Investing Sustainably At Ontario’s Teachers Investment Plan Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Investing Sustainably At Ontario’s Teachers Investment Plan Case Solution

Investment Alternatives

The Ontario’s Teachers Pension Plan had two investment options,i.e.investing in En-bridge or the Canadian Natural Resources Limited. En-bridge was a pipeline company, which used to transport oil across North America. The company had a wide range of expansion projects, in responses to rising the demand for pipelines as means of oil transportation. Though the company offered attractive dividend yield, one of its projects i.e. “Northern Gateway Pipeline “faced severe opposition because of its weak environmental performance.

The other investment opportunity included Canadian Natural Resources Limited, which was an oil exploration and production company. The company was highly exposed to volatile WCS oil pricing, as a result of which its shares were trading at discounted price despite the company held quality assets. Moreover, the company had to face uncertain and one-time expenses related to the environmental and social problems.

Question 1

OTPP should invest in the oil and gas industry, as the industry offers a huge profit potential due to different expansion projects undertaken by the extraction and the pipeline companies. Though the companies, like: En-bridge, were weak at their environmental performance and the company was responsible for a series of oil spillovers;despite of which the company invested in improving its pipeline condition to reduce the spillovers, which lessens the impact of these oil production and transportation companies over the environment. Being a responsible investor, Ontario’s Teachers Pension Plan should invest in the oil and gas sector, but it should follow the principles for responsible investment plans. It should properly disclose the ESG issues incorporate during the investment analysis and there should be a requirement from the oil and gas companies to prepare a full disclosure of their concerns regarding the ESG issues.

Question 2

The financial performance of oil and gas companies is completely dependent on the adherence of these companies towards the sustainability standards and regards to ESG issues. For instance, the CNQ was charged with $1.5 billion dollars, as two workers were killed in a construction incident. Moreover, the company started leaking the spillovers into the nearby forests and the ponds, which affected different wildlife in the forests, requiring the company to cover the cost of 40 million Canadian dollars for cleaning up the spillover. These situation are an example that financial performance is aligned with the organization’s sustainability performance. Even in the long term; the oil and gas companies have to abide with the sustainability standards in order to remain competitive and profitable in the long run.

Question 3

Cheng’s valuation of the Canadian Natural Resource shows that the intrinsic value per share is $51.87 (See Appendix 2), while the company’s stock is trading at $46, which shows that the stock is undervalued and the investors should buy the company’s stock. The company’s 6b pipeline rupture at Michigan had one of the largest spillovers, whereby the oil flows remained for almost 17 hours. The river clean-up costs amounted to a total of $1 billion dollars, and still the cleaning process is continued. These costs if added to the company’s valuation,would-decrease the free cash flows generated by the company, which would ultimately decrease the equity’s value and the share value per share

Question 4&

Appendix 3 shows the addition of 1 billion cleanup costs in the Undervaluation and after every 10 years;the incremental cost would reduce the company’s profitability and earnings per share by 30-40%. The clear impact of 1 billion in the CAPEX can be seen through the valuation, as the company’s free cash flows and the enterprise value have decreased to a great level, and the intrinsic value of the company’s share has resulted in 11.97 per share. This shows that the ESG issues have the potential to destroy a company, as ENB has been currently providing a dividend yield of 70% percent approximately.If these costs are incorporated into the valuation; the investors would no more interested in purchasing the company’s shares.

Question 6

Rather than bearing the $1 billion costs for cleanup of its spillovers; the company should invest 1 billion in applying the safety measures to get the Northern Gateway Project accepted. If the company invests this amount in improving its safety measure, the company’s share value would increase by $4 as calculated by Cheng. It is because the investment in the safety measures would increase the likelihood of the Northern Gateway Project to be accepted by the regulatory authorities, i.e. by 70%. The expansion project would create the investors’ demands for the company’s stocks, which would increase its share value by $4.

Question 7

The external rating reports enables the investors to determine the environmental, social and governmental costs faced by the oil and gas companies, depending upon the ratings assigned to different areas among the ESG issues. For instance, out of 100, ENB is rated 25, which shows that the company does not have a detailed and validated environmental policy, which means that the company does not adhere to ESG standards. Such non-compliance could lead towards high scrutiny and regulation costs by the government authorities, ultimately destroying the company’s profitability and value per share...........................

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