Canada’s public pensions at risk of stranded assets, as fund managers increase fossil investments

An Insecure Future: Canada’s biggest public pensions are still banking on fossil fuels  was released by the Corporate Mapping Project in mid-August . It examines the investments of the Canada Pension Plan Investment Board (CPPIB) and the Caisse de dépôt et placement du Québec (CDPQ) over a five-year period from 2016 to 2020 – the two together manage $862.7 billion, which fund the pensions of over 26 million Canadians. The report finds that, despite public declarations and climate strategies, CPPIB increased the number of shares in oil and gas companies by 7.7 per cent between  2016 and 2020.  The CDPQ in 2017 pledged to increase its low-carbon investments by 50 per cent by 2020, but the authors calculate there was only a 14% drop in fossil fuel investments between 2016 and 2020, and also note that overall, the CDPQ holds over 52 per cent more fossil fuel shares than the CPPIB. The paper also highlights the funds’ investments in individual fossil fuel companies, including ExxonMobil ; TC Energy ; Enbridge; the world’s highest-producing coal companies, and in companies that are members of the Canadian Association of Petroleum Producers.  The numbers are startling,  and demonstrate a high potential for stranded assets which will threaten Canadians’ pension security.

The authors propose a number of policy changes, including a call for Canadian public pension fund trustees/investment boards to “ Immediately design a plan to phase out fossil fuel investment in alignment with targets set by the Paris Agreement to limit global warming below 1.5 degrees Celsius” and re-invest in renewables.  Recommendations for  the federal government include :  “mandate a clear timeline for public pensions to withdraw from all fossil fuel investments. Define reinvestment criteria that support a just and equitable transition to a renewable-based energy system” .

The report is summarized in “For climate’s sake, Canada Pension Plan needs to take a serious look at its investments”  (National Observer, September 7th),  which also summarizes the “oily” corporate connections of the decision-makers of the CPPIB, and highlights the current election promises related to financial regulation of our pension funds.

Total, Exxon announce stranded assets but some Canadians aren’t listening

Just as the long-predicted weather disasters are coming to pass before our eyes, so too are the stranded assets of the oil and gas industry.  In July, French fossil fuel multinational Total announced  “asset impairment charges” caused by low oil prices, and “in line with its new Climate Ambition announced on May 5, 2020 , which aims at carbon neutrality, Total has reviewed its oil assets that can be qualified as “stranded”, meaning with reserves beyond 20 years and high production costs, whose overall reserves may therefore not be produced by 2050. The only projects identified in this category are the Canadian oil sands projects Fort Hills and Surmont.” Total also cancelled its membership in the Canadian Association of Petroleum Producers (CAPP) , as had Teck Resources in May 2020 as part of the cost-cutting which saw it withdraw from the Frontier mine project in February.

As reported by Bloomberg News on August 5, a regulatory filing to the SEC by Exxon announced that low energy prices render as much as 20% of its oil and natural gas reserves as stranded assets, without book value. The  massive Kearl oil-sands mine near Fort McMurray Alberta was the only operation specifically named in Exxon’s filing, and a separate filing of Exxon subsidiary Imperial Oil Ltd also singled out Kearl’s reserves as “imperiled”.

The Energy Mix summarized and commented on these developments in “Colossal fossil Total declares $9.3b in stranded assets in Alberta tar sands/oil sands” (July 31) and “Exxon rips up $30 Billion rebuilding plan, could declare stranded assets at Kearl Lake” (Aug. 19).   

A different future?

In sharp contrast to the companies’ announcements: the Alberta office of Price Waterhouse has posted a rosy consultants’ view in a series titled: Energy Visions 2020: What’s ahead for Canada’s oil and gas industry . Part 1, “The Evolving Role of oil and gas in the Energy Transition” acknowledges the current low demand, but hones to that persistent industry view: “Given the cyclical nature of the industry, we anticipate that within five years we’ll have moved into a period of recovery and growth. By then the current oversupply will likely have been drained.”  PWC’s prescription for Canadian oil and gas producers: “to differentiate themselves from global competitors, they’ll have to continue to focus on important differentiators aligned with environmental, social and corporate governance (ESG) measures… Canadian oil and gas companies are already global leaders on some ESG principles. These include demonstrating high employee health-and-safety standards, a record for empowering and investing in the communities in which they operate, support for reasonable government carbon pricing and a commitment to new technologies to reduce emissions. But the challenge remains around how our industry communicates this story to investors.”

