The Economist called the strip mining of oil sands in the forests of Alberta, Canada “One big scar on the landscape” and “one of the bleakest scenes of man-made destruction”. According to Global Forest Watch Canada (GFWC), Canada has surpassed Brazil as the new “global leader” on deforestation.

After Venezuela and Saudi-Arabia, Canada has the third largest oil reserves in the world with 97% of these reserves located in oil sands. Oil sands are a natural mixture of sand, water, clay and bitumen. The oil sands industry plays an important role in Canada’s economy, in terms of job creation and growing economic activity. However, this growth has come at a cost to society.

Oil sands have a significantly higher carbon intensity than conventional oil. As a consequence, the industry already accounts for 8.7% of Canada’s greenhouse gas emissions and this number is increasing rapidly. But that is not all. The industry is also facing other serious ESG challenges, such as those relating to land disturbances, environmental damage, water usage and impact on local communities.

What struck me the most was that the impact of the industry on the environment and the health of communities seems much larger than anticipated. So far, only a small percentage of the disturbed land has been reclaimed. The whole process can take decades. A conifer tree, for example, needs approximately 80 years to grow to maturity. Moreover, a large portion of the disturbed area are wetlands, which are complex ecosystems and practically impossible to reconstruct.

The health impacts are also a serious concern amongst local (indigenous) communities. They believe that their health is being impacted by air and water contamination from the oil sands industry effecting their food chain and feel that authorities are not putting enough effort in investigating reported adverse health impacts.

The pace of improvement in the ESG space has been slow, as companies are not incentivised enough. Although oil sands producers have taken some steps to improve their ESG credentials – for example, greenhouse gas emissions were reduced by 28% (on a per barrel base) between 1990 and 2012 and 80-95% of the water they use is now being recycled. But much more needs to be done to successfully address the negative environmental and health impacts, especially given that the industry is rapidly growing. Canada’s oil sands output is likely to double by 2020, according to the Canadian Association of Petroleum Producers (CAPP).

On a positive note, Canada's Oil Sands Innovation Alliance (COSIA) is committed to steering developments in the right direction.  They have already taken some steps to improve technology and knowledge sharing in the industry. We, of course, welcome these steps, but also believe more investment should be directed towards energy efficiency and renewables. The government and regulators too have a responsibility in this, as they should ensure that enforceable regulations are in place. We, as investors have an important role to play as well and ING IM will continue to engage with companies in the oil sands industry on improving ESG aspects.