ESG Update

Sep 21, 2020

Hey, everyone. Thank you for joining us. We're very excited to be joined by Enbridge CEO, Al Monaco, to talk about ESG. Before we dive into ESG directly here, maybe we'll start with the big picture. Why is ESG important to Enbridge? And how has your thinking on this evolved over time? And why do you think it could be a differentiator for Enbridge in the midstream energy space? Okay. Well, for having us on. First of all, Jeremy, we appreciate the opportunity here. You know, ESG got coined a little while ago, but to us ESG really isn't about that acumen, it's about how we run the business every day. And what I mean by that, it's part and parcel of operating, the company. It's essential to how we approach stakeholders. You need to be good at that today as you know. Importantly, And it's embedded in the strategy and how we allocate capital in the company. And maybe I'll just spend one minute if I can on each of those. So in terms of how we operate the business day to day, if you boil down what we do, our business really requires trust by the public and that we're world class in what we do. And that means that safety, reliability, environmental protection has to be number one. It means that you need to be at the forefront of technology on the operating side, when it comes to integrity management of the pipes. And it means reducing emissions intensity as you go along. On the second part there, we've really seen an elevation of the game, if you will, on stakeholder engagement. And again, as you know, it's really critical to getting things done in this space today. So it used to be that construction capability was number one, but now stakeholder engagement and how we engage the communities is really the core competency. And you have to really focus on all of your stakeholders. If you look at it, it's the local level, it's the right of way, participants, it's indigenous groups. And then of course, you've got regulators, governments, suppliers, your shareholders and naturally your employees. So I would say that's a big part of it on stakeholders. And the third element is on strategy and capital allocation. And for us, it's always been about making ESG part of the growth and asset mix driven by the fundamentals that we see. And over time, if you look at it, we've got an interesting history here to illustrate it and it's about shifting in our view the asset mix. If you go back decades ago, we were pretty much a pure pipeline company on the liquid side. Twenty years ago, we had a pretty specific point of view on how the fundamentals were shifting. So mostly to gas, but also to renewables and their growing importance in the energy mix. So I think we were pretty good at foreseeing a little bit of the future. So we use the excess free cash flow we had back then to acquire what in our view was the best utility in consumers gas in Ontario. And we started building a pipeline in renewables. Good skill set was being brought through the company and basically starting that from scratch. So you'll know Jeremy back in 2016, we made our second major movement to natural gas to further expand what we had with the Spectra acquisition. And then a couple of years later, we sold our G and P business, which as you know is quite emissions intensive. So all I have to say that we think that embedding ESG into the business really differentiates us. And for us, it's not about checking the box, if you will, on ESG, it's how you actually run your business day to day. And it shows up again and how you operate, high engage your stakeholders and how you, go about your strategy. That makes a lot of sense. Thanks for that backdrop there. Maybe we'll start off with the environmental side and drill in a little bit more. How does Enbridge think about the pace of energy transition to lower carbon energy sources? And how do you view your assets in this context? Okay. Well, is the big question of the day, of course. Having a point of view on the fundamentals, as I mentioned earlier, is critical to how we think about it. First of all, you know, I guess in the big picture, it feels like the pace of this transition everyone's talking about is quickening. And I think that's true, but the reality is also that transitions take a long time and they're really measured in decades and you just have to look at the coal industry to go back in time. Technology is one reason for that. To be perfect and to be scalable and new technologies takes a long time. Existing infrastructure is always very competitive and it goes to consumer affordability. And then as you know, countries develop at different paces. And so that's part of why it takes a long time. I would say the second thing is in a capital intensive business like ours, you can't afford to get this PACE question wrong. You need a clearer understanding of demand, supply and the economics of energy as I mentioned. I don't think there's much disagreement out there that energy demand is going to rise in the next three decades. Every credible piece of work will tell you that. But it's also clear that we're going to need all forms of supply to meet that demand And everybody now agrees that we need to reduce carbon intensity. And I think the biggest change you've seen in our industry is that everybody is pretty much on the emissions page, today. So our approach at Enbridge to the pace of the transition is always to continually