The ESG Case for Developing the Northwest Passage

ABSTRACT

As arctic ice melts due to the impacts of climate change, an economically viable ocean passage North of the Canadian mainland – the Northwest Passage (NWP) – is increasingly open for maritime transit. Accordingly, the use of this passage presents potential economic and environmental benefits that range from the financial and expediency afforded by shorter shipping routes, to a potential surge in regional investment to the area. However, such opportunities also come with significant risk, including potential environmental damage, social impacts on the local populace, and governance challenges arising from international territorial disputes. Taking these factors into consideration, we seek here to outline the benefits and ramifications of leveraging an accessible NWP through an Environmental, Social and Governance (ESG) lens, while also providing recommendations for an acceptable way forward.

INTRODUCTION

As one of the world’s largest Arctic nations, Canada has traditionally occupied an important geopolitical position in oversight of the vast Northern area. While stereotypically conceptualized as a frozen wasteland, climate change is catalyzing rapid evolutions in Arctic climate. One such evolution includes the newfound accessibility of a maritime transit route that will likely entail significant implications not only for Canada, but for the greater international community moving forward.

With ice in the region melting as a result of climate change, the Northwest Passage (NWP), an ocean passage along the Northern shores of Canada, is becoming increasingly passable for maritime transit. The grander consequences of climate change notwithstanding, use of this route presents potential economic and environmental benefits, though also entailing risk in many areas.

Taking all these factors into consideration using an ESG lens, this article will briefly outline a broad overview of the NWP situation and weigh the benefits and risks of leveraging this route. Moreover, we will seek to present general recommendations for an acceptable way forward on this topic, pointing to the importance of Canadian investment in the area – not by the approach of Arctic exceptionalism, but rather to the benefit of the overall international community.

BACKGROUND

Sea ice in the Arctic Ocean has typically been thickest during February or March and thinnest in September.^[1] However, with a warming climate, that window of little to no sea ice is expanding. While estimates vary, it is expected that year-round passage will be possible within a matter of a generation.^[2] Long after the disastrous expedition of HMS Erebus in 1845, the first cargo ship sailed through the NWP with the assistance of an icebreaker in 2013. In 2014, another cargo ship made the journey unescorted. From 2013 to 2019, there was a 44% increase in the number of unique ships entering the NWP, with a 107% increase in distance sailed.^[3] Further interest in the North is driven by its untapped oil, gas, mineral, and other natural resources.

When considering these untapped resources and the Arctic region as a whole, it must be remembered that these sovereignty issues stem from the same desires and fears for all parties, as outlined by Tim Marshall in Prisoners of Geography^[4] – notably the desire to safeguard maritime routes for military and commercial shipping, the desire to own natural riches from the region, and the fear that others may gain where states may lose. As such, with the world gripped by inflation and Europe facing an energy crisis concurrent to the illegal Russian invasion of Ukraine, the Arctic – and consequently the NWP – may soon come to play a bigger role in the overall policy of stakeholder nations moving forward. Thus, this article specifically deals with such environmental threats, social impacts, and governance & security considerations.

ENVIRONMENTAL THREATS 

When compared to passing through the Panama or Suez Canals, Northern routes can provide both economic and environmental benefits. The shorter travel distance consumes less fuel, saving costs and reducing greenhouse gas emissions (GHGs). Furthermore, the deeper northern waters do not have the same weight and depth restrictions as canals, meaning ships can move more cargo, increasing efficiency.

Specifically, considering China’s heavy reliance on energy imports, and as a major hub of global trade, a year-round navigable NWP would see significant increases in Chinese shipping activity – particularly considering the decreased transit distance between East Asia and Europe by at least 7,000 kilometres. As an example, the Nordic Orion’s journey through the NWP in 2013 allowed it to move 25% more coal while saving four days of travel and $200,000^[5]. However these clear economic benefits come with serious risks to the area, including the disruption of local wildlife, transport of invasive species, and the threat of oil spills.

