Moral failure and financial risk at the Canada Pension Plan Investment Board

Mark Carney will leave his role as Governor of the Bank of England in January 2020 and return to live in Canada as he takes up his new job as the United Nations’ special envoy on climate action and climate finance.  According to the BBC,  “Mr Carney will be tasked with mobilising private finance to take climate action and help transition to a net-zero carbon economy for the 26th Conference of the Parties (COP) meeting in Glasgow in November 2020. This will include building new frameworks for financial reporting and risk management, as well as making climate change a key priority in private financial decision making.”

fossil futures ccpaRequired reading on the topic:  Fossil Futures: The Canada Pension Plan’s failure to respect the 1.5-degree Celsius limit, released on November 19 by the Canadian Centre for Policy Analysis-B.C. (CCPA-BC).   The report reveals new evidence in the long-standing criticism of the management of the Canada Pension Plan Investment Board (CPPIB), which manages the fund on which all Canadians rely when they retire.  Fossil Futures’ major finding is that the CPPIB is failing to consider the Paris agreement target of 1.5 degrees C., stating:  “Within its public equities portfolio, it has over $4 billion invested in the top 200 publicly traded fossil fuel reserve holders (oil, gas and coal). To stay within 1.5 degrees, these companies can extract only 71.4 billion tonnes of carbon dioxide, yet the companies the CPPIB is invested in have 281 billion tonnes in reserve, meaning they have almost four times the carbon reserves that can be sold and ultimately burned to stay within 1.5 degrees. Since reserves are factored into current company valuations, this means the CPPIB has invested billions of dollars in companies whose financial worth depends on overshooting their carbon budget.”  This aspect of the report was highlighted in an article in The Narwhal .

Fossil Futures also considers why the CPPIB has lagged the rest of the world in climate responsibility, stating that “the board of directors and staff are entangled with the oil and gas industry. For example, one of the CPPIB’s managing directors of energy and resources sits on the board of nine oil and gas companies.”  And as for its traditional position that it has not divested from fossil fuel companies so that it can influence their direction on environmental issues, Fossil Futures concludes: “The CPPIB’s attempts to draw on proxy voting as a central tool to address climate in its portfolio appears ineffective at best, but at worst may misinform beneficiaries expecting a more stringent and meaningful climate strategy.”

Fossil Futures makes recommendations for both the CPPIB and the Canadian government:

  • The CPPIB should: 1. Carry out a portfolio-wide risk analysis in the context of the climate emergency and disclose all findings to pension members. 2. Divest and reinvest. The surest way to address the financial and ethical risks associated with investment in the fossil fuel industry is to start the process of divestment. This means freezing any new fossil fuel investment, developing a plan to first remove highrisk companies from portfolios such as coal, oil sands and fracked gas producers, and finally, moving toward sector-wide divestment and reinvestment of capital into renewable energy sources. 3. Advocate for strong climate policy. Scientific and economic experts predict that climate change beyond 1.5 degrees will result in widespread political, social and economic decline, with the attendant impacts on pension returns. While pension plans are incapable of preventing such changes on their own, managers of these plans can become strong advocates for climate policy that is in alignment with their intergenerational fiduciary duty.

 

  • The Canadian government should: 1. Require full public disclosure of climate risk—including disclosure of all fossil fuel holdings—for all pension funds. California recently passed a law requiring that its major public pensions disclose climate risk. The Canadian government should do the same with the CPPIB. 2. Provide regulatory clarity to ensure that executing fiduciary duty means avoiding shortterm economic gains that imperil long-term climatic security for Canadians and the global community. 3. Revise the CPPIB’s “investment-only” mandate so that social and ecological values are better represented in investment decisions. It is unclear that securing retirement income by investing in tobacco companies, weapons manufacturers, private prisons and the fossil fuel companies responsible for the climate emergency is aligned with the interests of current or future beneficiaries.

 

Is+your+pension+part+of+the+solution+-+Shift+graphicAction item:   Tides Canada campaign has launched a new campaign, called Shift your Pension, for individuals who are concerned about their pensions – both the financial health and the impact on the climate crisis.  It allows you to send your own message to the CPPIB as well as provincially-managed public sector pension funds.