INVESTOR EXPECTATIONS

for Improving Environmental and Social Performance in Canadian Oil Sands Development
October 22, 2012

Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands Development
October 22, 2012 We are a group of 49 investors, representing $2 trillion in assets under management, with holdings in companies that operate in Canadas oil sands. We recognize the economic significance of the resource, but are concerned that the current approach to development, particularly the management of the environmental and social impacts, threatens the long-term viability of the oil sands as an investment. Controversy about the environmental and social impacts of oil sands development is escalating and recent developments raise concern about the associated financial risks. These developments include the US delay of the Keystone XL pipeline, Canadas delay of the Northern Gateway pipeline and the reversal of the Line 9 pipeline, the highcarbon classification of oil-sands-derived fuel in Californias Low Carbon Fuel Standard and the EU Fuel Quality Directive, the announced goals of several major companies to reduce their use of oil-sands-derived fuel, and lawsuits by Canadian First Nations. This controversy creates unwelcome uncertainty for investors and could potentially limit the growth of oil sands development, according to the International Energy Agency.1 While we recognize and appreciate the leadership that a number of companies in the sector have demonstrated, the collective nature of the risks facing the industry requires collective action. As a result, we were encouraged by the announcement earlier this year of the formation of Canadas Oil Sands Innovation Alliance (COSIA). We are supportive of COSIAs goal to accelerate the pace and scope of environmental innovation to put the oil sands on a more sustainable path, as well as its focus on transparency and accountability.2 We believe that COSIAs effectiveness will be greatly enhanced by setting specific goals for improving environmental and social performance along with detailed plans for achieving them. We also believe that these goals will have greater legitimacy if stakeholder input is incorporated throughout the process. Below, we outline the performance improvements we believe are needed in the areas we see as posing the most material risks: greenhouse gas emissions, water withdrawals and freshwater contamination, land disturbance and reclamation, and responsibilities to First Nations, Mtis, and Inuit communities. We believe these performance improvements should be prioritized ahead of unmitigated growth ambitions for oil sands development.

We believe that COSIAs effectiveness will be greatly enhanced by setting specific goals for improving environmental and social performance along with detailed plans for achieving them.

1 2

International Energy Agency, World Energy Outlook 2011 Canadas Oil Sands Innovation Alliance (COSIA), Our Charter

2 | Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands Development

Greenhouse Gas Emissions

Oil sands development is the fastest growing industrial source of GHG emissions in Canada, projected to approximately double by 2020.6

Oil sands production is more greenhouse gas (GHG) intensive than conventional oil (average oil refined in the U.S.) and fuels derived from oil sands are more GHG intensive than fuels derived from conventional oil on a lifecycle basis.3 The oil sands industry made considerable progress in reducing its GHG intensity from 1990 to 2004, but the trend flattened from 2004 to 2009 and has reversed since 2010,4 due to the relative increase of in situ production, which is 2.5 times more GHG intensive than mining production.5 This emissions trend is concerning because the market for oil sands-derived fuel may be limited where policies are being adopted to reduce the GHG intensity of fuel, such as in California and the European Union. In addition, oil sands development is the fastest growing industrial source of GHG emissions in Canada, projected to approximately double by 2020.6 This emissions growth presents a considerable challenge to Canada in meeting its national GHG emissions reduction targets under the Copenhagen Accord. Existing measures announced by federal and provincial governments will reduce GHG emissions by 65 Mt, which is only one quarter of the 243 Mt needed by 2020.7 We are encouraged that the Alberta government has set GHG emissions reduction targets and implemented a plan to achieve them through the Specified Gas Emitters Regulation (SGER), carbon capture and storage (CCS) initiatives, and renewable energy incentives. However, these efforts have limitations and Alberta appears unlikely to achieve its 2020 GHG emissions reduction target if oil sands production grows as projected.8 Although the SGER sets a GHG intensity reduction target and puts a price on emissions, the price is low enough that compliance by oil sands operations occurs primarily through payments into the Climate Change and Emissions Management Fund (CCEMF) and purchases of offset credits instead of actual reductions in GHG intensity. In addition, Albertas GHG emissions reduction plan relies heavily on CCS, which is not yet technologically or economically viable for oil sands projects. Albertas emissions reduction targets will also likely need to be more ambitious for Canada to achieve its national targets agreed to under the Copenhagen Accord.