Part 2, “Finding Opportunity for Canada in the Global Energy Transition”  states: “Canadian energy companies have the opportunity to proactively address climate issues, take advantage of new opportunities where possible and find ways to create additional value for their communities, employees and shareholders.… We can and must raise our profile by highlighting all the positive achievements we’ve made in producing our energy more efficiently by using new technologies…”. Post Covid, “there may be opportunities for those companies that have the desire and balance-sheet strength to pursue new capital-intensive energy investments. Companies for which diversification isn’t an option must stay focused on their core business and continue to execute more efficiently, digitally and diversely than any global competitor……..We can expect that federal government support for all industries will come in some form of infrastructure investment, and the adoption of alternative energies will likely be part of the government’s infrastructure agenda.“

Finally, Part 3, “New World, New Skills: Preparing your workforce for the Energy Transition” discusses “The Transformation Imperative”, but focuses on automation and artificial intelligence as the disruptors. The report offers the general advice that employers need to create an “upskilling” organizational culture for their employees, while acknowledging that millennials rank the oil and gas as their least attractive career destination.   

Ontario Teachers’ pension fund invests in Abu Dhabi oil pipelines

The Ontario Teachers’ Pension Plan (OTPP), has outdone the May decision of AimCo in Alberta to invest in the Coastal GasLink pipeline,  with its announcement on June 23d that it is part of a consortium which has invested $10.1 billion  in a  gas pipeline network under development by the state-owned Abu Dhabi National Oil Company.  Details appear in the Globe and Mail    and Energy Mix on June 23.  The consortium partners are Toronto-based Brookfield Asset Management, New York-based Global Infrastructure Partners (GIP), and investors from Singapore, South Korea, and Italy.  The Ontario Teachers Pension Plan  is quoted by the Globe and Mail, stating: “This strategic transaction is attractive to Ontario Teachers’ as it provides us with a stake in a high-quality infrastructure asset with stable long-term cash flows, which will help us deliver on our pension promise.”

Advocacy group Shift Action for Pension Wealth and Planet Health responded with a scathing statement , which says:

“Investments like the OTPP’s in fossil fuel infrastructure are betting the hard-earned retirement savings of thousands of Ontario teachers against the long-term safety of our climate… Ensuring the growth of pensions in the long-term requires ending investments that lock-in fossil fuels and redeploying massive pools of finance into climate solutions like renewable energy and clean technology.”

Shift also links to a 25-page Toolkit for OTPP members on the risks of fossil fuel investment of their pension funds. (May 2020).   The OTPP Statement on Responsible Investing for 2019 is here.

Banks, fossil fuels, and a collapsing oil and gas industry

Rainforest Action Network is one of the advocacy groups which monitor fossil fuel investment on an ongoing basis: their Fossil Fuel Report Card for 2020: Banking on Climate Change  was released on March 18.  As it does every year, the report calculates how much money  has been invested in fossil fuels since the Paris Agreement was signed in 2015 – in 2020, that has reached $2.7 Trillion.  The report also names and ranks the  banks behind the fossil fuel financing, which continue to be dominated by the big U.S. banks: JPMorgan Chase, Wells Fargo, Citi, and Bank of America.  Canada’s RBC ranks 5th in the world, having invested $141 billion since the Paris Agreement, wit  TD ranking 8th,  ScotiaBank 10th and Bank of Montreal ranked 16th.

