Russia’s invasion of Ukraine caused oil prices to surge. But there have been suggestions the rise of ESG investing has also influenced energy costs. Greg Bonnell speaks with Priti Shokeen, Head of ESG Research and Engagement, TD Asset Management, about the connection between ESG and energy.
[MUSIC PLAYING]
- The price of oil and gas surged when Russia invaded Ukraine, but some have suggested the real culprit for higher prices might be the rise of environmental, social, and governance investing. Well, our featured guest today says it's actually a little more complicated than that.
Joining us now is Priti Shokeen, head of ESG engagement at TD Asset Management. Priti, great to have you on the program. Fascinating topic. I'm eager to jump into it. Because, of course, in this environment of high inflation, high energy prices, some people have pointed the finger at ESG. What's actually happening there?
- Well, thanks, Greg. And thanks for having me here. I think the overemphasis on ESG might be a little bit misplaced. Because there's been many factors that have been contributing to inflation and higher commodity prices. The primary factor being quantitative easing that we saw over the pandemic. The pandemic itself created a lot of problems, such as supply chain issues. There's public policy also attached to energy transition, which is part of the factor.
But also, we observe markets and political developments quite closely. And the fact is that there is a sentiment in the market that there has been underinvestment in the oil and gas sector and some of the commodity sectors, which seem to be carbon-intensive. And the fact is that because of that underinvestment now, we're seeing not only a demand, which is pretty strong and will continue to be strong in the short to medium term, but we're also seeing supply crunches.
And the Ukraine-Russia conflict has been a contributing factor to that. The timing of Putin's conflict could not be worse, because there is a very tight demand and supply equation in the oil and gas commodities. So not only has it contributed to higher commodity prices, we know energy fits into everything that we do in terms of economic activity. If the gas prices, oil prices go up, everything else goes up.
- Has that been the trickiest part of this? And even before the Russia-Ukraine conflict, there was this feeling that we weren't getting the transition right, or it could be a bumpy transition. As we look towards the future-- 10 years, 15, 20 years out-- you're seeing the shift in energy sources. But a fear in the near term that we weren't getting the mix right.
- Yeah. So it's very, very challenging from an energy transition perspective. I think the climate objectives are definitely challenged in the current environment. The fact of the matter is that short-term priorities will always rule long term objectives. And the idea of people sitting in cold and dark is a very scary idea.
Germany, for example, is working on securing its energy needs for the winter. And the G7 leaders are meeting as we speak. And the fact is energy security will trump energy transition in the short to medium term, as I mentioned. And it's something that will be top of mind for all the political leaders going forward in the next one to two years.
- When it comes to big, publicly-traded names, obviously with their objectives when it comes to ESG and trying to abide by those standards-- they might be divesting themselves of some assets that aren't considered to be ESG-friendly. You raise an interesting point. I know it's something you've been watching in the fact that it's OK-- if you divest yourself of these parts of your company, where are they going? Are they going to the most responsible places?
- There's a term for it now. It's called brown spinning. And--
- Oh, really?
- Yeah. And the fact is that a number of larger corporations have committed to net zero and have transition plans. With oil prices being extremely strong, it's easier, low hanging fruit to spin off some of the more carbon-intensive assets. And according to some of the numbers that we're seeing, 64% of asset sales within the fossil fuel sector are going from public to private hands.
And it creates a little bit of an interesting challenge. Because we are believers in managed phase out emissions. So divestment may be playing a little bit of a negative hand in real economy emissions reduction. And we don't fully understand what it will do to the emission profile of the economic activity globally going forward.
So I think Canadian oil and gas sector seems to be in a good place from that perspective. Because we have major players who have very high level of commitment. And our approach of engaging with them and having that dialogue and discussion around having a managed phase out approach, which is more responsible, in our view, as opposed to selling the assets to, perhaps, players who are not as responsible.
- It almost sounds that would be as important-- if you're doing an ESG screen as an investor and worried about that kind of thing, not just to say, hey, good. The company divested those asset, know exactly how they did that. And perhaps would that become maybe even part of a criteria going forward for an ESG investor, saying, well, I don't like the way you have divested yourself of that asset.
- I think it is an extremely important criteria that ESG investors will need to pay attention to. It's not just about decarbonizing your portfolios. It's about decarbonizing the economy. And for decarbonizing the economy, it's more effective to be at the table with the companies that have that carbon footprint, as opposed to just divesting out of those assets and not having oversight of that.
- You talked about how in the near term, obviously, energy security is going to trump ESG concerns. Longer term, is there a way for those two things to work together?
- I believe so. I think the sentiment of underinvestment in energy is across the board. Energy sources are not just restricted to fossil fuel energy. It's many other renewable energy sources as well. So I think the investment needs to happen across the board.
I think according to the International Energy Agency, there was around an estimate of $3 trillion that needs to be invested in energy transition every single year. That includes carbon capture and sequestration. That includes solar, wind. That also includes biofuels, as well as-- nuclear is in there somewhere as well.
So there's many different types of energy that we could invest in to make sure that these goals collide, at least in the medium to long term.
- Is there a danger going forward that ESG-- although a lot of institutions have made it pretty core to their mission right now, that it gets pushed aside by these short-term concerns? And then longer term it's not being followed through on.
- It's interesting you say that. Because ESG investing seems to be at the forefront right now of political decision makers. We've seen the sentiment in European Union, for example, where in addition to investing in more fossil fuel sources of energy for the short term, they're also looking at policy making for the medium to long term, and how they can invest more, allocate more, have more capital expenditure into sources of energy which are not as carbon intensive as fossil fuels.
- I feel like I am committing the deadly sin, even though I know full well heading into the program that we were talking about ESG investing. All I've asked you about is environmental. Environment this, environment that. The S and the G stand for something as well. Is it an uncomfortable grouping? Or do those three things-- environmental, social, governance-- work hand in hand?
- Well, sometimes they do, sometimes they don't. There may be some trade offs sometimes among E, S, and G. And we, as investors, need to be very cognizant of that when we evaluate or do our due diligence of an investment to include in our portfolios.
So in terms of E, S, and G, obviously, climate goals are very much aligned with social goals. At the end of the day, if the planet is out of its planetary boundaries, it's going to affect all of us, and communities, employees, stakeholders, everybody. So that's the S part of it in the long term.
At the same time, in the short to medium term, we need to focus on that just transition in the sense of transitioning some of the employees who have been traditionally employed in oil and gas sector to newer sectors or cleaner tech industries. So I think these go hand in hand.
And then there's always a question of governance. Right governance controls, things like privacy and data security, are top of mind for tech companies. There's a ton of focus right now on health care, as you know, with Roe v. Wade being overturned in the States. So there's a ton of social issues and governance issues that we definitely need to pay attention to in addition to the E.
[MUSIC PLAYING]