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Posted: April 4th, 2019
What adjustments, if any, should OTPP make to its base valuation model
Each person should hand in a one-page summary of their analysis of the case. What you turn in should summarize your conclusions and convince me that you have done some analysis, but in just one page maximum. Your analysis should touch on the following questions:
1. Should OTPP even be investing in oil sands if they want to be a responsible investor?
2. What is the fiduciary duty of the pension fund?
3. The following two questions are things that I want you to think about generally, and specifically as you evaluate the two possible investments in this case: i) What are the potential barriers to implementing the PRI? ii) How can ESG information be incorporated into financial analysis?
4. Evaluation of Enbridge as an investment of OTPP: Assume that absent any ESG concerns, investment in Enbridge is favorable.
a) What would be the financial impact if Enbridge had to pay for the entire Kalamazoo cleanup?
b) What is the impact of a delayed or denied project to Enbridge?
c) Assume Enbridge can invest $1 billion in additional safety measures for its Northern Gateway project.
Cheng believes this will increase the likelihood of regulatory approval by 70%. How much should Cheng add to his valuation? d) What adjustments, if any, should OTPP make to its base valuation model of Enbridge? Think about recurring spills and the value of the Northern Gateway project.
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One-Page Summary:
OTPP should reconsider investing in oil sands if it aims to be a responsible investor. Oil sands extraction is associated with significant environmental concerns, including high greenhouse gas emissions and the destruction of ecosystems. As responsible investors, OTPP should prioritize sustainable and low-carbon investments to align with environmental objectives.
The fiduciary duty of the pension fund is to act in the best interests of its beneficiaries. This includes managing investments prudently, maximizing returns within acceptable risk levels, and considering long-term sustainability. OTPP must balance financial returns with responsible investment practices, taking into account environmental, social, and governance (ESG) factors.
i) Potential barriers to implementing the Principles for Responsible Investment (PRI) include limited data availability, difficulty in quantifying ESG factors’ financial impacts, and conflicting priorities between financial returns and sustainability goals. ii) ESG information can be incorporated into financial analysis by integrating it into risk assessment, valuation models, and decision-making frameworks. Factors such as carbon footprint, social impact, and governance practices should be evaluated alongside traditional financial metrics.
a) The financial impact of Enbridge paying for the entire Kalamazoo cleanup would depend on the costs involved. OTPP should assess the potential expenses and factor them into its valuation model for Enbridge to account for the financial liability.
b) A delayed or denied project would have a negative impact on Enbridge. OTPP should evaluate the potential consequences, such as lost revenues, reputational damage, and increased regulatory scrutiny, and adjust its valuation model accordingly.
c) If Enbridge invests $1 billion in additional safety measures for the Northern Gateway project, Cheng believes it would increase the likelihood of regulatory approval by 70%. OTPP should consider this information and adjust its valuation model to reflect the higher probability of successful project completion and factor in the potential benefits.
d) OTPP should make adjustments to its base valuation model of Enbridge to incorporate the recurring spills and the value of the Northern Gateway project. It should quantify the costs and reputation damage associated with spills, and assess the potential future earnings and risks associated with the Northern Gateway project. Adjustments should be made to account for these factors and provide a more comprehensive valuation of Enbridge.
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