Quebec Pension fund leads the way in low-carbon investing in Canada

The  Caisse de dépôt et placement du Québec (CDPQ) is Canada’s second largest pension fund, with $286.5 billion under management for the  public and parapublic pension plans of  Quebec workers. On October 18, the Caisse burnished its existing reputation as a responsible investor by releasing  “Our Investment Strategy to address Climate Change”,    a detailed strategy document which pledges to factor climate change into every investment decision.   The CDPQ will increase its low-carbon investments by 50% by 2020, and reduce the carbon intensity of its portfolio by 25% by 2025 across all asset classes.   According to an article in the Montreal Gazette , “the Caisse is the first fund in North America, and only the second in the world — after the New Zealand Superannuation Fund — to adopt this type of approach.” That article also notes that investment managers’ compensation will be tied to the emissions performance of their investments:  investment teams will be given fixed carbon budgets, “and their performance will be evaluated and remuneration linked to how well they stick to these budgets.” The announcement was also covered by the Globe and Mail  .

In contrast, the Canada Pension Plan Investment Board , entrusted with the funds to support the public pensions of 20 million Canadians (the CPP), continues to invest in oil and gas ventures – and according to Bloomberg Research , is currently involved in a bidding process for an Australian coal operation owned by Rio Tinto .  Friends of the Earth Canada is advocating against the bid as part of its ongoing campaign, Time to Climate-Risk-Proof the CPP  .  The CPPIB describes its investment strategy regarding climate change here  .

It is worth noting that the Labor Convergence on Climate event  organized by the Labor Network for Sustainability in September included a discussion of how union leaders and rank and file members can work through their pension funds to join the movement to divest from fossil fuels and make green investments .

The role of the banking and investment community is important in policy development also; the case is most recently made in  “Three suggestions for for B.C.’s Climate Solutions and Clean Growth Advisory Council” in the National Observer (Oct. 26). The article concludes:  “If the Advisory Council wants to see money move to support its policy aspirations they will have to find genuinely committed allies in the asset management and banking community. Action on climate change is great economic opportunity for British Columbia and Canada, and the financial sector must be brought into the discussion in order to accelerate the transition to a low-carbon energy system.”

How receptive is the Canadian investment community to considering and disclosing climate change risks and stranded assets? Two reports  by the UN-affiliated Principles for Responsible Investment ( PRI )   are relevant to this question. Fiduciary duty in the 21st century: Canada roadmap (Jan. 2017) makes recommendations for how Canadian pension fund and investment managers can catch up with the international community and implement the recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD) . The PRI Canada country review (June 2017) describes the current regulatory framework for environmental and social governance disclosure .  The Responsible Investment Association has  also published the 2016 Canadian Responsible Investment Trends Report .

Actors within Canada include the Canadian Securities Administrators , which began their own  review on climate-related financial disclosure practices in March 2017 , but have not yet reported.   A group of Canadian Chief Financial Officers launched  the CFO Leadership Network in March 2017, to focus on the role CFO’s play in integrating environmental and social issues into financial decision making. The Canadian CFO Leadership Network is the Canadian Chapter of The Prince of Wales’s Accounting for Sustainability (A4S) CFO Leadership Network; in Canada, it operates in partnership with Chartered Professional Accountants of Canada , with support from The Prince’s Charities Canada.

Finally, SHARE (Shareholder Association for Research & Education), is a Vancouver-based organization which actively promotes sustainable and responsible investing. On October 12, it announced  that it is participating in an investor-led initiative which has written to the CEO’s of sixty of the world’s largest banks, including six Canadian banks, calling on them to adopt the landmark recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD), released by the Financial Stability Board in December 2016 .  Specifically, they call for disclosure in four key areas: climate-relevant strategy and implementation, climate-related risk assessments and management, low-carbon banking products and services, and banks’ public policy engagements and collaboration.

