Answering Mark Carney: What are the climate plans for Canada’s banks and pension funds?

On December 18, the Bank of England was widely reported  to have unveiled a new “stress test” for the financial risks of climate change. That stress test is a proposal contained in an official BoE Discussion Paper,  2021 biennial exploratory scenario (BES) on the financial risks from climate change , open for stakeholder comments until March 2020.  Mark Carney, outgoing Governor of the Bank of England, has led the BoE to a leadership position on this issue in the financial community and will continue  in his new role as United Nations special envoy on climate action and climate finance in 2020.  In a December BBC interview reviewing his legacy, he warned the world yet again about stranded assets and asked: “A question for every company, every financial institution, every asset manager, pension fund or insurer: what’s your plan?”

What are the climate plans for Canada’s pension funds ?

shift action pension report 2019In their June 2019 report, Canada’s Pension Funds and Climate Risk: A Baseline For Engagement  , ShiftAction concludes: “Canadian pension funds are already investing in climate solutions, but at levels that are far too low relative to the potential for profitable growth, consistent with levels required to solve this challenge.” The report provides an overview, and importantly, offers tips on how to engage with and influence pension fund managers.

Since then…..

The sustainability performance of  the  Canada Pension Plan Investment Board (CPPIB) continues to be unimpressive, as documented in  Fossil Futures: The Canada Pension Plan’s failure to respect the 1.5-degree Celsius limitreleased in November ccpaFossilfuture2019 by the Canadian Centre for Policy Analysis-B.C. (CCPA-BC).  According to the CPPIB Annual Report for 2019, (June 2019) the CPPIB is aiming for full adoption of the Task Force on Climate-related Financial Disclosures recommendations by the end of fiscal 2021 (page 28).

Canada’s second largest pension fund, the Caisse de dépôt et placement du Québec (CDPQ), announced in November that CEO Michael Sabia will retire in February 2020 and move to the University of Toronto Munk School of Global Affairs and Public Policy. The press release credits Sabia with leading the Caisse to a position of global leadership on climate change, beginning in 2017 with the launch of an investment strategy which aims to increase low-carbon assets and reduce the carbon intensity of investment holdings by 25%. In 2019, the Caisse announced that its portfolio would be carbon-neutral by 2050.   Ivanhoé Cambridge ,the real estate subsidiary of the Caisse de dépôt, has a stated goal to increase low-carbon investments by 50% by the year 2020 and to reduce greenhouse gas emissions by 25% by the year 2025. In December 2019, Ivanhoé Cambridge announced that it had issued a $300 million  unsecured green bond to finance green initiatives – the first real estate corporation in Canada to do so. Shawn McCarthy reviewed Sabia’s legacy in “Canada’s second largest pension fund gets deadly serious about climate crisis”, in Corporate Knights in December.

AIMCo, the Alberta Investment Management Corporation is a Crown Corporation of the Government of Alberta, with management responsibility for the public sector pensions funds in Alberta, along with other investments. In November 2019, the Alberta government passed Bill 22, which unilaterally transfers pension assets from provincial worker plans to the control of AIMCo (see a CBC summary here ). The Alberta Federation of Labour and the province’s large unions protested in a joint statement, “Union leaders tell UCP: ‘The money saved by Albertans for retirement belongs to them, not to you!’” (Nov. 20) . The unions state: “we’re worried that what you’re attempting to do is use other people’s money to create a huge slush fund to finance an agenda that has not yet been articulated to the public – and which most people would not feel comfortable using their life savings to support.” And in December 2019, those worries seem to come true as AIMCo announced  its participation in a consortium to buy a 65% equity interest in the controversial LNG Coastal GasLink Pipeline Project from TC Energy Corporation. Rabble.ca reported on the demonstrations at AIMCo’s Toronto offices regarding the Coastal Gas project in January .

On January 8, the Toronto Star published  “Toronto asks pension provider: How green are our investments?” – revealing that the city has asked for more details from the Ontario Municipal Employees Retirement fund (OMERS). OMERS, with assets of over $100 billion, manages the pension savings of a variety of Ontario public employees, including City of Toronto and Toronto Police, Fire, and Paramedics. On January 8, OMERS announced the latest consolidation of Toronto pension plans with its consolidation of the Metropolitan Toronto Pension. Its Sustainable Investment Policy statement is here .