3 4 5 6 7 8

U.S. Department of State, Final Environmental Impact Statement for the Keystone XL Project, August 26, 2011 Canadian Association Petroleum Producers, 2010 Report: How We Are Doing Pembina Institute, Drilling Deeper: The In Situ Oilsands Report Card, March 2010 Environment Canada, Canadas Emissions Trends, July 2011 Op. Cit. Environment Canada Pembina Institute, responsible action? an assessment of albertas greenhouse gas policies, December 2011

GHG

3 | Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands Development

WE REQUEST THAT OIL SANDS COMPANIES:

Q Set goals and timelines for reducing the GHG intensity of oil sands production to at least that of conventional oil production, including complying with the SGER entirely by reducing actual operational GHG intensity, rather than through payments into the CCEMF or purchases of offset credits; Q Provide disclosure on research and development efforts to reduce GHG intensity, including estimates on the likelihood of success relative to designated targets and timelines; Q Invest in renewable energy; Q Support the Alberta government in strengthening its efforts, including setting a carbon price sufficient to drive economy-wide emissions reductions, increasing investment in research and development for technologies that have the promise to significantly reduce emissions, and increasing investment in renewable energy; and Q Support the Canadian government in implementing a national energy strategy that includes a carbon price capable of achieving Canadas emissions reduction targets under the Copenhagen Accord.

Water Withdrawals and Freshwater Contamination

There remain a number of unresolved concerns around the impacts of the oil sands on fresh water, particularly the sustainability of surface and groundwater withdrawals as well as the potential release of contaminants into aquatic environments from oil sands operations. Water withdrawals for mining and in situ production are projected to increase substantially as new oil sands projects come online,9 and tailings ponds from mining production are projected to grow 30% between 2010 and 2020, from 843 million cubic meters (m3) to 1.1 billion m3. A recent assessment by the Water Monitoring Data Review Committee, convened by the Alberta government, concluded that, despite claims to the contrary, [polycyclic aromatic compounds] and trace metals are being introduced into the environment by oil sands operations.10 Even though most growth in oil sands development will come from in situ production, which uses primarily fresh and saline groundwater and does not create tailings ponds, the effects on fresh groundwater are only beginning to be assessed.11

A recent assessment by the Water Monitoring Data Review Committee, convened by the Alberta government, concluded that, despite claims to the contrary, [polycyclic aromatic compounds] and trace metals are being introduced into the environment by oil sands operations. 10

9 10 11

Canadian Association of Petroleum Producers, Water Use in Canadas Oil Sands, July 2011 Water Monitoring Data Review Committee, Evaluation of Four Reports on Contamination of the Athabasca River System by Oil Sands Operations, March 7, 2011 Government of Alberta, Albertas Oil Sands Provincial Action, December 17, 2010

WATER

4 | Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands Development

We are concerned that the current voluntary approach lacks enforcement mechanisms to ensure that the framework is actually followed. We also note that there is no consensus on what constitutes an Ecosystem Base Flow (EBF),12 a critical gap.

The Royal Society of Canada concluded that water withdrawals for mining production do not threaten the viability of the Athabasca River if the rivers water management framework is fully implemented and enforced. This is encouraging. However, we are concerned that the current voluntary approach lacks enforcement mechanisms to ensure that the framework is actually followed. We also note that there is no consensus on what constitutes an Ecosystem Base Flow (EBF),12 a critical gap. In addition, Directive 74 of the Energy Resources Conservation Board (ERCB) requires tailings management,13 but full compliance is not mandatory, only two of nine mining projects have plans that fully meet its requirements, and the annual performance and compliance reports for many of the companies are not available online.14 We are encouraged that the Alberta government is addressing concerns about surface and groundwater withdrawals and freshwater contamination by creating a world-class environmental monitoring system15 and the proposed Lower Athabasca Regional Plan (LARP).16 However, we are skeptical about whether these concerns can be adequately resolved while oil sands development continues on its present trajectory.

