keystone XL pipeline, and wonder if fracking is next to be tested in the same way?

It’s not that things aren’t already on the boil. Fracking disputes have piled up a lengthy history in the courts. And a number of states and provinces have introduced moratoriums or put restrictions on its use pending further research into all the potential health and environmental consequences. In January, Quebec’s Parti Québecois government was the latest. It said it was banning all fracking pending a review and introduc- tion of new governing legislation (this followed a partial moratorium installed by the previous Liberal government in 2011). At the other end of the spectrum, other states have lifted earlier restrictions and some haven’t and won’t go near them at all.

In terms of future regulation and legislation, both Washington and Ottawa are expected to announce the results of extensive reviews and new guidelines in 2014. No doubt, many companies involved at all stages of the energy production process will be watching and waiting (and trying to lobby) to see what those rules convey. Higher costs, market restrictions, increased exposure to potential liability—any and all of these can have serious consequences for share prices and valuations.

“Access is the biggest hurdle oil and gas companies must face in retrieving shale products,” says Milla Craig, owner of Millani Perspectives, a Montreal-based sustainable development consultancy. “You may have the best resource out there but if you can’t get access to it because the public doesn’t want you there, or because the public has influenced governments and regulators to impose barriers to access it, then that’s a major risk for an investor.”

At the same time, it’s often social media, documentaries and movie reenactments that get the people riled up. In that context, what does it say about fracking’s potential to grow as an issue that it’s spawned at least one celebrated indie doc, “Gasland,” and then just made it to Hollywood in the Matt Damon film, “Promised Land?”

Make no mistake, fracking still isn’t driving a lot of institutional activism. In 2012, in the U.S., 10 shareholder resolutions were put to companies on fracking.“I think it’s a percolating issue,” says Glenn Keeling, director of Phoenix CST Advisors in Toronto, a leading proxy adviser.

For the most part, Keeling says, fracking still fits under a bigger subset of potential exposures and environmental risks. But that doesn’t mean it isn’t noticed. As Craig notes, as soon as analysts went back to the drawing board to look for other ways to identify risk after the 2008 financial crisis, weighing environmental, social and governance (ESG) factors for company valuation purposes and to identify potential investment risk became mainstream. “Two or three years ago Bloomberg started to embrace ESG data by adding it to their terminals,”she says. “They rolled the dice on it and now it’s their biggest growth sector.”

Craig also makes the important point that shareholder activism is a bit like an iceberg. There’s the noisy, public stuff above the surface that you hear about. But down below, or behind the scenes, managers of very substantial “ethical” funds and other large pension fund managers are putting quiet pressure on companies to integrate better ESG practices. There’s no doubt fracking comes up. “They will go directly to management teams. Their goal is ultimately to get the best performance for you and I as pensioners and they don’t need to make those activities public,” says Craig.

When it comes to finding ways forward that work for industry, affected communities and the environment alike, there are nearly as many questions and debates in academic, political and activist circles as there are potential fracking sites (and little consensus in sight). In the U.S. for example, some wonder who should regulate the chemically laden fracking wastewater? Should it be the Environmental Protection Agency or state-run transportation departments since the water is transported both within and across state lines?

In Pennsylvania, the Department of Environmental Protection recently announced a plan for a year-long study of radioactive waste from fracking. In New York State, where activist activity on both sides of the debate is growing, a moratorium on shale gas exploration expires at the end of February. During a recent protest in the city of Albany, legendary folk singer Pete Seeger showed up to lead the crowd in a rendition of “This Land is Your Land.” As the moratorium expiration drew near, environmental groups also hinted at the possibility of launching lawsuits if exploration is approved. Challenges in court could prevent companies from operating for years.

In Quebec, American firm Lone Pine Resources Inc. (TSX:LPR), which is incorporated in Delaware but headquartered in Calgary, filed notice last November that it intended to sue the federal government for more than $250 million over the previous provincial Liberal govern- ment’s moratorium. The company has said the move to halt natural gas exploration permits beneath the St. Lawrence River was illegal under provisions of NAFTA.

“It seems that we’ve either gone from a regulated-but-full-speed-ahead approach or the other end of the spectrum, which is it’s not going to happen at all,” says Matt Horne, director of the climate change program at the Pembina Institute in Calgary.

Horne says the level of alarm and activity against shale exploration varies from region to region, depending on a few factors including differences in geology. For example, where water basins are closer to the surface (as they are in Quebec or Eastern Canada when compared to aquifer depths in B.C.) concerns over contamination risks seem elevated. The presence of a few bad actors and incidents, which there has been in Pennsylvania, also “raises a bunch of alarm bells on the environmental implications,” says Horne.

The industry isn’t standing still. It’s primary association, the Canadian Association of Petroleum Producers (CAPP), publishes best-practice fracking guidelines that it expects all of its members to follow. Pembina’s Horne says it would be better if those guidelines were enforceable.