What are the climate plans for Canada’s private Banks?  

The 10th annual edition of Banking on Climate Change: the Fossil Fuel Finance Report Card was released in October 2019 by Banktrac, Rainforest Alliance Network and others . It states that $1.9 trillion has been invested in fossil fuels by the world’s private banks since the Paris Agreement, led by JPMorgan Chase, Wells Fargo, Citi and Bank of America. Canadian banks also rank high in the world: RBC (5th), TD (8th), Scotiabank ( 9th), and Bank of Montreal (15th).  Also in October, the World Resources Institute green-targets2published Unpacking Green Targets: A Framework for Interpreting Private Sector Banks’ Sustainable Finance Commitments , which includes Canadian banks in its global analysis and provides guidance on how to understand banks’ public documents.  “How Are Banks Doing on Sustainable Finance Commitments? Not Good Enough”  is the WRI blog which summarizes the findings.

Since then….

On September 14, the Canadian Imperial Bank of Commerce announced the release of their first climate-related disclosure report aligned with the Task Force on Climate-Related Financial Disclosures. Building a Sustainable Future highlights the CIBC’s governance, strategy, and risk management approach to climate related issues. It provides specific metrics and targets, especially for its own operational footprint, but also a commitment: “to a $150 billion environmental and sustainable finance goal over 10 years (2018-2027).”

Scotiabank also announced climate-related changes in November, including “that it would “mobilize $100 billion by 2025 to support the transition to a lower-carbon and more resilient economy”; ensure robust climate-related governance and reporting; enhance integration of climate risk assessments in lending, financing and investing activities; deploy innovative solutions to decarbonize operations; and establish a Climate Change Centre of Excellence “to provide our employees with the tools and knowledge to empower them to act in support of our climate commitments. This includes training and education, promoting internal collaboration, and knowledge and information sharing.”  Their 4-page statement on climate commitment  is here. Their  2018 Sustainable Business Report (latest available) includes detailed metrics and description of the bank’s own operations, including that they use an Internal Carbon Price of CAD$15/tonne CO2, to be reviewed every two years.

RBC, ranked Canada’s worst fossil-fueling bank in the 2019 edition of Banking on Climate Change , released a 1-page statement of their Commitment to Sustainable Finance (April 2019)  and an undated Climate Blueprint  with a target of $100 billion in sustainable financing by 2025.  However, in their new research report,  Navigating the 2020’s: How Canada can thrive in a decade of change , the bank characterizes the coming decade as “Greener, Greyer, Smarter, Slower”, but offers little hope of a change in direction. For example, the report states “ Canada’s natural gas exports can also play a role in reducing emissions intensity abroad. LNG shipments to emerging economies in Asia, where energy demand is growing much faster than in Canada, can help replace coal in electricity production, just as natural gas is doing here in Canada. …As climate concerns mount, Canada’s challenge will be to better sell ourselves as a responsible, cleaner energy producer.”

European Investment Bank stops fossil funding; Bank of Canada acknowledges the dangers of stranded assets

european investment bank energy_lending_policy_enThe long-awaited decision came on November 13, when the European Investment Bank (EIB) issued a press release announcing that “ We will stop financing fossil fuels and we will launch the most ambitious climate investment strategy of any public financial institution anywhere.”  Also, “…..The EIB will work closely with the European Commission to support investment by a Just Transition Fund. The EIB will be able to finance up to 75% of the eligible project cost for new energy investment in these countries. These projects will also benefit from both advisory and financial support from the EIB.”  The Guardian summarizes the policy here ; details are in the full document, EIB Energy Lending Policy: Supporting the energy transformation.

The decision ends a long and contentious review process which received more than 149 written submissions and petitions signed by more than 30,000 people.  National members of the EU negotiated and compromised – the German government had been expected to abstain from the vote but ended by supporting the measure.  A press release from WWF-Europe  is generally supportive, stating “All public and private banks must urgently follow suit” – while pointing out that the decision postpones the end of financing for gas projects until 2021, and allows for further financing for any gas infrastructure that could potentially transport so-called “green gas”. A summary in Clean Energy Wire quotes Claudia Kemfert, climate economist at the German Institute for Economic Research, who calls the EIB decision “a game changer”, and says, “Even if there’s still a backdoor for fossil gas included, this is an important and necessary step in the right direction.”