WE REQUEST THAT OIL SANDS COMPANIES:

Q Set goals and timelines for minimizing surface and groundwater withdrawals and maximizing water recycling for mining and in situ projects; Q Provide disclosure on research and development efforts to minimize water withdrawals and maximize water recycling, including estimates on the likelihood of success relative to the designated goals and timelines; Q Limit water withdrawals from the Athabasca River to ensure it maintains an Ecosystem Base Flow and limit groundwater withdrawals to a sustainable yield, both determined by an independent, long-term, and science-based assessment of habitat and water quantity and surface-groundwater interactions; Q Submit and follow tailings management plans, performance, and compliance reports in full accordance with Directive 74; and Q Support the Alberta government in fully implementing and enforcing the water management framework, ensuring that the new monitoring system incorporates all the recommendations of the Alberta Environment Monitoring Panel, and ensuring that the LARP fully addresses the cumulative impacts associated with surface and groundwater withdrawals and water contamination from mining and in situ production.

12 13 14 15 16

Op. cit. Pembina Institute Energy Resources Conservation Board, Directive 047, February 3, 2009 Op. cit. Pembina Institute Alberta Environment Reporting Panel, A World Class Environmental Monitoring, Evaluation and Reporting System for Alberta, June 2011 Alberta Environment, Draft Lower Athabasca Regional Plan

WATER

5 | Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands Development

Land Disturbance and Reclamation

Disclosure by oil sands companies of reclamation costs has been poor.20 Unaccounted liabilities for oil sands mines were up to $15 billion in 2008 and could reach up to $33 billion by 2025.21

The Alberta Environmental Protection and Enhancement Act requires land reclamation for all oil sands projects,17 but the pace and scale of land disturbance raises substantial concerns about how compliance will be achieved. The total active footprint of oil sands mining increased 8% from 2009 to 2010, from 67,613 hectares to 71,497 hectares, while the area under reclamation only increased 0.3% to 7,542 hectares. Only 104 hectares0.13% of the total footprinthave been awarded reclamation certification and the active footprint is expected to increase as new mining projects become operational. The number of active in situ wells increased 9% from 2009 to 2010, from 9,405 to 10,229 wells. While the number of wells awarded reclamation certification tripled to 115, this was primarily an indication of increased drilling activity because exploration wells are often drilled and abandoned in the same season.18 The Auditor General has expressed concern that the Alberta government is not obtaining sufficient financial security for reclamation liability for mining projects, leaving Albertans and potentially investors vulnerable to major financial risks.19 In particular, disclosure by oil sands companies of reclamation costs has been poor.20 Unaccounted liabilities for oil sands mines were up to $15 billion in 2008 and could reach up to $33 billion by 2025.21 The rate of reclamation has not kept pace with the rate of land disturbance and it is unlikely that this trend will reverse as oil sands production grows. Additionally, while the land disturbance for in situ projects is more diffuse than for mining projects, the scale of the impact may be similar if the landscape fragmentation caused by ancillary developments, such as natural gas pipelines, is taken into account. The impacts of the land disturbance for oil sands development on biodiversity and ecosystem function are considerable, but have not been rigorously assessed.22

17 18 19 20 21 22

Royal Society of Canada, Environmental and Health Impacts of Canadas Oil Sands Industry, December, 2010 Op. Cit. Canadian Association of Petroleum Producers Op. Cit. Royal Society of Canada Pembina Institute and Ceres, Full Disclosure, June 9, 2011 Op Cit. Pembina Institute and Ceres Rooney, R.C., S.E. Bayley, and D.W. Schindler, Oil sands mining and reclamation cause massive loss of peatland and stored carbon, March 12, 2012

