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More carrot than stick

Investor group uses its clout as a shareholder to nudge oil and gas giants toward disclosing environmental risks

Special to The Globe and Mail

Shareholders of Suncor Energy Inc. will soon know more about the costs of carbon in the company's business. Owners of EnCana Corp. stock will learn about risks from an industry practice known as hydraulic fracturing. Enbridge Inc. will provide additional disclosure about its Northern Gateway oil-pipeline project.

These Calgary companies didn't reach these decisions independently, however. In each case, the commitment to expanded disclosure about environmental issues came after talks with executives at Ethical Funds Co., an institutional investor with social responsibility as part of its core mission.

The efforts of Ethical Funds illustrate a growing place for environmental concerns in the corporate governance movement. For years, shareholder proposals have focused on executive compensation or board-of-director issues. Now activist institutional investors are asking to bring carbon costs and water quality to the annual shareholder ballot.

The proposals from Vancouver-based Ethical Funds, which is a part of Northwest & Ethical Investments LP, don't make specific operational demands of the companies, such as asking for a reduction in emissions by a certain date. Instead, the firm asks for increased disclosure of environmental practices and risks. Once the companies get beyond their worries about revealing competitive information, they frequently agree.

The current push came after Ethical Funds surveyed its investors and found "environmental issues tend to rise to the top," says Robert Walker, vice-president for sustainability. The proposals "try to put companies on notice that shareholders are concerned about these issues."

In three cases, Ethical Funds and major Canadian energy companies reached agreement and the fund managers withdrew the shareholder proposals before they could be voted on at annual meetings this spring.

"We're very careful about approaching companies well in advance of the proxy," Mr. Walker said. "In general, we don't seek to embarrass the company and we don't use the annual meeting as an opportunity for political theatre. The shareholder resolution is just one of the tools in the toolbox."

Here's a look at what Ethical Funds had proposed and what the companies have agreed to do as a result.


Suncor Energy

Ethical Funds asked for a report to Suncor shareholders by October of 2010 that details "how the company has incorporated the potential costs of carbon into long-term business planning."

Suncor faces carbon regulations only in Alberta ($15 a tonne beyond the regulatory limit), and Ethical Funds believes successful greenhouse-gas-reduction efforts in Canada and elsewhere will create a cost higher than that from taxation or cap-and-trade systems. "We felt it was a significant enough risk and [Suncor] should disclose it - and they've agreed," Mr. Walker said.

It is not as if Suncor has been a blank slate on the matter. Gordon Lambert, the firm's vice-president of sustainable development, said it has participated in the Carbon Disclosure Project, a 10-year-old, shareholder-based non-profit organization, since its beginning. The CDP says it works on behalf of 534 institutional investors holding $64-trillion (U.S.) in assets under management.

Yet Suncor's answers to the Carbon Disclosure Project's questions on cost have not been detailed enough to satisfy Ethical Funds. Mr. Walker said the fund company could not estimate future exposure to costs or be assured that Suncor had incorporated it into its capital planning.

A remaining concern, Suncor's Mr. Lambert said, is the prognostication required to put this into place. In Alberta, "it's very clear what the cost" of carbon emissions is. In other provinces and United States, "carbon policy is not in place."


Ethical Funds asked EnCana's board to prepare a report on risks associated with "unconventional gas exploration," specifically the use of hydraulic fracturing, a process used to extract natural gas from shale reservoirs.

Ethical Funds cited an article by a professor at the University of Texas at Austin that said hydraulic fracturing can use between 1.2 million and 3.5 million gallons of water for each fracturing well. In addition, fracturing fluid, a substance used in the process, can contain chemicals such as benzene, ethylene glycol and naphthalene, Ethical Funds says, but exact amounts of the chemicals

are held close to the vest by the drilling companies.

Mr. Walker said Ethical Funds pulled its proposal after EnCana agreed to a general improvement on fracturing disclosure. It also agreed to consider joining a water-disclosure program run by the Carbon Disclosure Project, and confirmed it would be able to produce water-quality metrics in roughly a year.

Environmental activists expecting full disclosure about "fracking fluid," as it's known informally, may not get what they want. The Ethical Funds proposal allows EnCana to "omit proprietary information" from its report to shareholders, and that seems likely to include fluid formulas.

"For us, the issue is that we are learning more about the fracking issue and right now are content to push for disclosure and dialogue," Mr. Walker said.

An EnCana spokeswoman declined to comment for this article, saying the company's corporate communications staff was preoccupied with producing the company's annual report.


Enbridge has proposed a multibillion-dollar oil pipeline called the Northern Gateway project. The Gateway is supposed to send oil collected from the oil sands of northern Alberta to the British Columbia coast. Its planned path heads through numerous native communities, including areas where the aboriginals haven't signed treaties.

Environmental regulators will rely on a joint review panel before issuing permits for Gateway. The panel must fulfill the Crown's duty to consult the aboriginals, Ethical Funds says - and it notes there have already been 15 submissions to the panel from native communities saying the process is inadequate.

Ethical Funds was looking for Enbridge to "detail the potential legal and regulatory risks inherent in the environmental review process ... as this relates to potential opposition from First Nations located along the pipeline right of way."

The company has agreed, Mr. Walker said, to beef up the management discussion and analysis, or MD&A, portion of its securities filings and add more detail in its annual Corporate Social Responsibility report.

Enbridge spokesman D'Arcy Levesque, Enbridge's vice-president of public and government affairs, said his company has had a "long history of constructive engagement" with Ethical Funds, and "in this case, we were philosophically aligned."

David Milstead



Ava Yaskiel, above, a partner in the Toronto office of Ogilvy Renault LLP who specializes in securities and merger-and-

acquisitions work, has tips for boards of directors that find out they're facing a potential shareholder proposal on their proxy circular:

Understand the law

The stockholder must own a minimum number of shares, for a minimum amount of time, before a proposal can make it onto the proxy. Similarly, a number of statutory exceptions will disallow a proposal, such as if it does not relate to the business or affairs of the company; if it's used primarily for publicity; or if it's intended to settle a personal matter. The proposal may be DOA if it doesn't meet the legal thresholds.

Learn about the


"Is it an agitator, or a shareholder putting forth a legitimate concern you should consider dealing with?" Ms. Yaskiel asks. If the shareholder isn't a trouble-maker, then ...

Consider it an opportunity, not a challenge

"The world has changed - shareholders are motivated, interested, socially concerned and active, and there's no going back to the days the board dictated and the sheep followed," she said. "If there's an opportunity to work with the shareholder for the betterment of the corporation, you should do that. It should be the start of a discussion, not the start of a fight."

David Milstead

© 2007 The Globe and Mail. All rights reserved.

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