Against this entrenched position in support of fossil fuels comes the plummeting price of oil and an industry in crisis.  An April 1 blog by the International Energy Agency explains the five key dimensions – including the Covid-19 crisis –  which explain that “The global oil industry is experiencing a shock like no other in its history”.  The panic setting in to the industry is captured in the Wall Street Journal article on April 14, “Thirst for Oil Vanishes, Leaving Industry in Chaos”.  The Carbon Tracker Initiative published “COVID-19 and the energy transition: crisis as midwife to the new” which states: “Fossil fuel demand has collapsed and may never surpass the peaks of 2019.  By the time the global economy recovers, all the growth may be met by renewable energy sources….. And once the peak is passed, the fossil fuel sector as a whole will face an eternal scrappy battle for survival, struggling with overcapacity and stranded assets, with low returns and high risks.”

Forbes is even more blunt in  “After COVID-19, The Oil Industry Will Not Return To “Normal” (April 5), which states:  “Canada and the United States are in a bind. There is a temptation to bail out oil, if only to keep people employed and ensure that these over leveraged companies don’t drag banks underwater…. Financial support for oil workers is an imperative, but support for the oil sector is a waste of money, whether the Saudis and Russians stay their course or not. Investments in shale and the Canadian oil sands are bound to become stranded assets, even if we return to “normal.” Oil’s days were numbered before coronavirus, and they will be numbered after it.”

The Canadian picture

Andrew Nikoforuk provides a Canadian view in “The other emergency is crashing oil and gas prices” in The Tyee (Mar. 18).  A Globe and Mail article on March 19 (updated Mar. 20)  outlines political calculations and lobbying, and predicts that the federal government will offer a multi-billion dollar post-Covid-19 rescue package to the oil and gas industry (although determined lobbying is also pushing for investment in clean energy instead.  Jim Stanford addresses the issue in We’re going to need a Marshall Plan to rebuild after Covid-19 ” (in Policy Options, April 2), and  writes: “ With the price of Western Canada Select oil falling to close to zero (and no reason to expect any sustained rebound to levels that would justify new investment), it is clear that fossil fuel developments will never lead Canadian growth again. ….. However, the other side of this gloomy coin is the enormous investment and employment opportunity associated with building out renewable energy systems and networks (which are now the cheapest energy option anyway). This effort must be led by forceful, consistent government policy, including direct regulation and public investment (in addition to carbon pricing). Another big job creator, already identified by Ottawa and Alberta, will be investment in remediation of former petroleum and mining sites.”  By April 9,  the Globe and Mail published “Climate, clean tech could take centre stage in federal economic recovery plans” .  The Narwhal argues  “Doubling down on Alberta’s oil and gas sector is a risk Canadians can’t afford to take”  (April 14).

Despite this, in what Common Dreams calls “a shameful new low”, the Alberta government announced a $1.5 Billion cash infusion to “kickstart” the Keystone XL Pipeline on March 31. Ian Hussey of the Parkland Institute reacted with “Alberta’s Keystone XL investment benefits oil companies more than Albertans” (April 2).  Bill McKibben reacted with outrage in “In the Midst of the Coronavirus Pandemic, Construction Is Set to Resume on the Keystone Pipeline” in The New Yorker .  Other reactions, circling back to the role of Canadian banks: “Reckless Keystone XL Decision by TC Energy Endorsed by JPMorgan Chase, Citi and Canadian Peers”  (Rainforest Alliance Network);  and “Bank of Montreal, RBC, Blackrock Among the Backers for Alberta’s ‘Reckless’ Keystone XL Subsidy” (The Energy Mix , April 5)  .

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.

Corporate Climate Risk Disclosure needed to protect Pensions

To protect pensions, companies should be required to come clean on climate risk” writes Keith Stewart of Greenpeace Canada in an Opinion piece in the National Observer on November 27.  Stewart reports that Greenpeace Canada has filed a formal request under Ontario’s Environmental Bill of Rights, for the Ontario government to review the need for mandatory disclosure of climate-related risks in corporations’ financial filings. The government’s response is expected by the end of 2017.  This is the latest of recent and ongoing calls for increased corporate disclosure of the risks posed by climate change,  to protect investors and financial stability.  The issue has even made it to the conservative Report on Business of the Toronto Globe and Mail newspaper, in  “Business risk from climate change now top of mind for Canada’s corporate boards” (November 22)  . The article warns that Canada’s  stock markets are  particularly vulnerable to a potential “carbon bubble” in the valuations of fossil-fuel-dependent companies, given that the Toronto Stock Exchange is so heavily weighted with energy and mining companies (20 per cent for that category, as compared with only 2 per cent for clean technology and renewable-energy companies).  And that’s not the worst:  on the TSX Venture Exchange, mining and oil and gas companies account for 68 per cent of the index.  (Such a resource sector dependency was part of the reasoning given by the Norweigian Wealth Fund for its proposal to divest oil and gas investments (Nov. 16)).