look at the asset mix in the context of those fundamentals and rebalance that over time. And that's what we've done. I think it's critical to also employ, what we call the utility like commercial structure to make sure that if you're wrong, you're getting your return on and return of capital. And because you're not always right, you need to develop, low cost optionality in other areas like we did in renewables and like we're doing in other areas that I'm sure we'll talk about on this call. Just to maybe just to illustrate one more thing that we look at here, not to extend this too long, that we actually look at our current assets and test their resiliency of the business and the cash flows. And if you look at it, one of the biggest things that gives us that comfort is the markets we connect to, whether it's the liquids business and going to the best refineries, the natural gas business and that we really feed about 170,000,000 people in terms of the market size and on the utility side, a very strong utility base there that has a good advantage over other fuels. So I think when you look at it, it comes down to those fundamentals and your advantage, into certain markets. Got it. That makes sense. But do you believe EMV's fossil fuel presence, does that keep away significant amount of ESG investors and capital away from the company? How do you think about that? And are are there practical ways to mitigate this? Yeah. Well, I I gotta be honest. I think most investors take a pretty balanced view on this, Jeremy. And they recognize the criticality of of what we do as a business and importantly, as I just mentioned, our competitive position and resiliency. So I think most of them get that. But I will say to go to your question, they want to really understand the approach and they want to focus on the companies that do this the best. So sound ESG goals and strategy, I think is the best mitigation to differentiate. Just to be clear, our goal is to solidify ourselves as the midstream leader on this front. So we get broader recognition and appeal and attraction of capital. We spend a lot of time with stakeholders explaining the ESG program today. From an investor side, on the equity side anyway, we generally get recognized for the strong performance here. And of course, you've got a bunch of agencies out there that people can look to and we're generally at the top of that. What's interesting I find is on the debt side and you know the work that goes into debt investors review and I think it's showing up in our ability to access capital at very low rates today and credit spreads And we've shown that throughout the last year or so when this focus on ESG has been absolutely the highest. I think the mitigation that you're talking about also extends to performance of the broader industry. And the oil sands is often, the subject of attack here. If you look at the facts of the matter, the oil sands producers have done a tremendous job in not only reducing emissions on par with U. S. Barrels, but a very, strict regulatory regime, environmentally in Alberta, for example, they were also the first to introduce the carbon tax and emissions cap. So I think, it's about, you know, the things you can do strategically and the actions that you're taking. Those are the best forms of mitigation to what you're talking about. That makes sense. And maybe pivoting to the renewable side, given government support and positive improvements in renewable costs, how do you expect EMV's renewable platform to evolve over time? And how does hydrogen or renewable natural gas fit into your low carbon ambitions here? And can you leverage existing assets for hydrogen transportation such as utility or the natural gas pipes you guys own? Okay. Well, on the first part, you know, our renewables business has actually grown at a pretty good clip and we're one of the largest players, certainly in Canada and even North America. But our issue has been the rest of the business has been growing as well. I think that renewables could become a larger part of the mix and the way we're looking at it internally right now, we've got three big platforms, of course, liquids, natural gas transmission and then our big utility, ownership position. And this renewable space is sort of growing to be a fourth platform. Today, we've got, somewhere in the order of 24 or 25 operating projects, onshore and offshore renewables. We're seeing pretty good opportunities still in European offshore wind and we were lucky there. We got in with some very good partners right upfront and they recognize what we bring to the table in terms of offshore expertise. Obviously, we build offshore pipelines. So we bring something to the table there along with our major projects execution capability. The focus I think for us going forward in this space is probably to move up the value chain a little bit. So we've been focused mostly on projects that are ready to construct or already spinning. We're moving that up a little bit now to development, construction and ops. And I think if we can do that well, we'll be able to retain some good returns in that business. But we've seen a lot of cash coming into the renewable space recently. So we've got to make sure that we're keeping our discipline on that front. I think you mentioned RNG and hydrogen. I think both are going to come into play for us. We were set up extremely well