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.