LAND

6 | Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands Development

WE REQUEST THAT OIL SANDS COMPANIES:

Q Set goals and timelines for reducing the rate of land disturbance from oil sands development and increasing the rate of land reclamation relative to the rate of land disturbance; Q Provide disclosure of oil sands reclamation liabilities, disaggregated from total liabilities, and of research and development efforts to reduce the rate of land disturbance and increase the rate of land reclamation, including estimates on the likelihood of success relative to the designated goals and timelines; Q Establish wetlands and biodiversity offsets for the remaining land disturbance that does occur and that can not be mitigated through other measures; and Q Support the Alberta government in limiting the maximum amount of land available for oil sands development at any time and obtaining sufficient financial security for reclamation from oil sands companies.

Responsibilities to First Nations

The number of legal challenges by First Nations, Mtis, and Inuit communities to oil sands development is growing. The risk of a court ruling in their favor is increasing and could lead to the suspension of an oil sands project.23

Increasingly, First Nations, Mtis, and Inuit communities are expressing concern about the impacts of oil sands development on their health and livelihoods, and asserting that these impacts infringe on their treaty rights. First Nationtreaties with the Canadian government date back to 1876 and are recognized by the Canadian Constitution, which requires national and provincial governments to consult and accommodate the rights of First Nations. In 2008, 44 First Nations passed a resolution for a moratorium on new oil sands projects until comprehensive land management has been done. In 2010, Assembly of First Nations Chief Shawn Atleo elevated their concerns about oil sands development to the national level. Additionally, the number of legal challenges by First Nations, Mtis, and Inuit communities to oil sands development is growing. The risk of a court ruling in their favor is increasing and could lead to the suspension of an oil sands project.23

23

Ceres, Canadas Oil Sands Shrinking Window of Opportunity, May 2010

FIRST NATIONS

7 | Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands Development

Considering the Water Monitoring Data Review Committees recent conclusion that oil sands development is resulting in environmental contamination, it is critical to immediately investigate and address any associated impacts to the health and livelihoods of First Nations, Mtis, and Inuit communities. The Alberta government has taken an important step by initiating a community health study in Fort Chipewyan, where concern has been raised that elevated rates of cancer may be tied to oil sands development.24 However, this is long overdue and will take years before there are conclusive results.

WE REQUEST THAT OIL SANDS COMPANIES:

Q Fully incorporate the principle of Free, Prior, and Informed Consent in their relations with First Nations, Metis, Inuit, and other communities affected by oil sands operations; and Q Support the Alberta government in fully incorporating the principle of Free, Prior, and Informed Consent in all its relations with First Nations and immediately address any impacts of oil sands development on their health and livelihoods.

A Commitment to Constructive, Solutions-Focused Engagement

We have an economic stake in the long-term viability of the resource, and are committed to constructive engagement to move the industry toward a more sustainable long-term trajectory.

As investors in companies that operate in Canadas oil sands, we have an economic stake in the long-term viability of the resource, and are committed to constructive engagement to move the industry toward a more sustainable long-term trajectory. We look forward to a dialogue with COSIA and with the companies in our portfolios on how to best accelerate the innovations and regulatory improvements that will be needed to address these substantial risks. The oil sands industry is now in a position to demonstrate its commitment to addressing these risks by setting specific goals for improving environmental and social performance along with detailed plans for achieving them. As these goals are being determined, we will appreciate consideration of the requests we have laid out above.