Another related Globe and Mail article provides an excuse for the current state of climate risk disclosure in Canada in  “Companies Looking to Report Environmental Data Also Navigate Inconsistent Frameworks” (Nov. 22) . The article states that “There is a dizzying number of best-practice guidelines for climate disclosures” and lists the major ones – with information drawn largely from the Carrots & Sticks database . In fact, Carrots & Sticks lists  nine sustainability reporting instruments unique to Canada, in addition to widely-recognized international ones such as the Principles for Responsible Investment (PRI) Reporting Framework  and the OECD Guidelines for Multinational Enterprises  .  (Carrots & Sticks  is an initiative begun in 2006 by KPMG International, Stichting Global Reporting Initiative, UNEP, and the Centre for Corporate Governance in Africa, with the goal of encouraging and harmonizing financial disclosure guidelines.)

Most recently, the Task Force on Climate-related Financial Disclosures, led by Marc Carney and Michael Bloomberg, released their  landmark Final Report and Recommendations in 2016. The following Canadian pension funds have, at least on paper, supported it:  Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan, OPTrust, the Caisse de dépôt et placement du Québec and the British Columbia Investment Management Corporation.  The Canadian Securities Administrators  launched a Climate Change Disclosure Review  in March 2017 to investigate and consult re Canadian practice, which will issue a report “upon completion of its review”.

And across the globe in Australia, the  Australian Prudential Regulation Authority (APRA), the  regulator of the financial industry, has  also announced an industry-wide review of climate-related disclosure practices.  On November 29, an Executive Board member of the APRA delivered a speech, “The weight of money: A business case for climate risk resilience” , in which he outlines the Australian perspective on climate-related financial risks, and states:  “So while the debate continues about the physical risks, the transition to a low carbon economy is underway, and that means the so-called transition risks are unavoidable: changes to market sentiment, new financial or environmental regulations, or the emergence of new technologies with the potential to prompt a reassessment of the value of a large range of assets, and consequently the value of capital and investments.”  The speech is summarized in The Guardian.

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.

 

Public sector pension administrators are recognizing climate risk, protecting pensions of public employees in Ontario and New York City

OPTrust administers the Ontario Public Service Employees Union (OPSEU ) Pension Plan, with almost 87,000 members and retirees.  On January 31, it became a leader in Canadian pension plan administration by releasing two documents:   Climate Change: Delivering on Disclosure, a position paper, and OPTrust: Portfolio Climate Risk Assessment, a report by Mercer consultants, which provides an assessment and analysis of the fund’s climate risk exposure .  The  OPTrust  press release  states: “For pension funds, climate change presents a number of complex and long-term risks. In Canada alone, pension funds manage well over $1.5 trillion in assets, which brings a real responsibility to collectively seek innovative approaches to modeling carbon exposure and its impact across portfolios.”   The position paper, Delivering on Disclosure, includes a call for collaboration amongst other financial actors to develop standardized measures for carbon disclosure.  It is noteworthy that OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by the union,  OPSEU,  and five by the employer, the Government of Ontario.

In a February 2 press release  affecting  the pension plans of New York’s public employees, teachers, firefighters and police,  the Office of the Controller of New York City announced:  “the Trustees of the New York City Pension Funds … will conduct the first-ever carbon footprint analysis of their portfolios and determine how to best manage their investments with an eye toward climate change. In the 21st century, companies must transition to a low-carbon economy, and a failure to adapt to the realities of global warming could present potential investment risks.”  The  New York City pension system  has been a leader in addressing climate change risks, including an initiative called the Boardroom Accountability Project  , which began in 2014 to give investors the ability to ensure boards are diverse and “climate-competent”.