here. In fact, on the renewable natural gas side, we've been in this space for a while already. We've got one project operating related to organic waste and we've got several more coming into play over the next two, three years. On the hydrogen side, seems to be certainly a key area of focus these days. We've experienced this, let's call it hyper cycle before. But I think the difference this time is that you're seeing governments put a lot of effort and subsidy into it. So I think it's different. We had an early start here too actually. We commissioned, in fact, our first utility scale project just North Of Toronto. It's essentially a project that supports the power grid that's managed by the ISO there. We essentially take surplus electricity and produce hydrogen through electrolysis. So in that case, you store hydrogen and we convert electricity to electricity when it's needed. This is a 2.5 megawatt project. So it's a good piloting phase. It's expandable to five And really the next phase of that project is going to be blending the product into the gas stream. So I think overall a good approach and we call it optionality to new businesses, Gradual, very much like we built up the renewables, test the technology, develop the capability and then expand the opportunity set over time. So it's a good I think it's a good example of how we look at these new businesses over time and gain that capability and scale over time. Got it. That's interesting. And when thinking about internal competition for capital, when you think about sanctioning new projects, how does Enbridge evaluate renewable developments versus midstream projects in terms of hurdle rates? Have green investments turned into a bit of a cost of capital shootout across the board? Or are there areas of opportunities such as what you found in European offshore where you can make projects make sense for you? Okay. Well, maybe I'll unpack it this way. On the first part, it's pretty straightforward. We evaluate, renewables projects exactly the same way as other projects. So in other words, renewables have to compete for internal capital just like any other project. And we do that pretty much through the hurdle rate process. So we establish a hurdle rate, as you know Jeremy, for each project. It basically starts with, you know, your your base level return, requirement, and then we build up that, hurdle rate for project specific risks. So just like any other project, we look at volume risk, price construction, the leverage in the project, foreign exchange, whether it's regulatory permitting and of course counterparty risk. So we build up a hurdle rate that way to make sure that we're comparing that project exactly the same as we would any other. I would say, return wise, renewable equity returns are at about the average of the entire company, maybe a little bit below the liquids pipelines projects that we've had, but, higher than utility or gas transmission. You also mentioned the I think you said it was a shootout on cost of capital. Yes, there is a lot of capital chasing these projects these days, and returns are getting big down. There's no doubt about that. Whether you look at public company valuations or single assets, Our view is you can't be chasing returns to the bottom. And I'll be honest, we lose a lot of projects just because we maintain discipline there. I think a good example, just to give you a bit of background here, we weren't really competitive on The U. S. Northeast offshore wind. I think we felt the returns there were getting crunched down from what we could see. And the other thing there is the cash flows are considerably a ways out there. One area that your clients may be aware of this is floating offshore wind and I think that presents another big opportunity setter called the next wave of the offshore wind endeavor. At this point though we've done a lot in the hopper in Europe to keep us busy for a while to support the near term growth targets that we have. So that's how we'd look at that generally, Jeremy. That's, very helpful. Thanks. Maybe turning to emissions a bit here. What has the approach been on CO2 and rogue methane emission reductions across your platform? And do you still intend to set new targets for further emissions reductions over time? Yeah. Well, we again, we've been at that one for a while now. In fact, I call we that was a part of the first round of emissions targets we had that we set a number of years ago. So we were ahead of the game, I think. In the early 2000s, it really started with what we call the cast iron and bare steel replacement program. And that resulted in emissions in the utility business coming down below our nineteen ninety levels. And, you can think of that as kind of eliminating the rogue emissions part of what we did in the utility. And now that's transitioned into a quite an in-depth leak detection program so we can pick up even the smallest forms of methane. And methane, as you know, is a big focus of the entire industry. Another part of that, which people often forget is our demand side management programs, which basically incentivize our customers for using energy more efficiently. And over a long period of time, we've managed to remove CO2 equivalent to taking about 12,000,000 cars off the road, if you can imagine. So I think we're moving along there. And of course, I mentioned RNG and hydrogen. I think the next phase