Energy sector applies EO100^TM standards and puts ESG principles into action

In our February 28, 2020, article^[1], Lorne Rollheiser and Adriana Da Silva Bellini of our Calgary office explored emerging ESG (Environmental, Social and Governance) standards and practices of several leading energy industry companies. In this article, Michael Garellek and Mathieu Santos-Bouffard of our Montreal Office offer a more detailed view of the ESG standards underlying the recent gas supply agreement entered into between Seven Generations Energy Ltd. ("Seven") and Énergir L.P. ("Énergir"), the first natural gas producer in Canada to obtain certification under the EO100^TM Standard for Responsible Energy ("EO100^TM").

On February 10, 2020, Seven and Énergir signed a natural gas supply agreement, the first of its kind for Énergir, to incorporate the EO100^TM. ^[2] Equitable Origin, the non-profit organization behind the EO100^TM Standard sought to develop the world's first stakeholder-based standards system for the responsible development of energy and natural resources. Throughout this transaction, Énergir was advised by the Pembina Institute, which conducted a review of various certification frameworks, consulted with Énergir's stakeholders, and ultimately recommended that Énergir use the EO100^TM Standard in its initiative for the responsible procurement of natural gas. The EO100^TM Standard was developed according to the requirements of the ISEAL Alliance, an association that consolidates several sustainability standards.^[3] The agreement between Énergir and Seven covers approximately 10 per cent of Seven's gas production in northwestern Alberta.^[4]

Énergir integrated the ESG (Environmental, Social and Governance) standards into its call for tender documents and it will monitor compliance through transparency requirements, which will apply to Seven. In return for Seven's adherence to the standards and ongoing demonstration of same, Énergir has agreed to pay a premium above the natural gas market price.^[5] Having agreed to these conditions and following an audit of its energy development sites, Seven was granted EO100^TM certification by Equitable Origin^[6] and will be required to adhere to a set of principles established through the certification process.

The EO100^TMStandard is divided into the following five principles:

1. Corporate Governance, Transparency & Business Ethics
2. Human Rights, Social Impacts & Community Development
3. Indigenous Peoples' Rights
4. Fair Labor & Working Conditions
5. Climate Change, Biodiversity & Environment. ^[7]

For all energy projects subject to the EO100^TM Standard, the responsibility to meet applicable obligations lies with the project operator ̶ in this instance, Seven.

The Corporate Governance, Transparency & Business Ethics principle pertains to compliance with laws, regulations and legal obligations applicable in the host country.^[8] Among other things, it requires the operator to implement a social and environmental risk management system that includes risk identification, assessment and mitigation.^[9] It further requires that the operator provide stakeholders(suppliers and other interested parties) access to information obtained through the risk management and assessment system.^[10]

Concerning human rights, the operator must implement the Guiding Principles on Business and Human Rights, which Canada has adopted.^[11] These principles may impose higher standards than those currently required under Canadian legislation. The operator agrees to consult stakeholders about project-related decisions, practices and performance in accordance with these principles.^[12] The operator must also respect international principles regarding the resettlement of affected communities, including the International Finance Corporation's Performance Standards, according to which adequate compensation must be paid in connection with such resettlement.^[13]

As for the principle relating to Indigenous Peoples' rights, the EO100^TM Standard requires that prior to beginning the project, the operator must consult Indigenous Peoples to get their free and informed consent when the project affects their rights as set out in the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP).^[14]

With respect to labour rights, the operator must abide by the International Labor Organization's Core Conventions, which aim to protect workers' rights, including freedom of association, equal treatment and remuneration.^[15]

In respect of climate change, diversity and the environment, the operator must minimize the effects of project activities on the environment and abide by existing environmental obligations. The operator must also remediate prior orphan environmental liabilities related to the project site as well as plan for sufficient financial provisions to cover site remediation costs once the project is completed.^[16]

The principles formulated in the EO100^TM Standard are based on a legal corpus of foreign and international references presented in Annex II of the document.^[17] These references include a number of statutes as well as declaratory documents of a more general nature. An operator's agreement through contractual incorporation of EO100^TM standards to conform to foreign statutes (such as the U.K. Bribery Act or the U.S. Foreign Corrupt Practices Act) may trigger significant obligations that go beyond the standard Canadian legal framework and have extraterritorial impacts.

This broad incorporation of principles pertaining to corporate governance, social issues and environmental considerations in contractual agreements reflects a developing expectation and willingness by the energy sector to commit to a framework within which ESG principles can be articulated and enforced. We expect to see more of this as energy companies respond to social and political pressure for environmentally and socially responsible resource development and use, and as investors and consumers continue in their efforts to reconcile these principles with continued economic development and activity.