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.

Alberta government proposes to snatch away joint governance of public sector workers’ pension funds

The UCP government in Alberta has made the unilateral decision to consolidate Alberta public sector pensions under the control of the Alberta Investment Management Corporation, a crown corporation administered by the provincial government . According to an article in the Calgary Herald,  “Unions blast provincial decision to shift billions in public sector pension funds” : “(The) government intends to reverse the option of public sector pension plans leaving AIMCo as a fund manager. Moreover, the Alberta Teachers Retirement Fund, Workers’ Compensation Board and Alberta Health Services will be expected to transfer funds to AIMCo for management, reducing redundant administration.” More details appeared  in  “Government contemplates changes to management of more than 400,000 Alberta workers’ pension plans” in the Edmonton Journal (Nov. 1) which summarizes the opposition  by the Alberta public sector unions on the grounds that the decision reverses a recent change that gave more than 351,000 public sector employees joint control of their pension funds, through  a joint governance model that had been authorized by 2018 legislation and which only took effect in March 2019.  The Edmonton Journal article also states that police and firefighter pensions might also be included in the government plans.  “Alberta’s public unions prep for a fight, whether in the streets or the courts” is a broader overview from CBC Calgary which discusses the pension consolidation, as well as the wage cuts and workforce reduction included in Bill 21 of the new budget under the new UCP government.

ccpa-bc_fossilpensions_june2018-thumbnail (1)The attempt to shift Alberta workers’ pension funds brings to mind the 2018 report, Canada’s Fossil-Fuelled Pensions: The Case of the British Columbia Investment Management Corporation by the Corporate Mapping Project.  The report found that  despite its statements that it was a climate responsible investor, BCI had actually increased its  fossil fuel investments – for example, by boosting investment from $36.7 million in 2016 to $65.3 million in 2017  in Kinder Morgan, owner of the Trans-Mountain pipeline.  And although the new publication by the Corporate Mapping Project,  Big Oil’s Political Reach: Mapping fossil fuel lobbying from Harper to Trudeau, examines the power of the fossil fuel industry at the federal level, some might argue that its influence could also extend to Alberta’s pension management decisions.

 

Canada Pension Plan Investment Board shifting toward renewables; new study shows fossil fuel investments lose value

Canadian workers can hope that climate change awareness is finally dawning  at the Canada Pension Plan Investment Board (CPPIB), responsible for the financial health of the Canadian public pension system. On November 4, a CPPIB press release announced that the Board entered into a purchase agreement with Pattern Energy Group Inc. ; the Globe and Mail describes the deal in  “CPPIB bets on renewable energy with $2.63-billion purchase of wind-farm operator Pattern Energy” . cppib 2019 report This would demonstrate a big leap for the CPPIB, which reported in its  2019 Report on Sustainable Investing, released on November 6,  “CPPIB’s investments in global renewable energy companies more than doubled to $3 billion in the year to June 30, 2019. This is up from just $30 million in 2016.”  The annual Report includes other details, including a description of the new climate change investing framework, launched in April 2019.   Bloomberg News video channel  (Nov. 5) offers an interview with the CEO  of CPPIB discussing the CPPIB climate risk strategy, and providing the good news that the CPPIB will not participate in the expected blockbuster fossil fuel public offering by  Saudi Aramco.

Changes to public sector pensions in Alberta

One hopes that the Alberta government may also invest in that province’s growing renewable energy industries, as it has made the unilateral decision to consolidate Alberta public sector pensions under the control of the Alberta Investment Management Corporation, a crown corporation administered by the provincial government . According to an article in the Calgary Herald,  “Unions blast provincial decision to shift billions in public sector pension funds” : “(The) government intends to reverse the option of public sector pension plans leaving AIMCo as a fund manager. Moreover, the Alberta Teachers Retirement Fund, Workers’ Compensation Board and Alberta Health Services will be expected to transfer funds to AIMCo for management, reducing redundant administration.” More details appeared  in  “Government contemplates changes to management of more than 400,000 Alberta workers’ pension plans” in the Edmonton Journal (Nov. 1) which summarizes the opposition  by the Alberta public sector unions on the grounds that the decision reverses a recent change that gave more than 351,000 public sector employees joint control of their pension funds  – a joint governance model that had been authorized by 2018 legislation under the previous NDP government, and which only took effect in March 2019.  The Edmonton Journal article also states that police and firefighter pensions might also be included in their plans.  “Alberta’s public unions prep for a fight, whether in the streets or the courts” is a broader overview from CBC Calgary which discusses the pension consolidation, as well as the wage cuts and workforce reduction included in Bill 21 of the new budget under the new UCP government.

The dangers of investing pension funds to prop up the Alberta fossil fuel industry are indicated by a recent study of three major state public pension funds in California and Colorado (CalSTRS, CalPERS and PERA) . “Study Shows Pension Funds’ Refusal to Divest From Fossil Fuels Cost Retired Teachers, Firefighters, and Public Workers $19 Billion”  appeared in  Common Dreams  on November 5,  summarizing a study by Canadian publisher Corporate Knights.  Their analysis concluded that those three pension funds collectively lost over $19 billion in retirement savings for teachers, state troopers and public workers by continuing to invest in fossil fuels.  The full reports are not available yet on the Corporate Knights website, but are on Google Drive here .  A response by 350.org  also summarizes the study,  calls fossil fuel investments  “a Losing Strategy for Retirement Savings  — and the Planet” and asks “Why would any fund manager continue to invest in fossil fuels? Risky, harmful to our planet and shared future, and less profitable than many other investment opportunities, fossil fuel investments are a lose-lose choice.”