of emissions reduction for us is pretty much in full swing today. And we're really excited about one part of that, which is self powering with renewables. As you know, we're a pretty big user of energy to power our pumps, and compressors on both the liquids and natural gas system. And we're leveraging what we've done on the renewables side and how much we've learned there to self power, mostly with solar. We've got the first project on natural gas side, which we're really happy with in New Jersey. That's a 2.25 megawatt facility and essentially powers compressors there. We're also now breaking ground on a new liquids pipeline facility powered by solar. So this is again pretty much up the curve and we're excited about this part of it. More broadly, guess, Jeremy, on the gas business, we've kicked off a pretty big modernization program to reduce air emissions at several compressor stations. So that's something we're looking forward to. And then I think you mentioned the targets. So yes, we are setting new broad targets. More to come on that, let's just say in the next month or two. And we're going to be very thoughtful about setting those targets. And you'll see in the next little while here that will be pretty transparent process to reaching more reduction in emissions at Enbridge. That's great. We'll definitely be on the watch for that. Maybe taking a step back for kind of a broader industry question here. Pipeline incidents, whether on your systems or others, can create perceptions and raise questions around pipeline safety, particularly as pipelines age, systems age. How does Enbridge and the industry respond to stakeholder concerns here? Has EMV's approach to safety and asset reliability changed over time? And what lessons from past experiences are you currently implementing in your portfolio? Yeah. I mean, going back to what I said earlier, the business is really today about public trust at the highest level, and you've got to have that. And I think the short answer is yes. We've changed a lot. We thought we were a very good company, on safety and reliability pre Marshall, Michigan. But obviously, when that kind of incident happens, you look at yourself and and you think about ways that that you can improve. And I think because of that, we've really taken the approach of embedding a safety focus into the culture of the company. And maybe just a few examples of the things we talk about with our own people. We don't want to just meet the regulatory standards. We want to try and exceed it. We put a lot of capital into maintenance and integrity of the pipelines. And the way we look at it Jeremy is, it's almost like a set aside. We set aside the amount of capital we need for maintenance and integrity as the first priority, not just because we need to be safe, but because it protects the revenue line. And I think the numbers as I recall in the last three years are about $4,000,000,000 on integrity and maintenance systems. We tend to really go after the latest and new technology and we try to be the first in the queue for using the latest and integrity management tools. Organizationally, we've got a really strong structure. We've got business unit accountabilities, we try to centralize safety and reliability to make sure that we're consistent across the board at the company. We do set integrity management targets and we track that process pretty close. So for example, we run the most in line tools in the industry. I think we did something like 26,000 miles since 2000 or in 2019, rather. And that's about two times more than the industry average on a mile basis. And then of course, and things you don't normally hear about, but we had two twenty five emergency response drills in 2019 and of course there were involving, local local authorities and so forth. So anyway, just a few examples to illustrate how we've come along on this and we're very proud of of the culture we've embedded in the company. Got it. That's, very helpful. And then maybe kind of pivoting to the ask the social side here, a couple questions on this side. Sure. With the Canadian government's proposed implementation of the UN declaration on the rights of indigenous people, UN DRIP, in recent court decisions supporting rights of tribal nations in The US, how does everybody think about approach to indigenous engagement at this point? How is that gonna change over time? Well, guess, Jeremy, very similar to the last discussion we had on your question. I think we've suffice to say, we've learned a heck of a lot over the last decade or so. The most important thing I can think of though is, our people interact with communities and in particular in this case indigenous people, as part of their job. What we found is making sure that training them, in terms of appreciating the culture of individual indigenous communities, understanding for example, their connection to the water and land. I would say that's probably the most important learning. The other one is we've changed our approach here rather than really focusing on engagement just when we are going to construct something, we now take what we call the life cycle approach. So we engage very early. We do that often, but we stick with it through the life of the project. The other thing I would say here that's important is we seek advice from them on the best way to manage the environment. If you think about it, the people that