24 January 2023

Energy Security And The Role Of ESG

Bennett Jones LLP


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There is an opportunity for Canada to use Environmental, Social and Governance (ESG) reporting to differentiate Canadian resources and provide greater global energy security through comprehensive...
Canada Energy and Natural Resources
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There is an opportunity for Canada to use Environmental, Social and Governance (ESG) reporting to differentiate Canadian resources and provide greater global energy security through comprehensive, verifiable and measurable reporting.

In December 2021, the International Energy Forum reported on a second year of depressed upstream investment in oil and gas and the risk of global supply shortages and recurrent price shocks. Such shortages became a reality in 2022, following the Russian invasion of Ukraine in February, which resulted in a massive destabilization of global energy markets and further strain on already tight supplies in Europe.

It seems almost weekly, we read about rationings, diesel fuel shortages, and with winter upon us, pressure from all around on individuals, businesses and public institutions to lower their thermostats to conserve energy. Shortages impact not only transportation and heating but also the production of petrochemicals used in plastics, clothing, and household goods, and the production of fertilizer needed for modern agriculture. Natural gas shortages, in particular, impact household heating in large parts of the northern hemisphere and electricity production required to back up intermittent renewables. In response to shortages, we have seen governments focus increasingly on the need for energy security and, in some instances, energy sovereignty.

The International Energy Agency (IEA) defines energy security as "the uninterrupted availability of energy sources at an affordable price." Some jurisdictions, including Alberta, have also started referencing the importance of 'energy sovereignty'. A paper published earlier this year in the journal Political Geography defined 'energy sovereignty' as "a country's ability to decide independently about the structure and sources of its energy supply [...] and about its energy policy."

Regardless of the term, the key element is access to energy. While Canada has abundant resources, it has struggled to get major projects approved and developed — projects necessary not only to export resources to assist with global energy supply, but also to refine products for domestic use. Part of the challenges stem from environmental concerns and perceptions regarding the continued relevance of oil and gas as part of Canada's energy mix.

What is clear from the supply constraints imposed on the world is that there continues to be, and will continue to be, a role for Canadian oil and gas in the years to come.

Canada is also a nation with rigorous regulatory regimes that require extensive stakeholder engagement and with an industry leading the way in new technologies to reduce emissions. ESG reporting if standardized and adopted broadly, could provide a platform to promote Canadian resources and garner support domestically and abroad. Such reporting on several indicators can establish a meaningful basis for global partners to recognize the distinct advantages Canadian energy has to offer, both for energy security and energy transition, as highlighted by industry initiatives such as the Pathways Alliance of oil sands companies targeting net zero emissions.

Robust ESG reporting practices could also assist in promoting further improvements as companies seek to differentiate themselves within the ESG space. However, the benefits surrounding such reporting depend on the broad implementation and content of the requirements. Currently, ESG reporting is still in its infancy.

Securities regulators, including the Canadian Securities Administrators and the US Securities Exchange Commission, are proposing mandatory rules surrounding corporate climate-related disclosures, which may improve the reliability, consistency, and completeness of ESG reporting. For example, both the CSA and the SEC have proposed requirements for companies to disclose their Scope 1 (direct), Scope 2 (indirect - energy), and Scope 3 (indirect – upstream and downstream supply chain) greenhouse gas emissions, and may also require independent attestation or auditing of ESG reporting.

The Chartered Financial Analyst (CFA) Institute has published recommended Global ESG Disclosure Standards for Investment Products which are intended to provide investors with information to help make investment decisions based on ESG preferences. Investment managers must satisfy the CFA Standards' requirements, including through independent or third-party assurance of compliance, before they can claim a compliant disclosure statement. Such requirements include standards on legal and regulatory compliance, documentation of policies and procedures, as well as the measurability of and means of attaining stated social and environmental impact objectives.

Whatever the future of ESG reporting, Canada and its energy producers have a unique opportunity to address global energy needs. While ESG reporting on tangible metrics can be an important tool in encouraging investment, attracting employees and garnering support for projects, even without such reporting, Canadian energy providers can still obtain some of the same benefits by effectively and verifiably demonstrating their commitment to ESG goals.

Originally Published by CBA National

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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