Bank of Canada acknowledges climate change risks to the economy

On November 19, the Bank of Canada published its most complete statement to date about the transitions and risks which climate change will bring, in Researching the Economic Effects of Climate Change , a report prepared by Miguel Molico, senior research director at the bank’s Financial Stability Department.  On November 21, the Governor of the Bank of Canada followed up on this by raising the issue of climate change and the risk of stranded assets during an address to the Ontario Securities Commission .  The National Observer summarizes the development in “Bank of Canada warns of stranded assets and an abrupt transition to clean economy” (Nov. 23).

Also in Canada, on November 19, the Institute for Sustainable Finance was launched Housed at the Smith School of Business at Queen’s University, Kingston Ontario : “ The Institute for Sustainable Finance (ISF) is the first-ever cross-cutting and collaborative hub in Canada that fuses academia, the private sector, and government with the singular focus of increasing Canada’s sustainable finance capacity.” A more formal statement comes in the Institute’s launch report:  Green Finance: New Directions in Sustainable Finance Research & Policy  which states: “the Institute will span a continuum of expertise from across varying disciplines, including finance, economics, environmental studies, political science and others, in order to foster innovative research, education, external collaborations and partnerships. The Institute’s mandate is threefold:

  •  Generate innovative and relevant research on sustainable finance and effectively communicate this research to all pertinent stakeholders.
  • Serve as a platform for collaboration between government, academia and industry.
  • Provide educational opportunities and develop capacity in the field of sustainable finance.”

The Green Finance report summarizes the discussions by financial experts at a conference by the same name, held on June 14-15, 2019, following the release of the Report of the government’s Expert Panel on Sustainable Finance – Mobilizing Finance for Sustainable Growth.  To help readers who are not financial experts,  the Institute website offers useful “primers” to explain some fundamental concepts in sustainable finance, including  Climate-Related Financial Disclosures, Divestment, and Transition Bonds. Not to be confused with Just Transition funding, the primer explains that “Transition Bonds” are corporate financing tools, and the companies who issue them must use the proceeds to fund a business transition towards a reduced environmental impact or reduction in carbon emissions. ( The example given is that a coal-mining company could issue a  transition bond to finance efforts to capture and store carbon.)

Institute for sustainable financeAs one of its first actions, the ISF established the Canadian Sustainable Finance Network (CSFN)  an independent formal research and educational network for academia, industry and government to bring together a talented network of university faculty members and relevant members from industry, government and civil society.  A list of members, here , includes multiple faculty from twelve Canadian universities, one from Yale in the U.S., and other individual academics from universities which are not institutional members (including UBC, HEC Montreal, and Memorial University).

 

What if the financial sector moved away from fossil fuel investments?

On September 17, Bill McKibben, a leader of the divestment movement, wrote Money is the oxygen on which the fire of global warming burns , published in The New Yorker. The essay traces the progress of the divestment movement and asks, What if the banking, asset-management, and insurance industries moved away from fossil fuels?. On the same day came the announcement that “ University of California drops fossil fuels from its $80 billion portfolio”.   An article in Rolling Stone  quotes the UC representatives, stating “it wasn’t moral or political pressures that convinced them to phase UC’s hundreds of millions of dollars in fossil-fuel investments. Instead, they say, it was the growing realization that fossil fuel investments no longer made financial sense and weren’t a worthwhile investment.”

Investment performance of Fossil fuel companies

In what has been seen as an historical turning point, ExxonMobil lost its spot on the S&P Index list of “Top Ten Companies” in August 2019 –  the first time it had not appeared since the Index launched in 1957.  In 1980,  the energy sector as a whole represented 28% of the S&P 500 Index; as of August 2019, it represents  4.4%.  According to a summary by the Institute for Energy Economics and Financial Analysis (IEEFA), the energy sector claimed last place in the S&P rankings of sector performance in August 2019, following similar results in 2018 and 2017.“This is not some temporary aberration. The oil and gas sector is in decline, profits are shrinking and investment options problematic …. This is true even for companies like ExxonMobil that historically have deep pockets.”