are closest to the community and indigenous expertise on the environment, I think really pays off for us. And before we move on with a project, we make sure that we take their advice on how to make it better. And that not only improves the safety of the project, but it helps gain the indigenous, trust through this process. And then finally, I would say, and this is the sequence of this is really important. Once you've built up the trust through what I just described, then we can move to what we call the economic partnership phase. You don't wanna talk about that at the beginning until you've got some trust and they can rely on what what you're saying. Partnerships, well, first of all, and jobs would be table stakes. That used to be sort of what everybody was looking for, but that's sort of a given today. What's more impactful, we find is really incorporating indigenous communities in our supply chain and a huge success story. Again, you don't hear much about this, but in Canada on Line three for example, we had $450,000,000 of economic benefits available through businesses that indigenous groups, had built up and we helped them, you know, train and as well develop their own expertise. That's been a huge success story. We've got more of that to come by the way on Line three on The U. S. Portion in Minnesota. And of course, we have a very good partnership there with the Fond du Lac tribe. So all I would say is to end off on this one, really take the time and effort and make sure you've got the skill sets that can be successful today with indigenous communities. That's great to hear. Thanks. Maybe taking kind of a step back on the social side and events this year have highlighted the challenges of systematic racism and inequality. What does this mean to Enbridge and how are you responding? Yes, I know another important part of the S in ESG I guess, you know to this point, this has been very interesting here at our company. We've had a, I'll call it a fairly robust diversity and inclusion policy And the way we looked at the policy, which I think is was prudent is you look at all ethnic and racial, minorities. So what does that mean? Including gender, it's indigenous, it's people of color, it's LGBTQ and and other groups. I think what we've learned in the last little while is that this is different, you know, going to what you're referring to as as of late. Because I think our conclusion has been that although all, minorities, ethnic and otherwise and and racial are covered under our umbrella, we think now that the black community has been more affected by some of the issues around racism, poverty, incarceration rates. So we are treating this differently today. So we've we've had to come to the conclusion, let's say, at 50,000 feet on some of the things we need to do. And then we'll be coming out later this year with some more specific targets. So for example, first of all, honest with where you are inside and outside the company. And that goes to not just our employee base or our leadership, but also to the board and we engage our board, on these kinds of issues. We talk to the black employees within the company to really make sure we understand, how they're seeing things and get some good insights in that. And we're just, finishing up that process now. I've always believed that training, as I mentioned, with the indigenous question you had, training around unconscious bias is going to be very key to this. I think we can all learn, about unconscious bias, in a in a more in-depth way. We've got to use our leadership voice to speak out and I think most importantly and perhaps most importantly is you really got to rethink recruitment, succession planning and how you advance people in the company and make sure that you're taking into account the diversity of the population, but also the diversity of your workforce. So we're going to lay out some more details on this approach later in the year. And as I said, we'll be setting some goals and some targets on it. That's great to hear. We'll certainly be waiting for that. And maybe just turning to the governance part G, if you will, a topic that's near and dear to our heart in our writing that we've been talking about for a bit. Unlike MLPs in The US that, for the most part, do not elect their boards and have demonstrated the value destruction that can occur with misaligned incentives, E and B has a long history of good governance overall with a focus on climate change and corporate social responsibility as we've talked about here. How do management and the board integrate environmental and social factors into management and, and strategy overall? And how has this changed over time? Okay. Well, first of all, thanks for mentioning, our track record here. We are proud of it. We focus a lot of time on it with the board. And on that I think, you know, management engagement with the board to make sure we're aligned with all of our stakeholders is really important. And I think years ago, perhaps Boards and management were focused on shareholder value. But I think there's a broader understanding now that it involves a whole bunch of other stakeholders to be successful. And that's where our priorities lie. So we talk about things like share ownership and how we need to align there with our shareholders, independence of directors, think we have a good record on and perhaps most importantly, the right skills