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Investing Sustainably At Ontario’s Teachers Investment Plan Case Solution & Answer

Investing Sustainably At Ontario’s Teachers Investment Plan Case Solution

Introduction

In mid-2014; the senior VP of the Ontario Teachers’ Pension Plan was thinking about two investment alternatives in the oil and gas industry presented by his group. He was concerned about  the responsible investment standards while choosing between the two options. (Tanaka, 2014)Each investment opportunity looked alluring, yet a developing stream of contentions encompassing oil sands extraction, pipeline security and ecological insurance had raised concerns. The VP faced different inquiries: How can the effect of these natural, social and administration issues be evaluated in quantitative measures? Would they be able to be converted into an educated speculation choice that the organizations’ shareholders will acknowledge? What sort of responsible investing approach is suitable? What elective techniques for joining these issues into the speculation choice cycle,are ought to be thought of?

Problem Statement

The controversies gradient oil extraction, environmental and pipeline safety had increased over the time, which became a major concern for the senior Vice President at the Ontario Teacher’s Pension Plan. It is because the fund’s management brought two investment alternatives related to the oil and gas industry. The Vice President had to choose among these opportunities while considering the environmental, social and government (ESG) standards, as a means of responsible investing. Though the information regarding the ESG impacts was not quantifiable and available in a limited format in case of public equities; the company needed to precisely consider these impacts before opting for any of the oil and gas market opportunities.

Company Background

In 1917, the Ontario’s government started offering pensions on the retirement of teachers. The pensions’ contribution were made by the government and the teachers in a trust managed by the Ontario’s government. The trust generated returns through investment in the non-marketable debentures issued by the Province of Ontario. After seven years; the province separated the investment management function of the fund from the government, which ultimately formed OTPP (Ontario’s Teachers Pension Plan) as an independent company, with an investment plan of 19 billion in different assets’ classes.

The pension payment payments were expected to be greater than the contributions and the existing investment, i.e. roughly $7.8 billion. At that time, the province expected that by investing in other asset classes other than just debenture, would remove the gap between the contribution and existing investments and the payment for pensions on the employees’ retirement. After establishing OTPP; the province hired a very professional team, which developed the fund’s capabilities into commodities, real estate, fixed income and other absolute return strategies. The fund started investing in different asset classes across different geographical locations. By the end of 2013, OTPP had the net assets of $140.8 billion and since its inception; it had generated a CAGR of 10.2%, which was much higher than the standard market return of 8%.

Oil & Gas Industry Overview

After Venezuela and Saudi Arabia; Canada was ranked third in its oil reserves. 97% reserves among the 174 billion barrels were located in the oil sands of Alberta. The conventional drilling was considered to be delivering the most production volume. The country’s major exports of the crude oil were transported to the United States, with approximately 2.4 million barrels per day. The oil and gas industry was prone to different challenges, which became a concern for the oil and gas companies and the companies with investments in such sector.

Risks in Oil & Gas Industry

Less Public Information

First of all, the public equities did not reveal much information about the impact of their explorations and extraction activities over the environment and the climatic conditions, which led towards an increased regulations and scrutiny by the government agencies. The legislations passed by the government entities had made a requirement over the companies to report the impact of their mining, extraction or explorations activities in their public reports and imposed taxes over the damages towards the environmental conditions. These taxes raised the cost of production and reduced the companies’ profitability levels.

Caps on Fresh Water Usage

The Alberta’s government had put caps over the usage of fresh water through lakes and rivers. In pit mining at the oil sands reserves; the steam generation process required huge source of natural gas and water. This further raised the concerns for the oil and companies, as water was scarce and a necessary element, which could enable the government to pass legislation or regulations to the companies.

Remediation of Oil Extraction Sites

20% of the oil sand reserves in Alberta were accessed by the extraction companies through open pit mining. Through different processes; the crude oil was extracted and the reserves were transported to the United States and refineries were located in the western Canada. But after the extraction processes; the Alberta government made it mandatory for the oil and extraction companies to bring the extraction site towards its original position after following different remediation measures. Additionally, the government imposed tax legislation over using the government property, thereby, increasing the costs of production for the oil and gas extraction companies.

Transportation Issues

The industry faced numerous transportation issues as the Alberta location did not have any access to the ports for transportation of oil extractions. In order to get to the coast; the company had to transport the oil through significant distance, i.e. form the high mountains or through the Gulf Coast or through the St. Lawrence River. Not only this, the transportation challenges became more serious due to the transportation of bitumen, which was very viscous and heavy. In order to make it less viscous, so that it could flow easily through the pipelines; the company used to add diluent, which became an incremental cost of production.

Less Prices

The major chunk of the oil exports from Canada was dependent on the Unites States’ economy. The United States of America was the largest and the main buyer of oil produced in Alberta. Approximately, 2.4 million barrels were shipped to the United States on a per day basis. The United States also started its own oil production through fracking technologies, which led to strong buying power over the Canadian oil market. The oil and gas firms were unable to charge the premium prices from the United States, because of its large buying power. Due to location disadvantages; the country was unable to export the oil other world markets and an ultimate reliance on the US Gulf Coast increased the supply of oil. As a result of an excessive supply; the prices of oil remained $15 – $20, as compared to the benchmark price of $36. (See Appendix 1)……………………..

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