Tamarack Valley Energy ("TVECN") set several firsts for the Canadian sustainability-linked bond ("SLB") market today. Not only were they the first Canadian oil and gas exploration issuer to enter the SLB market, but they were also the first Canadian high yield company to tie financing costs to their ESG targets.
The instrument incorporated two key targets for the company, which, if missed, would result in an increase in coupon:
- 39% reduction in carbon intensity by 2025 (measured as Scope 1 & 2 emissions per sales in barrel oil equivalent)
- 6% representation of Indigenous people in the company's workforce by 2025 (from a 2020 base of 3.5%)
"It is encouraging to see that Tamarack Valley ties its financing to their carbon intensity target, but they will need to execute on operational efficiencies." – Aaron Young, Associate Portfolio Manager, Credit Research (as quoted in the Bloomberg article, Tamarack Sells First SLB From a North American Oil Producer)
This is especially important given the company's uptick in carbon intensity between 2019 and 2020 (due to acquisitions, new Scope 1 methodology, and lower output from the pandemic). In addition, Scope 3 for the Oil and Gas producers remains a huge hurdle, representing a significant amount of the sector's overall carbon footprint.
TVECN's target for Indigenous workforce representation is a positive development and a welcome KPI that we have discussed with other issuers in the Energy and Utility sectors. The 6% target by 2025 is ambitious versus comparable targets set by larger companies.
Well done, TVECN… who's next?
RPIA is encouraged to see the development in TVECN tying their financing to impact a broader demographic, and we hope debt issuers continue to expand their diversity disclosures in 2022. We believe that the DE&I focus also needs to include statistics and targets in areas such as ethnicity, disability, and (especially important to Canada) the impact on Indigenous groups. We also think there is an opportunity to expand these measurements beyond just workforce representation to include Indigenous participation across seniority levels, pay gap analysis, and quantifying mobility for Indigenous peoples within the organization.
Finally, we note that part of the proceeds of the transaction are being used to pay down the company's existing sustainability-linked-loan ("SLL") facility. We think this use of proceeds may signal a trend in Canada as more companies rotate some of their capital stack from SLLs to SLBs.