and capabilities. So the board spends a lot of time on that. We've got, which I find very useful and helpful. We've got an extensive Investor Relations program, as you know, Jeremy, and you deal with our IR people all the time, but we use that feedback. The biggest thing I like to do when we're on a discussion with an investor or potential investor is get feedback from them. So we work that into our thinking and we review that with the Board. We work with, particular groups like, Canadian Coalition for Good Governance. So I think we're we're doing a lot to make sure, all of us are engaged in in what the future is going to look like. On climate change specifically, which I think was part of your question, we've had a dedicated board committee on this for quite a while. So our corporate social responsibility committee is really kind of that that top level to ensure that our climate change risks are being addressed. I think you asked how you go about, you know, making sure you've got all of this, you know, in focus. One of the best tools that I find that we use annually with the board is our enterprise risk matrix. Basically, we try to identify all the risks in every part of the business from the bottom up. And then we bubble that up to the board and they review it, they give us input and we finalize it. And basically, it identifies all of the current and emerging risks. And of course, ESG generally has been on that list for quite a while now at Enbridge. We rank the risks and we prioritize, but the most important thing is we have to demonstrate the mitigation plans. So it's fine to address a risk and outline what you think the impact might be, but okay, how are you going to mitigate and do you have the plans in place to do that. So, that's a pretty, important tool. I think maybe just a comment on the environment and safety, aspects of what we do is there's a clear link to compensation. And this is grounded in our pay for performance philosophy, as you know. And I think the sustainability and execution of the strategy is linked to comps. So for us, at the executive level, more than 80% of our compensation is tied to company performance to go to the G part of this. And I think we're confident in, our strong standing. We benchmark well to the peers. And again, we want to stand out there, but we also want to move to be, looked at as a global competitor in comparison to, you know, the rest of the group that is good at this. Got it. That makes sense. And then maybe building on that a bit more, what targets does management and board have for Enbridge share ownership and how has compensation been designed to ensure the continued alignment of, which stakeholders here? Yeah. Well, maybe I'll talk that from two different perspectives. If you just look at it for from share ownership, for myself, it's six times For our executives, it's it's three times annual comp, which, is obviously substantial. And in in many cases, example, for myself, I'm well above that. So we've always believed in a big share ownership requirement. And it's almost like we don't need the official requirement because we all feel as management that we have a great value proposition here. If you look at especially where we are today in terms of our valuation, we continue to be big buyers of the shares for a whole bunch of reasons, not just ESG, but, related to the growth and prosperity that we see going forward and the resiliency of our cash flows that we've demonstrated I think pretty well this year. On the safety and environment side though, so each of the businesses will have roughly 40% of their annual cash bonus rewards tied to specific targets on that. And we go through and set those objectives at the beginning of the year and we review them at the end to see how we did. So that is also benchmarked to peers and global leaders as well. So we think we have a good compensation related to those two areas, governance process and relative to other companies and others. Got it. That's great. Well, I think that just about brings us to the end of our conversation here. Just wanted to see if there's any kind of final remarks or thoughts that you had. And again, want to say thank you very much for taking the time to discuss these important topics with us this afternoon. Well, maybe the big message out of all of it is that, as I said at the outset when you asked your first question, the ESG moniker or that coined acronym has been around for a little while here. But as I said, the entire part of what we talked about today is really evidence I think we've been at this for a long time. And it's been embedded in our operations, how we approach our stakeholders, which is very important today in terms of executing, either operationally or new projects. And then of course, strategically, how we set up the asset mix to really be driven off what we see in the fundamentals. And at the end of the day, that's the fact set we have to use to choose where we deploy capital. That's obviously very scarce today and we need to be very careful with that. And just finally, thanks for having us know we like to tell this story. We think you have a great story but there's so many other parts of the business that I'm sure we could spend a lot of time on as well. But thanks for giving us the opportunity to do this. Great. Well, thank you again and everyone have a good day. Thanks for joining us. Thank you.