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.

 

Ontario Teachers Pension Plan invests in clean technology

The  Ontario Teachers’ Pension Plan acknowledges that “ Climate change risks have global impacts that affect multiple sectors and companies. On the other hand, climate change will also present new investment opportunities, such as innovative technologies.”  The embodiment of that approach came with the  OTPP announcement  on March 9 that it has partnered with Anbaric, a developer of clean energy transmission and microgrid projects from Wakefield Massachusetts.  According to the Boston Globe newspaper  , Ontario Teachers  will invest $75 million  initially to gain a 40 percent stake in Anbaric, creating a new management company, called Anbaric Development Partners  . Potential exists to invest a further $2 billion in clean energy projects.   The OTPP press release  states,  “Ontario Teachers’ investment in Anbaric creates an attractive launching pad for generating innovative energy jobs and boosting local economies while replacing our deteriorating and outdated fossil fuel-oriented grid with new and sustainable energy alternatives. This includes sophisticated high-voltage direct current (HVDC) transmission technology and microgrid projects that will bring renewables online with greater efficiency.” The Ontario Teachers Pension Plan controlled $171.4 billion in net assets at December 31, 2015 on behalf of  the province’s 316,000 current and retired teachers.

As a sophisticated, global investor, it has examined the risks of climate change, and in Fall of 2016, published  Climate Change: Separating the real risks for investors from the noise   , which, like the Canadian Pension Plan Investment Board ,   seems to acknowledge the reality and complexity of climate risk, while rejecting divestment of fossil fuel assets.  The report states that “Investors need a toolbox of solutions to help manage physical and regulatory risks across their portfolios, both in the short and longer term. Portfolio carbon footprints are only one tool, and they have limitations. Divestment should be the outcome of a well informed and thoughtful investment process, rather than a wholesale approach to a single sector. “   And further  –  “ Engagement with policy makers and companies provides investors with key pieces of information and could be the impetus for governments and companies to be more proactive in climate change mitigation or adaptation. “

Divestment decision at University of Toronto amid further financial warnings

At the end of March, the President of the University of Toronto issued an official response  to the Advisory Committee on Divestment from Fossil Fuels, which had reported in December 2015. The University rejected a blanket divestment strategy and opted to pursue a targeted approach which will incorporate environmental, social, and governance-based factors (ESG) in investment decisions. It states that the core mission of the university, research and teaching, will be used as its main contribution to the fight against climate change. The statement  is summarized in a  Globe and Mail article (March 30) .  On April 12, the New York Times reported  that Yale University had also found a compromise position regarding investment strategies for its endowment fund, rather  than outright divestment.  Arguing against such approaches: from researchers at the London School of Economics,  “Climate value at risk’ of global financial assets” in Nature Climate Change online (April 4)  which uses models to estimate the impact of twenty-first-century climate change on the present market value of global financial assets, and concludes that “losses could soar to $24tn, or 17% of the world’s assets, and wreck the global economy”.  An article in The Guardian   (April 4) summarizes this and other studies.  Even the Harvard Business Review (April 14)  is sounding the alarm, based on the latest research.   An article in Corporate Knights magazine, “Defending Divestment”   (April 6) considers the financial and moral arguments about divestment.

Pension Fund Managers Get It

Climate Change and the Fiduciary Duties of Pension Fund Trustees in Canada    was written by the Toronto law firm Koskie Minsky LLP for SHARE (Shareholder Association for Research and Education)  . Released on September 8, it examines the legal responsibilities of pension trustees, with an emphasis on British Columbia, and considers the interface with public policy and governments . Concurrently, SHARE and NEI Investments issued a public letter to the Premier of Alberta, stating “We encourage the Government of Alberta to keep carbon pricing as a central tenet of future carbon policy.” It also urges the government to diversity the economy and to invest in renewable energy and energy efficiency initiatives. The letter was signed by institutional investors and related bodies representing over $4.6trillion in assets under management, most notably the British Columbia Investment Management Corporation, the B.C. Teachers Federation, California State Teachers’ Retirement System, the Pension Plan for the Employees of the Ontario Public Service Employees Union, Pension Plan for the Employees of the Public Service Alliance of Canada, and investment and financial officials from churches around the world and across denominations.

Pension fund managers have lots to think about, as business-oriented reports continue to warn about the financial risks of climate change and stranded assets. The Koskie Minsky paper acknowledges the influence of the analysis of Mercer Investment Consulting , Investing in a time of Climate Change (2015), and an earlier 2011 Mercer report. Publications over Summer 2015 include: Carbon Asset Risk Discussion Framework   (published by World Resources Institute and the UNEP Finance, partly funded by the Bank of America Foundation, Citigroup, JPMorgan Chase Bank N.A., and Wells Fargo Foundation); The Cost of Inaction: Recognising the value at risk from climate change ( from the Economist Intelligence Unit); and Energy Darwinism II: Why a Low Carbon Future Doesn’t Have to Cost the Earth , (from  a division of Citi Bank).

A recent report by Trillium Asset Management found that California’s public pension funds, CalPERS and CalSTRS, had incurred a massive loss of more than $5 billion last year from their holdings in the top 200 fossil fuel companies. Legislation passed the California Assembly on September 2  to force CalPERS and CalSTRS to divest their holdings in coal; Governor Brown has until October to sign the Bill.