The climate crisis puts the security of workers’ retirements at stake, said Patrick DeRochie, senior manager at Shift Action for Pension Wealth and Planet Health, during a session at the Canadian Investment Review‘s 2022 Risk Management Conference.

Pension plan sponsors’ investment decisions and their ability to achieve adequate returns for their members depends on a stable climate, he noted, laying out the stark choice in front of institutional investors: they can choose to invest in developing gas plants, offshore oil projects and pipelines or they can allocate their capital to electric vehicles, wind farms and zero-carbon buildings.

With significant economic power, scale and global reach, institutional investors’ capital allocation decisions play a major role in whether real-world infrastructure can profitably make the required transition away from fossil fuels and be made resilient to a more extreme climate.

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Pension plan sponsors have a legal obligation to minimize risks and maximize returns, said DeRochie, referring to the physical, transition, policy and regulatory, legal and reputational and systemic risks they must take into consideration as they perform their fiduciary duties.

Physical risks — such as a warming world, increased fires, floods, heatwaves, hurricanes, droughts, rising sea levels and extreme weather — damage the systems and infrastructure that underpin the global economy and threaten the value of real estate, utilities, ports, highways, bridges, energy infrastructure and other physical assets that make up a significant portion of the holdings of Canadian pension funds, he noted.

Sectors such as electric utilities, vehicle manufacturers and oil, gas and coal are facing unprecedented transition risks right now, added DeRochie, noting these companies are a large part of the global economy and are widely held by pension funds. Indeed, the energy transition could create massive disruption and fuel a carbon bubble in which the valuation of fossil fuel companies could suddenly and rapidly plummet all at once, he cautioned.

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Public demand for faster methods to cut global carbon output has led world governments to set climate targets and increasingly stringent laws, policies and regulations that have massive financial implications for large parts of the world economy, said DeRochie. The industry is also facing an onslaught of litigation with more than 2,000 climate-related lawsuits filed against governments, oil and gas companies and their directors and officers for breach of fiduciary obligation, failure to disclose material financial risks to investors or tort claims as a result of losses.

“Polluting companies are losing their social licence to operate, having difficulty attracting labour and investment and facing massive financial penalties. Fossil fuel companies look a lot like tobacco companies did in the 1990s.”

The entire global economy and stability of the financial system is at risk from climate disruption, said DeRochie, noting the possibility of calamities such as the collapse of the interconnected food system, wide-scale water shortages, entire parts of the planet becoming too hot for humans to inhabit and devastating sea levels that flood coastal cities and cause mass migrations.

“If Canada’s largest public pension funds are serious about protecting their members’ retirement savings in the face of this emergency, they must act rapidly and decisively . . . [to] fully disclose all climate-related financial risks [and bring] carbon emissions from their portfolios to net zero as soon as possible.”

Read more coverage of the 2022 Risk Management Conference.