 

Canada Pension Plan Investment Board lags international financial community on recognition of climate change risks and stranded assets

In what the WWF has called   “a landmark moment for responsible investment in Europe” , the European Parliament voted in November 2016  to mandate that all workplace pension administrators must consider climate risk and risks “related to the depreciation of assets” -stranded assets-  in investment decisions.  It also requires greater transparency about investment policies. Individual governments of the EU now have two years to pass into national law this updated version of the  existing Institutions for Occupational Retirement Provision (IORP) Directive. Currently, the directive would affect occupational pension plans affected covering approximately 20% of the EU workforce, mostly in the United Kingdom, the Netherlands, and Germany .  A September 2016 Briefing Note from the European Parliament  details the administrative/political evolution of the Directive; a December  article from Corporate Knights  or  Go Fossil Free or Reuters  provide summaries.

In December 14, 2016, the Task Force on Climate-Related Financial Disclosure, chaired by Michael Bloomberg,  released its report and recommendations  to the Financial Stability Board, a G-20 organization chaired by Mark Carney. An article by the two men appeared in The Guardian, capturing the gist of the work:  “We believe that financial disclosure is essential to a market-based solution to climate change. …. A properly functioning market will price in the risks associated with climate change and reward firms that mitigate them. As its impact becomes more commonplace and public policy responses more active, climate change has become a material risk that isn’t properly disclosed.” The Task Force calls for companies to make voluntary disclosure of climate risks to their business,  to help  investors, lenders and insurance underwriters to manage material climate risks, and ultimately to make the global economic and financial systems more stable.   A 60-day public consultation period began with release of the report; an updated report, incorporating that input,  will be released in June 2017.  The Task Force report was summarized in   “Climate disclosure framework creates a better environment for investors” in the  Globe and Mail Bloomberg News also reported on another recommendation, “Carney Panel Urges CEO Compensation Link With Climate Risk ” , stating that the time has come for organizations to provide detailed reporting of how manager and board member pay is tied to climate risks.  (See a Dec. 1 Reuters article about Royal Dutch Shell’s moves to link CEO bonuses to GHG reduction).

In Canada, the Canada Pension Plan Investment Board, which administers the assets of the national public pension fund, seems to be standing on the sidelines.  A recent article in the Globe and Mail was written by the director of the CPPIB Sustainable Investment department , which is described in  more detail in their 2016 Report on Sustainable Investing . The report states (page 11)   “ CPPIB has established a cross-departmental Climate Change Working Group to consider how physical risks, as well as technological, regulatory and market developments will impact climate change-related risks, and create opportunities, in the future. …. This review, which will take some time, is being done from a long-term perspective in light of how the gradual transition to a lower-carbon global economy might unfold….  On the topic of divestment and climate change, research has shown that investors with longer horizons tend to be more engaged with the companies that they invest in, and CPPIB is a case in point. As responsible owners, we believe that in many cases selling our shares to investors who might be less active in terms of considering material risks, including climate change, would be counterproductive.”   In light of this very slow approach, Friends of the Earth (FOE) has been frustrated in its divestment campaign for the CPPIB in 2016 ;  FOE maintains a petition website, Pensions for a Green Future, which calls for the CPPIB to, among other things,  “report immediately to its 19 million members on the carbon footprint and exposure to climate solutions of our CPP investment portfolio” and “to replace climate polluting investments with those in green energy, technologies and infrastructure that support Canada’s commitment to act to avoid 1.5°C of warming.” The CPPIB discloses the companies it is invested in here  .

In contrast to the CPPIB, the Caisse de dépôt et placement du Québec (CDPQ),  the second largest pension fund manager is Canada,  is highlighted in a new report by the World Economic Forum  as “ one of the most important institutional investors in wind power” for its investment of  close to $2.5 billion (US) in both onshore and offshore wind projects in Europe and North America, starting in 2013 with a tentative investment in the Invenergy , and now including the London Array wind farm in the outer Thames estuary.  The Caisse statements on environmental and social responsibility are here ; it is a signatory to the U.N.  Principles for Responsible Investment (PRI), a member of the Carbon Disclosure Project and the Carbon Water Disclosure Project, and endorses the Extractive Industries Transparency Initiative , which monitors the oil and gas industry .

