Quebec fund quits fossil fuel investing
Caisse de dépôt cites climate concerns in decision to divest from oil production by 2022
The funding well hasn’t run dry, but the flow of money into Canada’s oil industry is slowing down.
The Caisse de dépôt et placement du Québec — Canada’s second-biggest pension fund — announced Tuesday it was divesting all of its oil production investments by 2022, citing environmental concerns.
The move by the Caisse de dépôt et placement du Québec — which will make it harder for Canadian oil and gas producers to raise money for new wells and oil sands projects — will draw cheers from other oil-producing countries, and could end up taking a chunk out of the economy, analysts and economists say.
“Oil and gas production is still a big part of the Canadian economy, and for a province like Alberta, it’s even bigger,” said Pedro Antunes, chief economist at the Conference Board of Canada.
Antunes, citing figures from Statistics Canada, said oil and gas exports and investment account for roughly nine per cent of Canada’s economy.
In Alberta, he added, oil and gas — directly and indirectly — account for 25 to 30 per cent of the provincial economy.
“The entire supply chain is affected. Alberta’s service industry is heavily linked to the energy sector. And so is their manufacturing sector,” said Antunes.
The head of the oil and gas industry association slammed the Caisse’s decision, saying it will cost Canadian jobs.
“Decisions like the one made by CDPQ do nothing to impact global demand for oil and natural gas but only serve to drive investment away from responsible energy developing nations like Canada,” said Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers. “This reduces jobs and opportunities for Canadians while enriching other countries that do not share Canada’s environmental or human rights standards.”
Victor Vallance, a vice-president at DBRS Morningstar who specializes in studying the finances of the energy sector, said the Caisse’s announcement is one step in a gradual slowdown of funding to the oil industry worldwide.
“By itself, I don’t think the Caisse’s decision will have a huge impact. But it’s part of a trend which has been growing,” Vallance said.
“This has been an ongoing trend for a few years, particularly from European investors. Some North American pension funds have been doing it too,” he added. “They’re increasingly focussed on the carbon footprint.”
Vallance says the slowdown in funding for new projects means that oil companies will instead need to focus on squeezing every last drop of profit out of older ones while keeping a closer eye on environmental concerns.
“They’re not going to be focussed on growth. They’ll be more in a holding situation, and focussing on cost efficiencies, and reducing their carbon footprint. Investors are growing more concerned about the carbon footprint,” Vallance said.
Christopher Hilkene, CEO of Pollution Probe, called the pension fund’s move “very good news.
“The Caisse had been reducing its exposure for a while, so it’s not a total shock. But noone expected this for another five years,” said Hilkene, who said the move will have ramifications beyond Canada’s oil patch, noting one of the Caisse’s investments to be divested is in French energy giant TotalEnergies.
“This will have an impact beyond Canada,” said Hilkene, who was also pleased to see the Caisse announce it will be investing $10 billion in a green energy fund.
That sends a message to other large pension funds, both in Canada and around the planet, Hilkene added.
“There are good returns to be made when companies start thinking of themselves as energy companies, and not just fossil fuel companies. People have been good at seeing the potential liabilities from fossil fuel investments.
Now the Caisse is showing that there’s money to be made from investing in green energy,” said Hilkene.
Energy companies rely heavily on large, institutional investors such as pension funds because the oil and gas industry is one of the most capital-intensive industries around, said Adam Freneth, an assistant professor at Western University’s Ivey School of Business, who specializes in the energy sector.
“When you’re going to the market for billions of dollars year after year, it’s not good when pools of capital get cut off,” Freneth said.
“There are limited numbers of places where you can access that amount of capital.”
Just as the Caisse announcement will hit Canada’s oil sector, it will provide a lift to the energy industry in other oil and gas-producing regions, including Russia, Iran and Saudi Arabia, Freneth said. And that, he argued, could end up backfiring for activist investors focussed on so-called ESG (Environmental, Social, and Governance) concerns.
“They’re popping champagne corks in Russia and other places right now where there really isn’t a concern about environmental, social or governance issues,” said Freneth. “People need to take the bigger picture into account. A lot of focus gets put on the E. But the S and the G matter too.”
In 2014, Canada’s oil and gas sector saw $91 billion worth of investments, Antunes said. By 2018, it was less than half that, he noted.
While the bulk of that decline came because the price of oil had plunged to below $50 (U.S.) a barrel, Antunes says ESG concerns more than likely had some impact.
Some of the investment might not bounce back even though the price of oil has rebounded to almost $80 a barrel, Antunes said.
“I think some of that investment will come back now that the price of oil is at $75 a barrel. How much comes back is another question,” Antunes said.
“By itself, I don’t think the Caisse’s decision will have a huge impact. But it’s part of a trend which has been growing.”
VICTOR VALLANCE VICE-PRESIDENT, DBRS MORNINGSTAR