Ships breaking a path through the ice can cut off the migration routes of caribou and provide an open channel for seals to escape, severing a vital food source for polar bears. Specifically, during Inuit workshops, it was noted that residents could not find any fish in the areas where vessels conducted seismic surveys. Concerns were also raised about illegal fishing, as there were reports of several occasions where ship crews have been seen fishing in unmonitored areas.^[6]

Another risk of note is that of invasive species, which can be introduced either by riding along the hull of a ship or in their ballast tanks. Ballast tanks are compartments that hold water to weigh a ship down, lowering its center of gravity and providing stability. Ships will discharge this water, in a new area, when taking on cargo. It is believed that the zebra mussel, an invasive species which has caused billions of dollars of economic damage, was introduced to the Great Lakes from ballast tanks filled in Western European ports. Invasive species from the Arctic may also threaten southern waters, as has already occurred with the red king crab.^[7]

The threat of petroleum spills that could be caused from shipping or oil drilling is perhaps the most concerning from an environmental standpoint. As an example, in 2015, a major fuel spill in Salluit, Quebec prevented mussel harvesting, fishing, and seal hunting for months. The extent of this spill was aggravated by rough weather conditions and highlights the increased risk associated with more traffic as well as a lack of infrastructure to quickly respond to environmental disasters in Canada’s North.

The value placed on protecting the environment should not be underestimated, as recently illustrated by a rejection of Baffinland Iron Mines’ planned expansion to its Mary River Site. Based on concerns of the environmental impacts to the region, Canada’s Northern Affairs Minister denied the company’s application. These concerns outweighed the fact that Baffinland’s operations account for about a quarter of Nunavut’s Gross National Product, and has contributed more than $2 billion CAD in royalties to the Inuit (through Nunavut Tunngavik Incorporated for the purposes of native treaty rights and treaty negotiation)^[8] over the mine’s 30 years of operations.^[9] Highlighting the importance of consulting with and addressing the concerns of residents, especially the Inuit.

SOCIAL IMPACTS

When thinking of the Arctic, it can be tempting to romanticize the vast landscape and the sense of adventure and danger of early European explorers such as Sir Franklin or Captain James embarking on missions to find a NWP. But this romanticization overlooks the fact that this area has been inhabited for thousands of years. The Inuit Nunangat, the Inuit homeland, is broken down into four land claim regions and extends across the Arctic region, containing more than a third of Canada's land mass and a half of its coastline^[10], including the NWP.

The social considerations of developing the NWP must account for governmental and commercial relations with the Inuit and how Northern communities are invested in and protected. The federal government's arguments for sovereignty of the North, and existing agreements with the Inuit peoples, provide a legal and moral obligation to work with the Inuit on any development of the NWP.

During the mid-1900s, the Canadian federal government was motivated to populate isolated areas to claim sovereignty of the North.^[12][13] The solution was to “relocate” many Inuit further North, with the promise of better hunting and with the option to return home in two years (neither of which held true). Interestingly, the Nunavik Inuit Land Claims Agreement definition of land "includes water and resources including wildlife", and stipulates that "...land use cannot be planned and managed without reference to the human community; accordingly, social, cultural and economic endeavors of the human community must be central to land use planning and implementation"^[14] as well as other guarantees, including Nunavik Inuit representation in discussions regarding international agreements on wildlife harvest.

Considering these factors, Inuit must be involved, and their concerns must be addressed when developing the NWP. But what are these concerns? Imagine returning from a trip to the store to find a wide ravine had been carved through the earth, cutting you off from any path home. While unlikely for you or I, such challenges are faced by Inuit hunters when ice breaking ships pass through their territory unannounced. A sense of security from the outside world, borne from living in a remote area that was mostly inaccessible (though less so during summertime), is melting away as quickly as the ice is.

Weariness of a rapidly changing world that one has little control over, is a fear we can all relate to. Inuit perspectives of the development of the NWP include environmental concerns as discussed above, as well as problems with hunting and tourism, but also an appreciation for potential social and economic gains.