Canada Pension Plan: improved benefits, but still exposed to fossil fuel risk

Welcome as it is that the federal government announced improvements in the Canada Pension Plan on October 4, it would be even more welcome to know that the CPP Invesment Board (CPPIB)  was not risking our future pensions by remaining invested in the  fossil fuel industry.  Friends of the Earth  Canada has launched a new campaign, Time to Climate Risk-proof the CPP,  which reveals that approximately 22% of the Canadian portfolio is invested in  fossil fuel producers or pipeline companies, including coal.  The Friends of the Earth campaign includes an online site called Pension Power , enabling ordinary Canadians to query their pension fund managers.  It also calls on the CPPIB to sign onto the Montreal Pledge, and  the Portfolio Decarbonization Coalition (PDC), two United Nations Environmental Program initiatives that encourage institutional investors to decarbonize their portfolios and disclose risky assets.  Anything less ignores the now-apparent decline of the fossil fuel industry and the shift to a low carbon world,  and thus fails the fiduciary responsibility of institutional investors – to protect assets against risk.

Canada’s Shareholder Association for Research and Education (SHARE) has published studies on the need for responsible investment;  Royal Bank of Canada (RBC), Suncor Energy and NEI Investments published Unburnable Carbon and Stranded Assets : What investors need to know   in January 2015, and  Canada’s Marc Carney,  in his high profile role as Governor of the Bank of England and Chair of the international Financial Stability Board,  has been a world leader in warning about the dangers of stranded assets since 2015 .  How can the Canada Pension Plan Investment Board have missed the message that other Canadians are so well aware of?

Further reading:   For an overview of the international literature, see Divestment and Stranded Assets in the Low-carbon Transition from the OECD (Oct. 2015)  or more recently: Unconventional Risks: The Growing Uncertainty of Oil Investments in July 2016;  Shorting the Climate ( from the Rainforest Alliance Network, BankTrack, Sierra Club and Oil Change International);  “New York City Pension Funds begin to craft a Fossil Fuel Divestment Path others can Follow”  (July 2016),  and  “Fiduciary responsibility and climate change”    in Corporate Knights (Aug. 30).

IF NORWAY CAN DIVEST FROM COAL ASSETS, WHEN WILL THE CANADA PENSION PLAN RECOGNIZE THE RISKS?

According to the New York Times   (June 5) “ Norway’s $890 billion government pension fund, considered the largest sovereign wealth fund in the world, will sell off many of its investments related to coal, making it the biggest institution yet to join a growing international movement to abandon at least some fossil fuel stocks.”   Yet a June 15th Special Report in The Guardian, “ Coal Crash: How Pension Funds Face Huge Risk from Climate Change ”  highlights the coal assets held by the public pension funds of South Africa, Netherlands, U.S. teachers, and Canada, and estimates that Canada’s Pension Plan Investment Fund holds $590m in coal-related investments. The report includes private asset management companies as well, with BlackRock as the clear leader with $24.5billion in coal. The June 14th article in the Globe and Mail, “Campaigns to Divest from Fossil-Fuel Holdings Gain Steam”  describes divestment by Canadian universities and the United Church of Canada, but makes no mention of pension funds. Helpful reading on the growing trend away from coal: Chapter 3, “Closing the Coal Plants”   in The Great Transition: Shifting from Fossil Fuels to Solar and Wind Energy  from the Earth Policy Institute ; a series by Inside Climate News “Coal’s Long Goodbye: Dispatches from the War on Carbon”, and “Big Oil takes on King Coal: The Climate Fight Shifts Gears” , a May 28 article from the National Observer in Vancouver, which argues that the petroleum industry will abandon its partner, coal, in the fight for its share of the world’s carbon budget.