Hello, and welcome back to Green Investing 101.
This week, it’s me, Emma Graney *waves enthusiastically.* I’m The Globe’s energy reporter and your guide to all things related to environmentally responsible investing this week.
Let’s get started.
ALLY JAYE REEVES
Getting started guide
In this issue, we’ll cover:
- The energy transition
- Diversification within fossil fuels
- Cutting through corporate language
This week, we’re taking a step back to look at the energy transition – or diversification, as some in the sector prefer. We’ll also dig into how and why the energy sector is changing.
The energy transition
There’s a good chance you’ve heard the term “energy transition” being thrown around as countries try and lower their greenhouse gas emissions. It’s a shorthand, catch-all phrase to explain that the status quo simply won’t jibe with climate targets. In Canada, about 82 per cent of emissions come from producing or consuming energy. And so? We transition – to a new energy system.
What does it mean for me? When we talk about transitioning, we’re talking all energy. That means how we fuel our cars and the trucks that carry goods to our cities, and how we keep the lights and heat on.
- Despite the pandemic, additions of solar and wind power to electricity grids increased at their fastest rate in 20 years in 2020, according to the International Energy Agency.
- Solar energy costs have dropped more than 80 per cent over the past decade.
The transition has picked up steam for a few reasons, including more climate-focused government policies, a dramatic drop in the cost of renewables, and increasing pressure from investors who want to be part of the climate solution.
The bottom line: The transition won’t happen overnight – infrastructure takes time to build, and some new technologies are still in their early stages or need to be scaled up to commercialization. But it will change the energy all of us access as we head toward net-zero emissions.
How did we get here? Diversification within fossil fuels
Canada produces a lot of oil. We’ve got tons of the stuff. In fact, we’re the fourth-largest producer in the world. The catch is that 97 per cent of our reserves are in Alberta’s oil sands, which have a higher environmental footprint than conventional crude, because extracting bitumen and other heavy crude oil requires more energy than going after lighter, more accessible forms of oil. As a result, each barrel from the oil sands is more emissions-intensive – and that causes problems when it comes to the ESG measures investors crave.
Canada’s oil sector often contends that Environmental, Social, and Governance-guided investing puts too much emphasis on the E, and not enough on the S and G.
As ESG-led investing ramps up, companies that traditionally focused on oil production have diversified in a bid to stay relevant. Supermajors like BP are retreating from the oil game, fattening their portfolios of renewables and alternative fuels instead. And it’s not just about being green – there’s also an economic benefit.
- The IEA’s World Energy Outlook 2021 estimates a US$1-trillion transition bonanza (comparable in size to the current global oil market) is up for grabs as countries move to net-zero.
- As the world diversifies from oil, research continues into green technologies and alternative fuels such as hydrogen, or diesel made from food waste or crops such as canola.
- Transportation and oil companies are also figuring out how those fuels can power ships, trains, trucks and planes to decarbonize the transport sector.
Most forecasts have global oil consumption declining markedly in the coming decades. Even so, many energy companies are increasingly looking for ways to lower their carbon footprint for the crude the world will need in the years to come. They’re looking at carbon capture, for instance, or ways to use less water or power in oil production.
Zoom out: A global focus on decarbonizing the energy sector – be it transportation fuels or the electricity grid – has companies diversifying more than ever before. They’re doing it not just for green street cred, but for a piece of the revenue pie that will come with new fuels and technologies.
Cutting through corporate language (what key terms *actually* mean)
Flick through energy company annual reports and one thing you’ll see a lot is a goal to hit net-zero emissions by 2050. It’s a signal to investors that the company is doing all it can to decrease its carbon footprint. Earlier this year, for example, Canada’s largest oil sands producers announced an alliance to achieve net-zero GHG emissions from oil sands operations by 2050.
While corporate net-zero goals aren’t legally binding, more and more companies are tying executive compensation to meeting climate targets. Even so, there are steps you can take to avoid being blinded by that nasty bait-and-switch ploy known as corporate greenwashing.
- Absolute emissions vs. emissions intensity: As the Business Council of Alberta explains, absolute emissions reduction means reducing the total, physical amount of GHG emitted into the atmosphere. Some companies focus on reducing emissions intensity, which is the volume of emissions measured against another unit (per person, per unit of output, or GDP for example). Take Alberta’s oil sands, which we touched on earlier. Per-barrel emissions are down 36 per cent since 2000, but the total number of barrels produced has gone up, so total emissions have increased, too.
- Think critically: Is it a broad net-zero goal, or are there achievable targets along the way? Does the company have a credible action plan? What is it doing now, for example? And what will it do in the future, once it has picked all of the low-hanging fruit when it comes to emissions-reductions?
The bottom line: If you’re thinking about green investing, keep your eye on the language corporations use around pollution reduction, whether they have consequences for not meeting their goals, and whether they have a credible path to get there.
Key takeaways
As you weigh your green investing options, the transition will likely play into some of the stocks you look at.
That’s it for week four of this course. Here are three key points to remember:
- The energy transition won’t happen overnight, but it will change what energy the world relies on.
- Even oil majors are diversifying their portfolios to include renewables and alternative fuels.
- Beware of greenwashing and keep your critical thinking hat on tight at all times.
This is a good foundation for thinking about green investment opportunities as countries around the world hasten their bid to hit net-zero emissions, to avoid the worst impacts of climate change. Next week, we will get a reality check on how green our investments are.
Pop quiz
Which province is home to the first oil well in Canada?
- Ontario
- Alberta
- Manitoba
- British Columbia
Keep going!
You know about how the energy transition could affect your choices, so staying on top of energy news and promises will be solid information to factor into your decision making.
- In October, our climate change columnist Adam Radwanski reported that despite efforts, Canada is on pace to fall well short of its 2030 emissions goals.
- Canada is at risk of squandering a distinct advantage. Here’s why the federal government needs a plan to double the country’s supply of clean electricity.
- It’s also worth looking back at past promises from the federal government. Were they kept? A lack of clarity has previously damped down emissions-reduction impacts of the Liberals’ policies.
Thanks for reading. If you took action using tips from this newsletter, let us know using #GlobeGreenInvesting on social media or e-mail us with the subject line Green Investing 101. We would love to hear from you.
How do you perform a reality check on companies you want to invest in? That’s up for discussion next week.
Pass it on
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Evergreen investing reading
- How (and why) to align your investments with a low carbon future
- Why Canadian energy stocks still hold long-term appeal despite climate activism
Pop quiz answer: Located near Oil Springs, Ont., James M. Williams dug the first oil well in Canada and later established a refinery at Hamilton.