Monday, July 30, 2012

Nexen takeover: Losing an ESG leader

CNOOC Ltd.’s takeover bid for Nexen raises concerns for responsible investors as the Chinese state-owned oil and gas company is an industry laggard on environmental, social and governance (ESG) issues, according to a recent corporate action alert published by Sustainalytics.

CNOOC has “significant gaps” in its ESG expertise, the report notes. “However, as integration moves ahead, responsible investors should keep a particularly close eye on CNOOC Ltd.’s performance related to social issues such as labour relations, human rights and community relations, with special attention to First Nations communities.”

The report points to CNOOC’s “weak” policies on the environment, human rights, bribery and corruption. In addition, the company’s ESG disclosure is of limited strength, there’s no evidence of a formal program to reduce greenhouse gas emissions, and policies on indigenous peoples’ rights and community engagement are lacking.

In contrast, Nexen has been an environmental leader in the oil and gas sector for a number of years, with operations either in line or beyond compliance, Sustainalytics says. “Of note are its strong environmental policy, its environmental management system and its track record on greenhouse gas emissions.”

“As CNOOC Ltd. becomes the operator of Long Lake, a major oil sands in situ extraction and upgrading site, responsible investors will expect higher levels of transparency and attention to environmental issues.”

Of particular concern for responsible investors, the report notes, is the disparity in how the two companies manage their human rights risks related to operations in sensitive countries. Nexen has a strong human rights record while CNOOC’s operations in Burma have faced allegations of human rights abuses.

“CNOOC is not, and, after acquiring Nexen, will not constitute an eligible investment for many responsible investors due to human rights issues in Burma.”

As demand for energy grows in emerging markets, the report concludes, natural resource acquisitions in politically stable countries will continue, and Chinese ownership in major oil and gas basins will grow.

“Given the state ownership of Chinese oil and gas companies, the need to target Chinese policy makers cannot be discounted. Regardless, responsible investor engagement on ESG issues in the oil and gas sector has to include Chinese companies in order to move the bar on environmental and social issues.”

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