Horne also says companies should be more transparent about reporting which chemicals they use in fracking fluid (some companies have argued that this information is proprietary) regardless of whether they are operating in a jurisdiction that mandates they do so or not. and are examples of U.S. and Canadian chemical disclosure sites where companies can do just that. In B.C., the British Columbia Oil and Gas Commission has forced companies to disclose the chemicals used in fracking fluid 30 days after the completion of a job. The information is then made public on (where over 450 companies are listed as participants.)

Due to environmental risk factors, Horne expects regulations to tighten in many jurisdictions, which will translate into higher operating costs for an industry already worried about a sharp decrease in exports.

Another voice joined the alarmist chorus in early February, when federal Environment Commissioner Scott Vaughan singled out risks from chemicals used in fracking in his last report as auditor of Canadian environmental regulations.Vaughan said he was worried about gaps in the government’s knowledge about all the chemicals used in the process— not only because they might be hazardous and dangerous, but because the government says as long as its information is spotty, “it cannot determine whether risk assessments and control measures are warranted.”

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Forbes — “Is CSR as we know it Obsolete?”

First and foremost, I am pleasantly surprised to see Forbes including a discussion on CSR in it’s online forum.  Secondly, I was equally surprised to read this headline and wanted to shout “Finally!”.

The author of the article notes that “I no longer believe that CSR is the best way to capture the relationship between business and society or an effective approach for addressing complex social issues”.  The author then goes on to determine that “it occurred to me that social changes isn’t the responsablity of business, it is the result of business.”  Again, “Finally”.

The author goes on to provide a four-part framework for business and society.  I’ll share the hightlighs here:

  1. In order to have social results, we need to acknowledge that every business, in every sector, of every size has a social purpose.  Businesses need to have the courage to declare their commitment to social change, the conviction to participate in building systemic solutions to social issues, and governance policies that support those priorities.   A corporations’s social purpose should be crystal clear and included in internal and external communications wherever possible.
  2. Social results have to be built into the metrics of every operational aspect of business.  They must be accountable for ensuring that their suppliers have fair hiring policies and safe working conditions and that environmental impacts are reduced where-ever possible.
  3. Business depends on people making or doing things that other people believe are valuable enough to be worth paying for.  Corporations should be capturing these outcomes in their annual review of business and social performance related to their employees and customers.
  4. Corporate philanthrophy is still important, and partnerships are more important than ever.  Partnerships that involve an equal exchange of ideas and allocation of resources towards shared business and social objectives are seen by participants as being essential ingreditions of social change. Corporations need to recognize how important these partnerships are, allocate more resources to building better relationships with civil society and measure the results of these key joint efforts.

Finally, the author concludes with:

we need to recognize that CSR is neither an adequate way to describe the relationship between business and society….I don’t have a new name for CSR, but I am convinced that our understanding of what business represents is far too narrow.  Business isn’t just about making money and it isn’t inherently irresponsible.  The business of business has the potential to make long-term, systemic social change a reality.

All in all, I can understand the conclusion that the author has come to.  Business is here to stay and business can and does have major impacts on society.  The question is whether society is ready and willing to work with business to seek change.  There are numerous examples of global corporations getting involved in partnerships as outlined above.  Are they easy?  Absolutely not.  Does anyone organization have the right recipe?  Time will tell.  What we do see, however, is a new business model coming to fruition and what it’s producing is a more competitive landscape.  It’s time for business to sit up and notice.


Posted in Competitiveness, Corporate Responsibility, Environmental, Governance, Social and Governance (ESG), Sustainability, Sustainable Investing | Leave a comment

UNPRI delays launch of new signatory reporting standards — what can that mean?

So there’s been lots of talk in the past few days about the implications of the UNPRI’s delay of the new reporting framework for it’s signatories. They’ve been working on this new framework since 2011 and it was due to be launched for the 2013 reporting season.   It now looks like it will now be delayed until 2014 — for the sceptics, that’s a 3-year time period without reporting accountability.

So what does all of this mean?  Should we be reading something more into this move?  According to Responsible Investor “signatories have raised issues about data security, client confidentiality and the complexity of the reporting process, despite the PRI’s attempts to lighten the burden in recent years.  But much resistance appears to have coallesced around whether the reporting process implies that there is a right way to do responsible investing.”

All of this causes me to ask some questions:

  • How can the PRI actively pursue disclosure and transparency through engagement with publicly-listed companies if their own signatories are not willing to do the same?
  • Doesn’t one need to walk the talk to be credible?
  • With more than 1100 signatories are we at the critical mass where we no longer truly need the reporting?
  • Have we already hit the tipping point and therefore, does it really matter?
  • Does this ultimately slow down the amount of pressure on public companies with regards to disclosure and transparency?