Increased shipping may mean more products; food, fuel, vehicles, and building materials would become available in the North, thus lowering costs and increasing product availability and choices. While median annual incomes may be similar^[15], people in Nunavut pay at least double what other Canadians pay for the same items, for example, in 2012, a jar of peanut butter was $18^[16] and in 2018, a 4L jug of milk cost over $10 CAD^[17]. By 2020, the food insecurity rate was 46.8% for Indigenous people aged 16 years and over in the territories, compared with 12.6% for non-Indigenous people.^[18]

Tourism is another promising, and potentially threatening, area for growth in the NWP. The opportunity to share their knowledge, traditions and way of life with tourists is exciting for many Inuit. Local artists may also benefit from selling traditional artwork such as carvings and drawings. However, tourists may also bring illegal drugs and alcohol, disturb historical sites and artifacts, and disrupt wildlife. Issues have already occurred as “…the personal [yachts] are just disrespectful, they take advantage […] There have been instances where kids were invited onto visiting private yachts and served alcohol.”^[19] An influx of tourists has been blamed for driving walrus populations in Salluit from their usual resting sites, forcing hunters to travel further to harvest them. Finally, cruise ships bringing large numbers of people (up to two to three times the population of communities) would overwhelm local resources in an emergency.^[20]

GOVERNANCE and SECURITY

While governance under ESG typically focuses on how a company is run and executives are compensated, in the context of this paper governance will focus on the challenges faced by the Canadian federal government in managing the NWP. One key dispute is its classification – is the NWP Canadian or international waters? While tensions with China or Russia may be expected over the use of Arctic waters, disagreements exist between long-time allies such as Canada and the United States.

International frameworks relevant to the NWP include the United Nations Convention on the Law of the Sea (UNCLOS), which codifies a regime of law and order in the world’s seas and oceans, covering all uses of the water and resources within.^[21] The International Maritime Organization (IMO), which is responsible for ensuring the safety and security of shipping and prevention of marine atmospheric pollution from ships, has already issued a Polar Code^[22]. Another important entity is the Arctic Council, an intergovernmental forum established in 1996 that promotes cooperation, coordination, and interaction between Arctic states, Indigenous peoples, and other inhabitants.

UNCLOS does not have a clear definition of an international strait – and this gap is being exploited by countries who desire unfettered access to the NWP. If it is classified as an international strait, there would be few restrictions on navigation. Ships, including warships, would have nearly identical rights of passage as on the high seas.^[23] This would be ideal for other countries, but Canada will ultimately be responsible for addressing negative environmental and social consequences associated with the use of the NWP. While Canada has been a driving force for cooperation in the North, the Arctic Council was created by the Ottawa Declaration in 1996, it lacks the capacity to enforce Canadian laws and values in the Arctic. This deficiency was illustrated by the voyage of the Beserk II, a foreign vessel denied entry to Canada because of the criminality of some of its crew members. The ship still managed to evade detection and sail deep into the NWP, only to be immediately identified after landing in an Inuit community.^[24]

Drawing upon the environmental and social considerations listed above, the fact remains that Canada can only reap the benefits from the NWP if the threats posed to the stability of international cooperation in the region are mitigated. To this effect, it can only realistically be achieved through enhanced governance of the area, which includes a credible security posture, which then becomes indicative of Canadian intent when it comes to management of the NWP.

When considering governance in terms of Arctic security and sovereignty in relation to the NWP, two key factors are Canada’s geographic and geostrategic positioning within the Arctic region. It is worth noting that these are not the same concepts. Whereas the geographic positioning of Canada ensures at least a “seat at the table” regarding Arctic and NWP matters, Canada’s current geostrategic positioning in comparison is dwarfed when considering other nations with interest in the area such as the United States, China, and Russia

Regarding geographic positioning, it is unquestionably understood that control of the Arctic region is difficult considering its enormous size, and the hazardous conditions the weather and terrain pose to those seeking establishment upon it. From a security perspective, the fact of the matter is that, although operations in the Arctic are considered domestic within a Canadian context, all other allied nations would consider such deployments as expeditionary, mostly considering the large distances to cover and aforementioned conditions to establishing a position within the Arctic.

