As institutional investors grow increasingly picky in where they put their money amid the global Environmental, Social, and Governance (ESG) push, North America's oil sector has started to look at ways to attract those investors who have been shunning fossil fuels by default. In recent weeks, two Canadian firms became the first North American oil companies to link their credit facilities to sustainability targets, willingly signing up for potentially higher borrowing costs if they miss those targets.
The sustainability-linked loans in the oil industry suggest that some companies are looking to turn around investors' reluctance to invest in fossil fuels by showing they are so serious about meeting sustainability targets to the point of embedding them in their future financial costs.
The so-called sustainability-linked loans originated in Europe four years ago, and have become increasingly popular in many industries since then.
Now it's North American oil companies' turn to appeal to the ESG concerns of investors, linking their targets to cut emission and boost diversity and inclusion to their borrowing costs.
Last month, Gibson Energy—a Calgary-based oil infrastructure company that operates in the storage, processing, and gathering of crude oil and refined products—became the first public energy company in North America to fully transition its principal syndicated revolving credit facility into a sustainability-linked revolving credit facility.
The 5-year credit facility arranged with BMO Financial Group includes terms that reduce or increase the borrowing costs as sustainability and ESG targets are met or missed, the company said. Gibson Energy is tying its targets to cut greenhouse gas emissions intensity and diversity in the workforce and its board to the costs of future loans.
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"This is further evidence of our commitment to reaching our Sustainability and ESG targets, as key targets from each of the three pillars of ESG will now also directly impact our financing costs," said Sean Brown, Senior Vice President and CFO.
"Deals like this one with Gibson Energy are aligned to the way BMO works with clients across industries, including the energy sector, to help them further their transition to a greener economy – proving we can both serve the needs of our clients and work toward a more sustainable future," BMO Capital Markets' Head of Sustainable Finance, Jonathan Hackett, said.
BMO wants ambitious emission-reduction and diversity targets for such loans to "stand up to the question of greenwashing," Hackett told Financial Post's Geoffrey Morgan.
Two weeks after Gibson announced the new kind of loan, another Canadian energy company, Enerplus, became the first North American exploration and production firm to link ESG performance targets to its principal revolving credit facility.
Enerplus' senior unsecured sustainability-linked loan with CIBC incorporates ESG-linked incentive pricing terms, which reduce or increase the borrowing costs by up to 5 basis points as Enerplus' sustainability performance targets are exceeded or missed, respectively.
"We continuously look to further integrate the Company's environmental, social and governance ("ESG") goals and targets into all aspects of our business," Enerplus Senior Vice-President and CFO, Jodi Jenson Labrie, said.
Going forward, sustainability-linked loans will grow in North America and elsewhere in all sectors, including fossil fuels, BMO's Hackett told Financial Post.
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Since the first-ever sustainability-linked loan in 2017 when eight such funding mechanisms were agreed, the number of SLLs has jumped to more than 250 annually in 2020, according to Sustainalytics, an ESG and corporate governance research and ratings firm. SLL deals slipped in 2020 compared to 2019, as companies and lenders focused on short-term financing solutions. But sustainability-linked loans picked up the pace again at the end of last year, and the first two months of 2021 saw an impressive volume of 41 SLLs deals globally, Sustainalytics noted.
The pandemic accelerated the global push to sustainability and greener economies, and companies in the oil industry are increasingly involved in ESG initiatives in an effort to show environment-and-social-conscious investors that they could be a part of the solution, not the problem, to the climate and lack-of-diversity issues.
By Tsvetana Paraskova for Oilprice.com
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A pragmatic approach is for the oil and gas industry to continue producing oil and gas while at the same time reducing emissions in its production of oil and gas rather than divesting itself of its assets.
For the oil industry to invest in the energy transition it needs plenty of cash 80%-90% of which is generated from oil and gas. As one chairman of an IOC put it succinctly “Black pays for Green”.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London