Only time will tell but one thing is for sure, this is a clear signal to watch.  They’ve succeeded in putting through mandatory fees (which no one expected to hold), so perhaps its best to take a wait and see approch!  Let’s see if signatories continue to grow.  Perhaps the choices that the PRI is making now to delay is, in fact, best for the longer-term success of it’s goals.

In the end, I’ve always said I feel that the true opportunity in this movement towards responsible/sustainable investing is to mainstream the integration of ESG factors into traditional investing.  As always, the success of any fund is based upon the manager and their particular style.  With such, doesn’t it then seem normal then that the reporting process needs to reflect individual style too?

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A CEO’s behaviour can move a company’s market capitalization by as much as 6%!

While attending the Responsible Business Summit last week in New York, I came across this interesting weekly publication called Agenda ( which ran a very intersting article on why the CEO’s personal conduct is a board matter.

The article highlights the work of Jonathan Low from Predictive Consulting (which specializes in measuring the financial impact of intangibles such as reputation) which has conducted research that suggests that a CEO’s reputation accounts for about 40% of a company’s overall reputation value.

The article is written by Nir Kossovky, CEO and director of Steel City Re, the reputation insurance intermediary.  He highlights that they have “applied an actuarial reputation-at-risk formula to Low’s results and found that the CEO’s behavior can move a company’s market capitization by a much as 6%.  That impact explains why two thirds of corporate directors in a recent survey from the accounting firm EisnerAmper stated that reputational risk is the second-most impotant risk to them after financial risk.”

I would suggest that most financial analysts would agree with the above noted, however until now, we’ve had very little tools and research to confirm these reseach results.  It also confirms the growing need for financial analysts to look beyond just financial risks and opportunities!

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Potash Corp. dropped from the NASDAQ OMX CRD Global Sustainability Index

Effective May 21, 2012, there’s an important change in NASDAQ OMX CRD Global Sustainability Index (NDAQ) for we Canadians.

For those of you who are unfamiliar with the index, it is an equally weighted equity index that serves as a benchmark for stocks of companies that are taking a leadership role in sustainability performance reporting and are traded on a major US stock exchange.  The index is made up of companies that have taken a leadership role in disclosing their carbon footprint, energy usage, water consumption, hazardous and non-hazardous waste, employee safety, workforce diversity, management composition and community investing. These are companies that are voluntarily disclosing their current environmental, social and governance risks as well as their revenue opportunities and how it will affect future performance.

Some investors follow this index as an indication of those Canadian-listed companies who are leaders in the field of sustainability.  The major change in the review is that Potash Corp has dropped out of  the index and Telus Corp. has been added.

This begs to ask the question if fundamentally there is something wrong at Potash Corp.  It’s been a leader in many of the governance rankings within Canada for the past few years.  Has something fundamentally changed?  Has the company lost sight of the importance of these issues?  Or, is this part of the impact that is the after-effect of the potential take-over of the company?   All valid questions that an investor should be asking.

Other Canadian companies that remain in the index are:

  • Bank of Montreal
  • Bank of Nova Scotia
  • Canadian Imperial Bank of Commerce
  • Royal Bank of Canada
  • Suncor Energy
  • Telus Corp
  • Toronto Dominion Bank
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Water Scarcity – Even the US Government sees the threat

As we look at the long-term issues that sustainability brings forth, resource depletion and scarcity are top of mind.  We’ve written about water a variety of times at this blog, but this past week brings a whole new confirmation of the scarcity that we face.

Last week, Bloomberg reported that the Director of National Intelligence released a report saying that competition for scarce water over the next decade will fuel instability in regions such as South Asia and the Middle East, all of which are important to the U.S. national security.

Although the report doesn’t suggest that we are looking at an all out war over water (in the next 10 years), they do highlight that they expect nations to start using water as a bargaining chip with each other.  They also go on to suggest that the adoption of water as a weapon by states or terrorists will become more likely after 10 years.  It highlights that the US intelligence community has a growing interest in understanding how environmental issues such as water shortages, natural disasters and climate change may affect U.S. security issues.  They go on to highlight that annual global water requirements will be 40% more than current sustainable water supplies by 2030.

So as an investor, is this not something that we need to start thinking about now?  Yes, we’re talking 10 years out, but as I recall, in terms of the feasibility process for new mines for resource companies, 10 years out is tomorrow.  So are we looking at risks that need to be considered in approvals for new mine sites?  Will resource companies not only have to work with the communities in which they hope to extract resources, but will the geo-political issues of our times not become even more concerning?  Are we asking these types of questions of companies in the resource sector?  Probably not at this point as most financial analysts won’t put any value on those operations into their financial models for some period of time.  The questions I have are: Will the risk be worth the effort?  What will this do to commodity prices?  Will we see more public-private partnerships on the water front?

With the announcement of the report also came the announcement of a new public-private U.S. Water Partnership that includes Coca-Cola Company, Proctor & Gamble and Ford Motor Company.  Sounds like some global companies are already thinking about these issues.  I think their shareholders should be too!

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