On this point, a January 2017 report from Vancouver-based Shareholder Association for Research and Education (SHARE) found that   “… companies in Canada’s most carbon-intensive sectors are not demonstrating ‘climate competency’ in the boardroom.”   The report, Taking Climate on Board: Are Canadian energy and utilities company boards equipped to address climate change? urges greater transparency from boards at publicly-traded corporations, stating “Investors need boards to demonstrate that they are “climate-competent” – that they understand and prioritize climate change risks to long-term value, including the physical, legal, reputational, stranded asset and regulatory risks related to climate change.”   The report is based on a  review of the public disclosures from 52 companies across Canada’s energy and utilities sectors,  using 3 measures: board skills and experience, oversight, and risk disclosure. It concludes that “more companies are starting to talk about climate change in their reporting, but only three boards disclosed any expertise amongst their members on the issue, and no board included climate change knowledge in its board competency matrix.” The full report is here.  (On another note, SHARE has walked the walk by filing shareholder resolutions with Enbridge Inc., and met with TD Bank regarding their environmental and social aspects of their investments  in  the Dakota Access Pipeline. See “The Dakota Access Pipeline and Indigenous Rights.” )

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).

Fossil Fuel Investment Risk: Losses, and Pressure to disclose Risks to Investors

A March 2 article in The Tyee, “How a B.C. union dumped fossil fuels and cashed in”   highlights the profitable  decision of the B.C. Government Employees Union to move $20 million in its strike fund and general reserves from equities (and fossil fuels)  into cash in 2014. The article then discusses the more complex issues of climate risk in pension fund investing (B.C.GEU did not divest its pension fund). A March 1 article  in Grist, “New York lost Billions with Fossil Fuel Investments”  estimates  that the New York State Common Retirement Fund,  the third largest pension fund in the U.S., lost $5 billion over three years through its investments in fossil fuel companies.  The estimate is based on the analysis of Toronto-based Corporate Knights, using its Decarbonizer  calculator.  Another Corporate Knights analysis of the performance of 14 major funds  , including Harvard’s endowment, the Bill and Melinda Gates Foundation, and the pension plans of Canada and the Netherlands, estimated that the combined losses of the 14 funds since  2012 was $23 billion.

In early March, the investment committee for the largest pension fund in the U.S., California Public Employees’ Retirement System (CalPERS) voted  to require that the corporations it invests in must include people on their boards who have expertise in climate change risk management strategies.  On March 24, CBC reported  that the U.S. Securities Exchange Commission (SEC) has ordered Exxon to put to a vote at its shareholders’ meeting in May a resolution which would require Exxon to make annual disclosure of risks to company’s operations from climate change or legislation designed to control carbon pollution.

These are all evidence that the investment community is paying attention to the investment risks of fossil fuels, particularly stranded assets.  At COP21, a global Task Force on Climate-related Financial Disclosures (TCFD) was established, with Michael Bloomberg at the head, to“consider the physical, liability and transition risks associated with climate change and what constitutes effective financial disclosures across industries”… and to “ develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders”.  In January, at the World Economic Forum in Davos, Switzerland,  proposals for risk reporting by fossil fuel companies were set out in  Considerations for Reporting Disclosure in a Carbon-constrained world   from Carbon Tracker Initiative and the Climate Disclosure Standards Board .  Too Late, Too Sudden: Transition to a Low-Carbon Economy and Systemic Risk (Feb. 2016)     from the  European Systemic Risk Board in February recommends that policymakers increase disclosure of the carbon intensity of non-financial firms (that would include the fossil fuel industry), noting that “Fossil-fuel firms and electricity utilities are substantially debt financed, exacerbating the potential financial stability impact of a sudden revaluation of stranded assets.”  For a Canadian context, see an October 2015 working paper from SHARE, Integrating the Economy and the Environment: An Overview of Canadian Capital Markets  .