 

Canada’s Expert Panel on Sustainable Finance recommends incentives to green pensions, RRSP’s

Canada’s Expert Panel on Sustainable Finance released its final report on June 14,  Mobilizing Finance for Sustainable Growth . The report makes fifteen recommendations,  stating “…. climate change opportunity and risk management need to become business-as-usual in financial services, and embedded in everyday business decisions, products and services.”  Although the Panel’s main focus was on institutional investments, they also made recommendations which would help individuals to make greener personal investments.

Tiff Macklem, Chair of the Expert Panel,  summarizes and simplifies the message of the Panel Report in “Climate change should be part of regular savings and investment decisions” in The Conversation  on July 3.  Concerning individual actions,  he states:  “To accelerate climate-conscious investment, we … recommend actively engaging Canadians in the climate opportunity and making their stake in fighting climate change more tangible…To engage them, we recommend the federal government create an incentive for Canadians to invest in accredited climate-conscious products. Specifically, we recommend that the Minister of Finance create additional space in RRSPs and defined contribution pension plans for these investments and offer a “super deduction” — in other words, a taxable income deduction greater than 100 per cent —on eligible investments.”   This proposal was further explained in “Expert panel on sustainable finance recommends super tax deduction to incentivize green savings” in Benefits Canada magazine.

Other recommendations in the final Report include:  Establish a standing Canadian Sustainable Finance Action Council (SFAC), with a cross-departmental secretariat, to advise and assist the federal government in implementing the Panel’s recommendations;  Establish the Canadian Centre for Climate Information and Analytics as an authoritative source of climate information and decision analysis;  Define and pursue a Canadian approach to implementing the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Although the recommendations include goals for private financing of the building retrofit market and clean tech industry, they also include a call to support Canada’s oil and natural gas industry “in building a low-emissions, globally competitive future.”

 

FTQ shareholder resolution calls for GHG targets aligned with the Paris Agreement; corporations respond with a charge of “micromanagement”

As part of its stated Action Plan for Engaging in a Just Energy Transition , the Fonds de Solidarité des Travailleurs du Québec  (FTQ) (an investment fund controlled by Quebec trade unions) put forward the following shareholder’s resolution  at the Cenovus Energy Annual Meeting in Calgary in April.  (The text of the resolution appears on page 51, as Appendix A in the company’s Information Circular):

Resolved: That Cenovus Energy Inc. (“Cenovus”) set and publish science-based greenhouse gas (GHG) emissions reduction targets that are aligned with the goal of the Paris Agreement to limit global average temperature increase to well below 2 degrees Celsius relative to pre-industrial levels. These targets should cover the direct and indirect methane and other GHG emissions of Cenovus’ operations over medium and long-term time horizons. Such targets should be quantitative, subject to regular review, and progress against such targets should be reported to shareholders on an annual basis.

The Board’s written response and recommendation  states “…..Cenovus has always and will continue to assess our approach to climate change risk management with a view to maximizing shareholder value. ….Achieving the level of commitment contemplated by the Paris Agreement requires an integrated plan at a national and global level, with policies to guide the actions of governments, individuals and corporations to collectively work together toward the desired outcome. Our view is that it is an overly demanding request, and contrary to the best interests of shareholder value, to require an individual company to unilaterally set targets….   As such, we recommend voting against the proposal.”  And sure enough, as expected, the FTQ proposal was defeated by an  89% vote against. The news is summarized  and in The Energy Mix  and  by the CBC  .

The  Fonds de Solidarité des Travailleurs du Québec (FTQ), along with the Canadian shareholders’ non-profit  SHARE, was also part of the recent resolution to Exxon . That resolution, filed in the U.S.  by a group of investors led by the New York State Common Retirement Fund and the Church Commissioners for England, proposed that the company develop “short-, medium- and long-term greenhouse gas targets aligned with the goals established by the Paris Climate Agreement to keep the increase in global average temperature to well below 2°C and to pursue efforts to limit the increase to 1.5°C.”  In response,  ExxonMobil   applied for and received permission from the  U.S. Securities Exchange Commission (SEC), allowing it to exclude the resolution from its Proxy Circular.  In retaliation, SHARE states in a blog, Why we’ll vote against Exxon’s entire board of directors, that it is “recommending to our proxy voting clients that they withhold their support for all Exxon directors at the upcoming annual general meeting on May 29th.”

The “Micromanaging” argument:  “Investors Worried About Climate Change Run Into New SEC Roadblocks” from Inside Climate News (May 3), in addition to providing a good overview of shareholder actions, explains: “The term “micromanage” has become the linchpin to objections by companies seeking to block these resolutions. The precedent was set last year when the SEC agreed with EOG Resources, a Texas-based oil and gas exploration company, that a resolution asking the company to adopt emissions goals had sought to “micromanage” the company.”  More in  “Exxon Shareholders want action on climate change: SEC calls it micromanagement”  in the Washington Post (May 8). According to the CBC report about the FTQ resolution at  Cenovus, the corporate CEO called the proposal “overly demanding”, and said  “we had challenges with the prescriptive nature of the proposal”,  echoing the industry’s language and strategy.

To stay up to date: The U.S. non-profit As you Sow  monitors corporate environmental and social responsibility, including climate change and the energy transition  – through  press releases  , reports, and an up-to-date database of resolutions .