24

Government of Alberta Intergovernmental, International and Aboriginal Relations, Working with Fort Chipewyan, September 21, 2011

COmmITmENT

8 | Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands Development

Signatories
Erik Jan Stork Senior Sustainability Specialist APG Asset management Francois Meloche Extrafinancial Risk Manager Batirente Steven Heim Managing Director Boston Common Asset management, LLC Manchan Sonachansingh Treasurer British Columbia Teachers Federation (BCTF) Salary Indemnity Plan Brian Rice Portfolio Manager CalSTRS Paul Bugala Senior Sustainability Analyst, Extractive Industries Calvert Investment management Les Steel Executive Director of Operations Canadian Labour Congress (CLC) Staff Pension Plan Julie Tanner Assistant Director Socially Responsible Investing Christian Brothers Investment Services Stephen Viederman Chair, Finance Committee Christopher Reynolds Foundation Ellen Friedman Executive Director Compton Foundation Thomas H. Kjrgaard Head of SRI and Corporate Governance Danske Bank Nam Abou-Jaoud CEO & Chairman of the Executive Committee Dexia Asset management Valerie Heinonen, o.s.u. Director, Shareholder Advocacy Dominican Sisters of Hope Kevin Leonard Executive Director EJLB Foundation Reinhilde Weidacher Head of Research Ethix SRI Advisors Dr. Dominique Biedermann Executive Director Ethos Foundation, Switzerland Karina Litvack Head of Governance & Sustainable Investment F&C Asset management Ltd. Steven J. Schueth President First Affirmative Financial Network, LLC Anders Sundstrm CEO Folksam Mario Tremblay VP Public and Corporate Affairs Fonds de Solidarit FTQ Jeffery W. Perkins Executive Director Friends Fiduciary Corporation Barbara Heisler Executive Director Funding Exchange Kristina Curtis Senior Vice President Green Century Capital management Helen Ingles IHM, CFO IHm Sisters of monroe, michigan Nathan Gilbert Executive Director Laidlaw Foundation Ian Greenwood Chair Local Authority Pension Fund Forum (LAPFF) R. Dean Kenderdine Executive Director maryland State Retirement and Pension System Jenny Russell Executive Director merck Family Fund Pat Zerega Director of Shareholder Advocacy mercy Investment Services, Inc. Luan Steinhilber Director of Shareholder Advocacy miller/Howard Investments, Inc. Sasja Beslik Head of Responsible Investments and VD Nordea Funds Sweden Nordea Gary A. Hawton President OceanRock Investments (meritas SRI Funds) Christine Gebel Treasurer Our Ladys missionaries Julie Fox Gorte Senior Vice President for Sustainable Investing Pax World management LLC Matt Crossman Ethical Research & Corporate Engagement Rathbone Greenbank Investments Erik Breen Head of Responsible Investing Robeco Frank Curtiss Head of Corporate Governance RPmI Railpen Investments Bill Boothman Director of Finance Sisters of St Ann Hans Aasns CEO Storebrand Asset management Marianne Nilsson Acting CEO Swedbank Robur Fonder AB John F. Swift President Swift Foundation Thomas E. Ellington, II Shareholder Advocacy & SRI Research The Sustainability Group of Loring, Wolcott & Coolidge Sister Patricia A. Daly, OP Executive Director Tri-State Coalition for Responsible Investment Jonas Kron, Esq. Vice-President, Director of Shareholder Advocacy & Corporate Engagement Trillium Asset management, LLC Erik Mathiesen Treasurer United Church of Canada Valerie Heinonen, o.s.u. Director, Shareholder Advocacy Ursuline Sisters of Tildonk David Russell Co Head of Responsible Investment USS Dermot Foley Manager ESG Analysis Vancity Investment management Timothy Smith SVP, Director of ESG Shareowner Engagement Walden Asset management

ABOUT CERES
CERES is an advocate for sustainability leadership. Ceres mobilizes a powerful coalition of investors, companies and public interest groups to accelerate and expand the adoption of sustainable business practices and solutions to build a healthy global economy. Ceres also directs the Investor Network on Climate Risk (INCR), a network of 100 institutional investors with collective assets totaling more than $10 trillion.

FOR MORE INFORMATION, CONTACT:

Ryan Salmon Manager, Oil & Gas Program, Ceres salmon@ceres.org Andrew Logan Director, Oil & Gas Program, Ceres logan@ceres.org

Ceres 99 Chauncy Street Boston, MA 02111 T: 617-247-0700 F: 617-267-5400 www.ceres.org 2012 Ceres