A New tool for Responsible Investing and Divesting in Canada

As it does every year to coincide with the World Economic Fund Meetings, Canadian magazine Corporate Knights released its rankings of the 100 Most Sustainable Corporations in the World in January 2016 . Perhaps surprisingly given the current VW emissions scandal, a German automaker, BMW, is ranked #1 in sustainability, based on its energy, waste and water reduction performance and for linking the salary of its senior executives to their sustainability performance. Corporate Knights also introduces its Eco Fund ratings , along with a discussion of responsible investing , “to make it easy for Canadian investors to see which funds provide the best combination of economic and environmental performance.” Canadian mutual funds are ranked, with calculations of their 3-year annualized returns, weighted carbon intensity, and exposure to green companies.  Such ranking may prove useful to the financial managers at the University of Toronto, who are currently considering the recommendations of a Presidential Advisory committee on divestment from fossil fuels . The committee has recommended that the university determine a method to evaluate whether a given fossil fuels company’s actions blatantly disregard the 1.5-degree threshold, and then proceed with “targeted and principled divestment from specific companies in the fossil fuels industry”.   Alternatives Journal puts this in context of the wider university divestment movement in “U of T could make Divestment History” (Dec. 2015)  . Disappointingly, the Globe and Mail reported on December 23 “Ontario Teachers, CPPIB opt to maintain fossil-fuel assets” . The Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board say they are committed to their roles as “engaged investors”, seeking transparency from companies regarding risk.     On January 1, 2016, Marc Lee summarized the issues in The Tyee and asked, “Is your Pension Fund in Climate Denial?

Banking Executive Compensation should measure Performance in GHG reduction

 A new report from Vancouver-based SHARE (Shareholder Association for Research and Education) examines the impacts that climate change-related risks could have for the banking sector, including their exposure to carbon-intensive assets, but also considering their own administration and operation as corporations. Banking on 2°: The Hidden Risks of Climate Change for Canadian Banks focused on Canada’s five largest banks: Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank, Scotiabank and Toronto-Dominion Bank. Amongst the recommendations: banks should have a climate change statement which delineates the steps being taken to reduce the climate impacts of its operations and its financing activities; performance targets to reduce operational and financed GHG emissions should be established and aligned with IPCC models to limit warming to 2°Celsius; and executive compensation and incentive packages should include performance in reducing GHG emissions from operational and financed sources.

Pension funds and Divestment: What Canadian Trustees and Workers should know

Pension Funds and Fossil Fuels: The Economic Case for Divestment , released by the Canadian Centre for Policy Alternatives in November, examines the top 20 public pension funds in Canada and estimates that their fossil fuel holdings put them at risk of losses of approximately $5.8 billion, because of the potential for new regulations, carbon pricing, emission caps, and stranded assets. The report, aimed at   pension fund trustees and concerned workers , argues for divestment of fossil fuel holdings and briefly reviews some of the alternative financial instruments and clean energy projects that could benefit from the divested capital. The analysis is supported by an October report by the Carbon Tracker Initiative, Lost in Transition , which warns that “ Coal, oil and gas companies are misleading shareholders with overly optimistic future demand projections” and “these scenarios are potentially underestimating the pace and scale of the transformation of the energy sector”. And Unhedgeable Risk: How Climate Change Sentiment Impacts Investment  concludes that that investors should concern themselves not only with the long-term fundamentals of climate change, but also with the immediate risks of “ sentiment shifts” (such as oil price panic and sell-off).

Landmark Guidance Document for Pension Managers released by UNEP

On October 8, at the Annual Meetings of the Boards of Governors of the International Monetary Fund and the World Bank Group in Lima, the United Nations Environment Program (UNEP) released the final report of the Design of a Sustainable Financial System Inquiry, titled The Financial System We Need, capping UNEP research stream that dates back to 2005. The documents produced include Fiduciary Responsibility in the 21st Century (September) , an analysis of investment practice and fiduciary duty in Australia, Brazil, Canada, Germany, Japan, South Africa, the UK and the US. “This report is a landmark piece in the global dialogue…By clearly defining the full remit of fiduciary duty and providing recommendations for how it should be implemented, this work serves as a definitive guide for any fiduciary unsure of the role that sustainability should play in their decision-making process”.

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.