The full Briefing Note,  ExxonMobil’s Fall From the S&P 500 Top Ten: A Long Time Coming (August 2019) also includes discussion of the role Canada’s oil sands have played in the decline of the industry.  Carbon Tracker Initiative provides further information in Exxon’s New Clothes – the tale of why Exxon lost its prized position in the S&P 500 .

Are the banking, asset-management, and insurance industries moving  away from fossil fuels?  

New initiatives launched at U.N. Climate Summit in New York in September point in that direction:

  1. 130 banks from 49 countries signed on to the Principles for Responsible Banking (PRBs), committing to align their business operations with the Paris Climate Agreement and the Sustainable Development Goals. Despite the fact that the Bank of Canada issued a report flagging the investment risks of climate change in May, the only signatories from Canada were the National Bank of Canada and the Desjardins Group . Hardly surprising, given the April 2019 Fossil Fuel Report Card from Banktrack , which showed that Canada’s big banks rank 5th, 8th, 9th and 15th in the world for fossil fuel invesment since the Paris Agreement in 2015. In response to the PRI pledge, civil society groups issued a statement, “No More Greenwashing: Principles must have Consequences ”  which highlights the lack of concrete plans and the slow time frame: signatory banks are allowed up to four years to demonstrate their implementation of the principles.  A thorough discussion published by Open Democracy asks “The UN banking principles are welcome – but do they go far enough to stop climate destruction?
  2. A new Net Zero Asset Owner Alliance  was launched, convened by the U.N. Environmental Program’s  Finance Initiative and the Principles for Responsible Investment, and supported by WWF as part of its Mission 2020 campaign. The Net Zero Asset Owner Alliance signatories are insurance and pension fund management companies which hold approximately $2.3 U.S. Trillion. Their commitment document  pledges to re-balance those investment portfolios to make them carbon neutral by 2050, with intermediate targets set for 2025, 2030 and 2040. Founding members include   German insurer Allianz, the California Public Employees’ Retirement System (CalPERS), Swedish pension fund Alecta, PensionDanmark, Swedish pension manager AMF, Nordea Life & Pension, Norwegian insurer Storebrand, and Swiss RE.
  3. European investment bank-logo-enThe European Investment Bank strengthened its climate commitments at the U.N. Climate Summit  pledging to “ position the EIB as an incubator for climate finance and expertise to mobilise others, helping our societies and economies transform to a low carbon future.” Specifically, the bank pledged that 50% of new investments will be for climate action and environmental sustainability by 2025 (previously the target had been 30% by 2020). Also,  “we aim to align all our financing activities with the principles and goals of the Paris agreement by the end of 2020. As an important first step, we will phase out energy projects that depend solely on fossil fuels.”
  4. financing the low carbon futureThe Climate Finance Leadership Initiative (CFLI) , chaired by Michael Bloomberg, released  Financing the Low Carbon Future  , a thorough but readable analysis of how clean energy investment works globally, with practical recommendations . The CFLI is composed of  senior executives of seven major private-sector financial institutions– Allianz Global Investors, AXA, Enel, Goldman Sachs, HSBC, Japan’s Government Pension Investment Fund (GPIF) and Macquarie.
  5. Over 500 environmental and advocacy groups from 76 countires supported the Lofoten Declaration at the U.N. Climate Action Summit. The Lofoten Declaration , (named after the Lofoten Islands of Norway where it was first drafted in 2017) states in part: “It is the urgent responsibility and moral obligation of wealthy fossil fuel producers to lead in putting an end to fossil fuel development and to manage the decline of existing production.”  Canada is one of those countries, and Catherine Abreu of Climate Action Network Canada was one of the supporters, stating: “True leadership in response to the climate emergency means having the courage to commit to ending the expansion of oil and gas production and make a plan to transition communities and workers to better opportunities.”  A summary  appears in “If a House Is on Fire, You Don’t Add Fuel’: 530 Groups Back Call to Rapidly Phase Out Fossil Fuels Worldwide” in Common Dreams (Sept. 23); Background to the Lofoten Declaration here  .