From a geostrategic perspective, Canada finds itself in a precarious position – mostly due to the growing interest from many nations, coupled with Canada’s long-term political inaction in this domain despite repeated calls for investment over the past several decades. Although Canada has seen some benefits from its 2007 SSE Defence Policy, they are relatively insignificant in contrast with the advancement of other nations in the region. To this effect, this allusion is not only towards adversarial states such as Russia or China, but rather also includes the likes of Norway, which aggressively expanded its investment in the region considering its newfound importance in the provision of energy to Europe as a result of the ongoing Russia-Ukraine conflict that began in February 2022.

This all being said, Canada does currently exert a significant amount of influence in the area, mostly stemming from the Arctic Council, behind which Canada was a driving force in establishing. The Arctic Council, along with other international commissions such as the United Nations Commission on the Limits of the Continental Shelf (UN CLCS), are widely seen by stakeholders to be leading entities for cooperation in the region.

In order to maintain the balance between these geographic and geostrategic implications pertaining to the NWP, it remains clear that Canada must continue to seek ways to exert its security influence over the region while also maintaining its clout on the international stage within entities such as the Arctic Council and the UN CLCS.

WAYS FORWARD

The final section of this article briefly demonstrates the ways forward for Canada to maintain that balanced security influence, while still ensuring that the environmental and social considerations are therein taken into account.

Though numerous, the challenges facing the North are not insurmountable. The way ahead will require significant investment and cooperation from all Canadians. Research and monitoring should be conducted and consolidated to measure the impacts of increased activity on the environment (an example of such an instrument is detailed in the Nunavik Inuit Land Claims Agreement)^[25]. Industry and government must coordinate with local populations to ensure locals know and can adjust for the routes and travel times of icebreakers. Education and training could be provided for both visitors and Inuit – this would help visitors understand the history of local customs and rules in place to protect the sensitive environment, and assist locals in finding ways to handle an influx of travellers and shipping traffic.

To facilitate these enhancements, investment in infrastructure, especially the construction of deep seaports, is required. These ports would help manage shipping and cruise ships as well as provide a base to launch environmental protection and remediation measures from. Further investment in the Canadian Armed Forces, Royal Canadian Mounted Police, and Canadian Coast Guard, to ensure the capacity to enforce Canadian laws and values in the North, is also necessary. Inuit game wardens could be hired to monitor non-Inuit hunting and fishing, and to ensure that shipping companies and tourists be held accountable for their actions if they ignore regulations. The overriding concerns or message should be to provide security for the Inuit by ensuring adherence to laws and regulations designed to protect the people and the environment.

While necessary, these measures will also be costly. Assuming that capabilities to assert Canadian authority are in place, passage through the NWP could be taxed to help fund the development of programs and infrastructure in the North. Further economic development of Arctic resources may also be required to provide tax and royalty revenue. Despite posing risks to the environment, business conducted in Canada can be held to a higher ESG standard than other parts of the world.

CONCLUSION

In short, taking into account the changing context of the Arctic Region and NWP as a result of climate change consequences, this article has briefly sought to underline key considerations for future activities in the NWP within an environmental-social-governance context.

The reality facing the Inuit is the same as for the rest of Canada – whether we wish it or not, change is coming to the North. Climate change and increasing international activity will reshape the NWP and the environmental, social, and governance threats to Canada’s NWP will not only persist but grow.

Addressing these threats and capitalizing on the potential benefits will require an expansion of Canada’s presence in the North so that it can remain true, strong, and free.

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Connor Hunerfauth, P.Eng, is a 2015 graduate of the Royal Military College of Canada with a B.Eng in Civil Engineering and a veteran of ten years of service to the Royal Canadian Engineers. He is currently a Master of Business Administration candidate at the McCombs School of Business in Austin, Texas. He can be contacted at connorh.email@gmail.com.

Alexander Landry, P.Eng, PMP, is a 2016 graduate of the Royal Military College with a B.Eng. in Chemical Engineering, and a 2020 graduate of the University of Fredericton with an MBA specializing in Global Leadership. He currently serves as a staff officer at NATO Allied Land Command, and is pursuing a Masters of International Affairs at King’s College London. He can be contacted at alexander.landry59@gmail.com.