Pension Funds ill-prepared for the risks of Stranded Assets

A survey by Asset Owners Disclosure Project (AODP) found that only 76 of the 500 largest asset owners in the world (pension funds, insurance funds, foundations and endowments) have taken meaningful action to manage climate risk. 21 of the 32 large Canadian institutional investors in the survey scored badly, including the Alberta Heritage Savings Trust Fund and the Ontario Public Service Pension Plan. “ Risky Management ”  at Corporate Knights magazine (April 29) provides a summary of the survey results. The full report is at the AODP website .

The Asset Owners Disclosure Project (AODP) is an independent not-for-profit global organisation whose objective is to protect retirement savings and other long term investments from the risks posed by climate change. AODP and a London-based environmental law firm, ClientEarth, have announced they will work with pension fund members to challenge trustees and managers to fulfill their legal duty to protect investments from climate risk. The campaign could result in a test case to clarify the legal duties of pension fund fiduciaries.

The Dangers of Stranded Assets and Carbon Bubbles

The HSBC Bank released advice to investors in April, titled Stranded Assets, What Next?  The letter admits that coal and fossil fuel investments are highly likely to become stranded, and advises that there are “reputational as well as economic risks to staying invested”. A blog by the Pembina Institute  summarizes the HSBC report and considers the dangers of stranded assets for Alberta.

At the international level, G-20 leaders have asked the Financial Stability Board in Basel to convene a public-private inquiry into the dangers to the financial sector as climate rules become much stricter, and fossil fuel assets become stranded. All member countries have agreed to co-operate or carry out internal probes, including the United States, China, India, Russia, Australia, and Saudi Arabia. The investigation will be modeled on that commissioned by Mark Carney at the Bank of England, which is set to report in July 2015. See “G20: fossil fuel fears could hammer global financial system”   in The Telegraph (April 29).

Divestment Still a Necessary Strategy as ExxonMobil Reports on Stranded Assets

The largest oil and gas company in the world, ExxonMobil, agreed under pressure from activist shareholders to publish a “Carbon Asset Risk” report on their website, to provide information to shareholders on the risks that stranded assets pose to the company’s business model, and how the company is planning for a low-carbon world. Stranded assets for Exxon are the carbon reserves which would need to remain in the ground if the world were to follow a carbon budget to keep below 2 degrees of global warming.

Some environmentalists are claiming this transparency as a victory – GreenBiz described it as “a pivotal milestone on the road to a low-carbon economy”. Bill McKibben, noting that the Exxon report was released on the same day as the IPCC Report, said it is “probably at least as important in the ongoing battle over the future of the atmosphere”. But McKibben sees “consummate arrogance” in Exxon’s statement that “we are confident that none of our hydrocarbon reserves are now or will become stranded”. For McKibben, the solution remains a divestment campaign – a strategy that Archbishop Desmond Tutu also urged in an April essay in The Guardian.

See “Exxon, Stranded Assets and the New Math” at GreenBiz: http://www.greenbiz.com/blog/2014/03/24/exxon-stranded-assets-and-new-math, and an article in the Wall Street Journal Market Watch at: http://www.marketwatch.com/story/landmark-agreement-with-shareholders-exxonmobil-agrees-to-report-on-climate-change-carbon-asset-risk-2014-03-20. But see also Bill McKibben’s article in The Guardian on April 3rd, “Exxon Mobil’s Response to Climate Change is Consummate Arrogance” at: http://www.theguardian.com/environment/2014/apr/03/exxon-mobil-climate-change-oil-gas-fossil-fuels?CMP=twt_fd&utm_content=bufferfc5c8&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer, and Desmond Tutu, “We Need an Apartheid-style Boycott to Save the Planet” at: http://www.theguardian.com/commentisfree/2014/apr/10/divest-fossil-fuels-climate-change-keystone-xl.

For an overview of Stranded Assets, see Unburnable Carbon: Wasted Capital and Stranded Assets at:
http://www.lse.ac.uk/GranthamInstitute/publications/Policy/docs/PB-unburnable-carbon-2013-wasted-capital-stranded-assets.pdf.