Much remains to be done:  Consider the September 2019 report by Carbon Tracker Initiative.  Breaking the HabitWhy none of the large oil companies are “Paris-aligned”, and what they need to do to get there. The report examines oil company investment activities , and concludes:

  • Last year, all of the major oil companies sanctioned projects that fall outside a “well below 2 degrees” budget on cost grounds. These will not deliver adequate returns in a low-carbon world. Examples include Shell’s $13bn LNG Canada project and BP, Total, ExxonMobil and Equinor’s Zinia 2 project in Angola.
  • No new oil sands projects fit within a Paris-compliant world. Despite this, ExxonMobil sanctioned the $2.6bn Aspen project last year – the first new oil sands project in 5 years.
  • The oil and gas in projects that have already been sanctioned will take the world past 1.5ºC, assuming carbon capture and storage remains sub-scale.

And Global Trends in Renewable Energy Investment 2019 , commissioned by the United Nations, was published in September, reporting the good news that  global investment in new renewable energy capacity, led by solar power, “ is set to have roughly quadrupled renewable energy capacity (excluding large hydro) in the decade ending in 2019. Renewables accounted for 12.9 percent of global electricity in 2018—and if hydropower is also included, the renewable’s share of global electricity production is  measured at 26.3%.  Cost-competitiveness of renewables has “risen spectacularly over the decade, as the levelised cost of electricity has been steadily decreasing, down 81 percent for solar photovoltaics and 46 per cent for onshore wind since 2009.”

Yet despite this good news, the report states: “Overall, we note that these figures represent a small share of the overall economic transition required to address climate change…. global power-sector emissions are likely to have risen by at least 10 percent between the end of 2009 and 2019.”

 

New report recommends mandatory financial disclosure of climate-related risks for Canadian companies

iisdleveraging-sustainable-financeThough written mainly for a financial audience, a new report from the International Institute for Sustainable Development (IISD) is relevant to the livelihoods and pensions of all Canadians.  Leveraging Sustainable Finance Leadership in Canada: Opportunities to align financial policies to support clean growth and a sustainable Canadian economy was released on January 16,  examining and making  recommendations for Canadian companies to disclose climate change risks to their shareholders and to the public. A press release summarizes the report.  Why is it so important?  It concludes with an analysis of financial disclosure in the oil and gas industry, (found in Annex E), and this warning about the dangers to us all of stranded assets: “When these emissions are counted via proved and probable reserves, as disclosed by Canadian oil and gas companies, a picture emerges of significant, undisclosed—and therefore unaddressed—risks to Canadian companies, financial institutions, pension beneficiaries and savers…. Once the implications of the Paris Agreement are fully priced into the market, oil and gas asset valuations will shift. If this change is sufficiently large, debt covenants may be triggered in companies. This will in turn impact financial institutions, including banks, insurance companies and pension funds. Debt downgrading could ensue, and bank capitalization thresholds could be impacted.” (And a related risk for oil and gas companies:  in December 2018, the Canadian Shareholders Association for Research and Education (SHARE) joined an international campaign for improved disclosure by oil and gas companies of the water-related risks of their operations ).

What is to be done?  Canada’s transition to a lower carbon economy requires private investment capital, and Canada’s financial markets cannot operate in isolation.  Canada has a lot of regulatory “catching up” to do regarding climate risk, (outlined in “Data Gap” in Corporate Knights magazine in May 2018) , and  evidenced by the examples given throughout the report of current practice amongst  European Union , G7 and G20 countries. The report shows the state of  Canadian regulation, with  frequent reference to the two major Canadian studies to date on the issue:  the Interim Report of the government-appointed Expert Panel on Sustainable Finance (Oct. 2018), and the Canadian Securities Association Staff Notice 51-354 (April 2018).  In Leveraging Sustainable Finance Leadership in Canada, author Celine Bak, sets out a three-year policy roadmap for Canada, calling for Canadian laws and statutes to be updated to require mandatory disclosure of climate risk by 2021. The report also calls for the Toronto Stock Exchange to  join the UN Sustainable Stock Exchanges Initiative, and that the the Canada Pension Plan Investment Board  be required to report on the climate change risks which might affect its fully-funded status.  Detailed and concise summaries are provided in the Annexes, titled:  “An Overview of the Key Reports on Corporate and Financial Sector Climate- and Environment-Related Disclosure”; “G20 and G7 Precedents for Implementation of TCFD Recommendations in Canada”; and  “Analysis of EU Sustainable Finance Proposed Actions, EU Laws and Canadian Equivalents”.

