Canadian oil companies woo ESG investors with self-imposed penalties if they don’t meet sustainability targets

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CALGARY — Canadian oil sector companies are willing to pay more interest on their debts in exchange for more environmental, social and governance credit from investors.

In a first for the North American energy industry, midstream company Gibson Energy Inc. announced a sustainability-linked credit facility with BMO Financial Group on April 19, in another sign that oil-sector companies are trying to woo ESG-focused investors that have preferred greener investments.

Gibson’s sustainability targets include a reduction in emissions and also an effort to boost diversity at the oil storage and pipeline company — as energy companies try to improve their credibility on the S and G components of ESG.

The company’s main $750-million credit facility is now linked to tangible goals such as reducing emissions by 15 per cent by 2025, boosting the number of women employed at the company to 40 per cent over the same time period and increasing the number of visible minorities at the company to make up 21 per cent to 23 per cent of the company.

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The company is also committing to change the makeup of its board of directors to include at least one board member who is a visible minority and to ensure that 40 per cent of the board are women.

Right now, three out of nine members of Gibson’s board are female and none of the company’s senior executives listed on its leadership team are female. Given this makeup, Gibson will need to add just one more woman to its board and one minority to hit its target.

“Generally we’re seeing green financing talk about greenhouse gas emissions. What Gibson’s facility does is it gives them credit or penalizes them not only on greenhouse gas emissions but they have specific targets for diversity and inclusion,” said Ram Vadali, senior vice-president at DBRS Ltd., who covers the company’s debt and credit rating.

Gibson, he said, has taken this trend “to a new level altogether” with its diversity and inclusion targets.

Similarly, Enerplus Corp., a Calgary-based light oil producer with assets in Saskatchewan and North Dakota, announced April 29 it would expand its credit facility to US$900 million and also link it to its target of  reducing its emissions by 50 per cent, cut freshwater use by 50 per cent and injuries by 25 per cent.

Enerplus’ borrowing costs will rise by up to 5 basis points if the company does not hit its sustainability targets. Canadian Imperial Bank of Commerce was the book runner on the deal and the “sustainability structuring agent.”

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“We continuously look to further integrate the company’s environmental, social and governance goals and targets into all aspects of our business,” said Enerplus senior vice-president and chief financial officer Jodi Jenson Labrie in a release.

DBRS’s Vadali expects more companies in the energy sector and in other industries to agree to sustainability-linked financings to attract more institutional investors, which have their own ESG profiles to worry about.

“In terms of investor portfolios, if you look at the larger pension funds and large institutional investors, they are looking at this and saying how much of this is representing the ESG criteria,” he said. “That’s a target that they also have.”

Gibson senior-vice-president and chief financial officer Sean Brown said in a release the financing deal will give the company “ample liquidity to continue to execute our business, fund the debt portion of our growth capital and maintain sufficient additional capacity to comfortably navigate through any environment we may encounter over the next several years.”

The company did not disclose what penalties exist under the credit facility if the ESG targets are not met.

ATB Capital Markets analyst Nate Heywood said in a research note said the agreement was a positive for Gibson, “however, we do recognize the potential risks for increased borrowing costs given any adverse sustainability-related impacts.”

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While Gibson’s unusual credit facility is a first in the North American energy sector, there have been other sustainability-linked debt financings in other sectors. BMO, for example, provided Maple Leaf Foods Inc. with a sustainability-linked loan in Dec. 2019 and in Feb. 2020 provided a green loan to Atlantic Packaging.

BMO Capital Markets head of sustainable finance Jonathan Hackett said BMO attempts to structure the deals in such a way that the climate and diversity pledges are ambitious targets rather than incremental steps already baked into a company’s business plan. He said the bank wants the loans to “stand up to the question of greenwashing.”

To do so, Hackett said BMO takes into considerations industry benchmarks and government imposed targets in helping companies set goals linked to their sustainability targets that are aspirational.

“The number of conversation we’re having with our clients indicates there is strong uptake,”  Hackett said, adding that sustainability-linked loans first originated in Europe roughly three years ago and are becoming more common in Canada and the U.S.

“We’ll see many others,” he said of sustainability loans in Canada and the U.S.

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