Equity Investments By Indigenous Communities In Energy Projects
Vivek Warrier, Luke Morrison and Ashley White
Bennett Jones, Calgary
Over the past several years, the energy industry has witnessed a veritable surge of transactions in which Indigenous Communities (ICs) have acquired significant and meaningful ownership in infrastructure projects across the full spectrum of the energy value chain. This paradigm shift towards co-ownership frameworks fosters the long-term alignment of interests and shared prosperity between energy industry project proponents (EIPPs) and ICs in Canada.
ICs have acquired over time an increasing body of knowledge regarding the prevailing metrics of impact benefits arrangements, and in many cases viewed such solutions as inadequate to the longer-term needs of their communities. Reinforcing this view, the Calls to Action of the Truth and Reconciliation Commission of Canada called upon the corporate sector in Canada to apply the principles of UNDRIP to corporate policies when involving Indigenous peoples and their lands and resources, pointing to direct participation in development projects as an ideal and appropriately collaborative strategy.
In addition, numerous government-backed funding providers (such as the Alberta Indigenous Opportunities Corporation and Natural Resources Canada) are levelling the playing field by providing direct funding and access to debt financing/backstop support for equity investments for ICs.
Embracing the Call
EIPPs and ICs alike have embraced this call. Increasingly frequent announcements on this website reflect the reality that equity participation by ICs in energy projects has become a core strategy within the industry, though it involves unique challenges and considerations that other co-ownership situations do not. ICs are highly diverse and hold varying views on equity ownership in energy projects.
While we do not purport to be in a position to speak on behalf of ICs in relation to the implications of Indigenous investments in the energy sector, through our transactional experience and engagement with various Indigenous community business leaders, we have identified some common themes in IC equity investments and approaches to transaction structuring.
Four Key Indigenous Community Investment Goals and Priorities
- Meaningful ownership and economic participation: A common feature in Indigenous equity ownership transactions is that the level of IC ownership and economic participation is "meaningful." This is an important structuring goal for both ICs and EIPPs. In our experience, meaningful IC ownership entails:
- A long-term, stable revenue source, for the ICs, distinct from one-time payments that would be more common under traditional impact benefit agreements.
- A considerable total percentage ownership interest that is beyond de minimus and that affords the IC owner the right to participate in the governance and affairs of the project.
- Environmental stewardship and sustainability: Equity ownership, and the influence that comes with it, allows ICs to have a role in project development and operational decisions with a view to stewardship and sustainability of their traditional lands. In turn, EIPP/IC co-ownership transactions may facilitate better integration of Indigenous knowledge and the exchange of Indigenous ideas and values regarding stewardship and sustainability. This may contribute to the overall success of the project, including by assisting EIPPs in achieving their environmental, social and governance (ESG) objectives.
- Preservation and sharing of traditions, culture and language: The ability to effectively preserve and promote the sharing of Indigenous traditions, culture and language increases greatly with the enhanced economic stability that equity ownership brings. Through equity ownership, ICs also have the opportunity to integrate Indigenous knowledge into the practices of the EIPPs and the project as a whole. For EIPPs, understanding this perspective assists in building the commercial relationship.
- Capacity building opportunities: Capacity, in the form of access to capital, training and employment, has historically been a barrier for ICs to achieve meaningful economic development. The shift towards equity ownership is presenting solutions to these issues for ICs. For ICs, equity ownership in energy projects may represent a key opportunity to cultivate capacity within their communities by delivering the long-term revenue streams needed to make further self-funded investments in training, capacity development and infrastructure improvements.
For corporate liability protections and taxation purposes, the most common legal structure for IC equity investment in energy projects is the limited partnership. Although the investment entity into the limited partnership may vary for each EIPP, where ICs comprised of First Nations are participating in the investment opportunity, the First Nation or a syndicate of First Nations, will typically invest through a limited partnership in order to maintain its tax-exempt status.
Although project structuring may be relatively consistent, each IC will determine what investment opportunities align with its interests, taking into account their own internal governance requirements, their investment goals and capital spend priorities. The vehicle used for an investment opportunity will be subject to an additional layer of approval, as the ICs' process for review and determination of support for the opportunity will be undertaken based on its own internal governance structure. An understanding of this process is an important element in developing the commercial relationship.
Governance: Another critical IC investment transaction issue is in respect of governance and control rights, specifically in relation to matters such as:
- rights to appoint directors and/or officers to corporate boards, at both the project and IC consortium levels;
- rights to appoint representatives to management and other operating committees which, depending on the overall project organizational structure, may be delegated certain key management functions; and
- rights to approve matters of material importance to the business or the project, including in relation to revenue calculations and distributions.
Often the overall project governance structure will recognize and incorporate certain traditional IC governance model elements, such as incorporating ESG criteria into matters that the IC owner(s) have approval rights over and using Chief and Council as special advisors to the investment entity, particularly when elements of the project impact the IC's traditional territory.
The evolution toward an equity ownership model has been embraced by many ICs as a mechanism to enhance the long term prosperity of their communities while at the same time providing opportunities to exert control and influence over project development matters such as stewardship and sustainability, and preservation of Indigenous traditions and culture. Similarly, EIPPs recognize that alignment through equity partnership transactions with ICs not only serves to mitigate investment uncertainty, but also in many instances reinforces long-held corporate values, underscores the organization's commitment to ESG performance and improves overall project economic viability.
Barriers to accessing capital are being surmounted and the market continues to assert that the recognition and inclusion of Indigenous perspectives is an essential measure of business performance. EIPPs should expect that the momentum of Indigenous equity ownership transactions in the energy sector will only intensify.
This column is a condensed version of the paper "Indigenous Ownership of Natural Resource Projects: A Framework For Partnership and Economic Development" that appeared in Alberta Law Review by the authors and Stephen Buffalo, President and Chief Executive Officer of the Indian Resource Council of Canada and Board Vice-Chair of the Alberta Indigenous Opportunities Corporation. Mr. Buffalo is a proud member of the Samson Cree Nation.
Bennett Jones is one of Canada’s premier business law firms and home to 500 lawyers and business advisors. Bennett Jones has been intimately involved in virtually every major energy development project in Canada in the past 20 years, representing project proponents, investors and other stakeholders. We provide complete ESG-related advice to clients that helps them seize ESG opportunities, minimize compliance gaps, and mitigate risks.