By Joel Kranc
With more than C$2 trillion in assets under management, Canada’s 10 largest pension funds command influence in domestic and global markets. Many, if not all, have targets towards net zero emissions investing, but few have commitments.
That is just one reason why Shift, a charitable organization that fights climate and environmental issues within the financial community, says Canada’s major pension funds are not on track to protect from worsening climate or to align their portfolios with a safe climate future. The report finds a high level of inconsistency, with the degree of urgency, detail, transparency, and ambition of pension fund approaches varying widely for managing climate-related risks and opportunities across the sector.
“Canada lags behind the leading pensions,” says Adam Scott, executive director of Shift. “There are a number of pensions on the international stage that are further ahead than Canadian pensions are, and as a group, Canadian pension funds are still not very far advanced when it comes to having climate alignment in their strategy.”
Shift’s report highlights that Canadian pension governance structure is one area behind the lack of climate alignment. There is an entanglement between the boards of the pension funds and fossil fuel companies. “There is a lot of overlap with common directors,” says Scott. “It’s not the case for every one of them but it has become quite substantial. We don’t know how those boards vote but we think it could be a contributing factor, for example.”
Also, within Canada, the fossil fuel/oil and gas industries are very much wrapped up in political culture. The influence is “outsized,” according to Scott, and people can be very unwilling to talk about the reality of climate change. In fact a ranking of the Toronto Stock Exchange’s top performers shows that Canadian energy stocks hold 14 of the 30 top spots. “Other countries may not have that same level of industry capture in the financial sector,” adds Scott.
But tides are changing. Scott says employment levels within the oil and gas sector are lower, foreign investment is lower in the sector, and international energy experts are saying there is a structural decline of the industry. “And this is one of the things we are warning,” he says. “There is significant downside exposure to that industry across the pension sector.”
Pensions towards the bottom of the ranking, such as the Healthcare of Ontario Pension Plan (HOOPP) and the Ontario Municipal Employees Retirement System (OMERS) still lack meaningful plans to achieve their climate objectives, while the worst ranked pension manager, the Alberta Investment Management Corporation (AIMCo), hasn’t even set a basic science-aligned climate objective, notes the report.
Emerging leaders, says Shift, particularly the Caisse de dépôt et placement du Québec (CDPQ), Ontario Teachers’ Pension Plan (OTPP) and Ontario’s University Pension Plan (UPP), have set strong short- and medium-term targets for emissions reductions, with the CDPQ, OTPP and other pensions also setting targets for increasing investment in climate solutions.
Leaders have also made clear that a stable climate is critical to protecting their members’ retirement security, set clear expectations for portfolio companies to align their business models with 1.5°C pathways, and begun excluding high-risk investments in the leading cause of the climate crisis – fossil fuels.
In Canada, only one pension has followed expert advice to phase out investments in high-risk fossil fuels to date – the CDPQ, which committed to selling all of its $4 billion in holdings in oil producers by the end of 2022.
Will others follow?
“I think it can change quickly,” says Scott. “Already we’re seeing evidence that funds are decreasing the amount of fossil fuels in their portfolio, but without creating a transparent policy for doing so. I think the risks are well recognized within the divisions of some of the funds but we haven’t seen that applied as an integrated net zero strategy.”
The report offers other comprehensive recommendations for pension managers to assess their management of climate-related risks against best practices for short-, medium- and long-term Paris-aligned targets, communicating climate urgency, developing and implementing a robust climate engagement program, infusing the management of climate risks across the organization, and protecting beneficiaries from the unique financial risk profile of the fossil fuel industry.
Looking ahead Scott says some of the funds that released a target but no plan, are working on them. “To be fair this report card came out between the commitment and the plan. When they release their plans we hope they will take the recommendations in our report very seriously and start from there.”
