By Erik Sherman

There’s been all kinds of public pressure on Canadian pension funds over the last decade to reduce investment in fossil fuels.  But one of the country’s largest industries is energy, ESG means lowering greenhouse gas levels, and tar sands are tough customers.

Deborah de Lange, an assistant professor of global management studies at Toronto Metropolitan University criticized pension plans seven years ago for not divesting and, therefore, not being ethical.

In 2021, some of the biggest pension managers “boosted their investments in the country’s major oil sands companies,” as Reuters reported. And, in February 2024, the special-interest non-profit Shift: Action for Pension Wealth and Planet Health released a report card claiming that of 11 of Canada’s largest pension funds, when it came to fossil fuel exclusions, six got an F, two got a D, one a D+, another a C-, and then one getting a B-.

And yet, “most of the funds have made net zero pledges,” says Sebastien Betermier, associate professor of finance at McGill University. Many of the big pension funds not only talk about the reduction of greenhouse gases across their portfolios, but the financial efficacy they’ve seen from renewable investments. For example:

  • The Canada Pension Plan Investment Board was glad to have its energy investments in 2023. Its real assets division saw a net return of 4.9%. “The overall gain was mainly from RA’s investments in the energy sector, particularly in renewables that benefitted from the global energy transition and capital inflows into the renewables space.”
  • Caisse de Depot et Placement du Quebec in its 2023 annual report explained that despite a challenging economic environment, the five-year annualized return was 9.5%, largely explained by performance in port and telecommunications assets, and in renewable energy.
  • Ontario Teachers’ Pension Plan in the 2023 report stated that it expects 67% of its portfolio emissions to reach net zero by 2025 and 90% by 2030. “Transitioning high emitters to a low-carbon future is complex and will take time and capital, but it also creates opportunities,” the report said. “The decarbonization of the highest global emitters presents both an opportunity to make a real-world impact and generate strong returns given the premium that can be gained by shifting these companies towards a net-zero future.”
  • British Columbia Investment Management Corp. has a commitment to ESG, with a record of reducing its portfolio carbon footprint by 34% between 2020 and 2023. They have $22.3 billion invested in infrastructure and renewable resources.

 Trouble at Home

To wrap up the criticisms, close to 100 Canadian business leaders signed an open letter saying that while the pension funds “represent approximately 37% of institutional savings in Canada,” they “have reduced their holdings of publicly traded Canadian companies from 28% of total assets at the end of 2000 to less than 4% at the end of 2023.”

Given the prominence of the energy industry in Canada, it would be interesting to argue that domestic investment should be only in every other sector.

“When you look at the mandates of the funds, for the vast majority of them, they have independence in investing,” says Betermier, who points out that they frequently invest directly. “Some stakeholders are asking for more domestic investment, saying the funds are too global. Clearly, there are advantages to investing in some assets in your backyard.”

Fossil fuel production in Canada makes for complications. “Oil sands are heavy on pollution,” Betermier says. “They are big economic contributors. There’s certainly a tradeoff of how to handle the investment.”

Progressive Pathways

What may seem obvious in investments from the outside is often more complex from the inside. Assessing net-zero pathways for funds and their holdings is complicated. “Many of the Dutch funds have adopted what is called conditional engagement/divestment approach,” Betermier explains. They work with firms and look for progress within a few years. If none is forthcoming, the funds start divestment, but that’s on a company-by-company basis, not entire industries.

“When you’re in an industry that’s quite carbon-intensive, like the oil sands, you have some ability to reduce carbon by using existing assets,” he explains. That includes becoming more efficient in recycling and dealing with waste. “Then you have a second state that relies on technology that may not exist today but might in the next five to ten years.”

There are four general strategies funds can employ. First, divesture by moving out of firms and increasing the cost to raise capital for new oil development projects. Second, working from within to make oil production cleaner. Third, speed the development of renewable energy sources. And fourth, engaging on the demand side for energy and working to make users more reliant on renewables.

The one thing they share is that the approaches — at least for long-term investment pension funds — take time, and the public rarely understands what that means.

“What the funds are looking at are the pathways the firms are developing,” Betermier says. “Many of the net-zero of the funds are progressive ways to decarbonize over the next 30 years. It’s the elephant in the room.”