Expect more discussion and publications about sustainable finance issues, as Canada’s Expert Panel  concludes its public consultations at the end of January 2019, and releases its final report later in the year.  The European Union Technical Expert group on Sustainable Finance (TEG) is also expected to report in June 2019,  and the international  Task Force on Climate-Related Financial Disclosures Task Force will publish a Status Report in June 2019,  updating its first report,  published in September 2018, with analysis of disclosures made in 2018 financial reports .

Oil sands companies called on to “keep it in the ground” – but Suncor opens new mine near Fort McMurray, deploys driverless trucks

Parkland report big oil coverThe majority of Alberta oil sands production is owned by the five companies: Canadian Natural Resources Limited (CNRL), Suncor Energy, Cenovus Energy, Imperial Oil, and Husky Energy.  What the Paris Agreement Means for Alberta’s Oil Sands Majors, released on January 31 by the Parkland Institute, evaluates what the 2°C  warming limit in the  Paris Agreement means for those “Big Five” –  by assessing their  emissions-reduction disclosures and targets, climate change-related policies, and actions, in light of their “carbon liabilities.” The carbon liabilities are calculated using  three levels for the Social Cost of Carbon, ranging from $50, $100, and $200 per tonne. Even under the most conservative scenario, the carbon liabilities of each corporation are more than their total value, and the combined carbon liabilities of the Big Five ($320 billion) are higher than Alberta’s GDP of $309 billion. Conclusion: “the changes required to remain within the Paris Agreement’s 2°C limit signals a need for concrete, long-term “wind-down” plans to address the challenges and changes resulting from global warming, including the fact that a significant portion of known fossil fuel reserves must remain underground.” What the Paris Agreement Means for Alberta’s Oil Sands Majors was written by Ian Hussey and David Janzen, and published by the Parkland Institute as part of the SSHRC-funded Corporate Mapping Project.  A National Observer article reviewed the report and published responses from the Big Five companies on January 31.

autonomous electric mining truckRather than keeping it in the ground, Suncor Energy announced on January 29 that it is continuing to ramp up production at its Fort Hill oilsands mine, about 90 kilometres north of Fort McMurray.  The next day, Suncor also announced  the beginning of a 6-year phase-in of approximately 150 autonomous electric trucks at numerous locations. The company said it will “continue to work with the union on strategies to minimize workforce impacts,” and that “current plans show that the earliest the company would see a decrease in heavy equipment operator positions at Base Plant operations is 2019.”   Reaction from the local union is here in a notice on the website of Unifor 707A;  Unifor National Office response is here:  “Driverless trucks aren’t the solution for Suncor” .  The National Observer published an interview with a Suncor spokesperson on January 31.  According to”Suncor Energy says driverless trucks will eliminate a net 400 jobs in the oilsands” , Suncor is the first oil sands company to use driverless trucks, and “Suncor’s plan to test the autonomous truck systems was initially criticized by the Unifor union local because of job losses. But Little says Suncor is working with the union to minimize job impacts by retraining workers whose jobs will disappear. The company has been preparing for the switch by hiring its truck drivers, including those at its just−opened Fort Hills mine, on a temporary basis.”

The good news is that  “the era of oil sands mega-projects will likely end with Suncor Energy’s 190,000 barrel-per-day Fort Hills mining project, which started producing this month”, according to an article by Reuters.  The bad news is in the title of that article:  “Why Canada is the next frontier for shale oil” (Jan. 29) . The article extols the strengths of Alberta’s mining industry, and quotes a spokesman for Chevron Corporation who calls the Duvernay and Montney formations in Canada “one of the most promising shale opportunities in North America.”  For a quick summary, read   “Montney, Duvernay Oil and Gas Fields Seize the Momentum from Athabasca Tar Sands/Oil Sands” ( Jan. 31) in the Energy Mix.

Also,  consider the work of Ryan Schultz of the Alberta Geological Survey.  Most recently, he is the lead author of  “Hydraulic fracturing volume is associated with induced earthquake productivity in the Duvernay play”, which  appeared in the journal  Science on January 18 , and which is summarized in the  Calgary Herald  on January 18.  It discusses the complexities of how fracking has caused earthquakes in the area.