Pension plan sponsors can’t ignore the financial risks of climate change or respond to them with half-baked approaches that allow companies to continue pumping out pollution.
To be credible, comprehensive and complete, strategies protecting Canadians’ retirement savings from the unprecedented risks of the climate crisis must include several key elements.
- A Paris-aligned commitment
The Paris Agreement is a legally binding international treaty signed by Canada to limit global heating to 1.5°C above pre-industrial levels. To do this, Canada’s largest pension funds must commit to investing in a manner allowing them to reach net-zero emissions as soon as possible.
While a 2050 net-zero goal is a start, leading funds have committed to achieving this earlier. In the U.S., several pension plans, including the New York State Common Retirement Fund, the third largest in the country, have committed to decarbonizing by 2040.
In Canada, the Alberta Investment Management Corp., the British Columbia Investment Management Corp., the OPSEU Pension Trust and the Public Sector Pension Investment Board have yet to make net-zero commitments. The commitments made by the Healthcare of Ontario Pension Plan and the Ontario Municipal Employees’ Retirement System have, so far, been limited to press releases.
- Interim Paris-aligned emissions targets, including absolute reductions and Scope 3 emissions
Credible climate plans require plan sponsors to make significant emissions reductions, including short- and medium-term targets in line with the Paris Agreement. According to the Net Zero Asset Owner Alliance, “absolute emissions reductions for the period 2020 to 2025 should range between 22 per cent and 32 per cent.”
The Canada Pension Plan Investment Board is the only Canadian pension organization to include Scope 3 emissions in its net-zero commitment. The Ontario Teachers’ Pension Plan and the Caisse de dépôt et placement du Québec have set the most aggressive 2030 targets.
To date, Canadian pension plan sponsors haven’t set short- and mid-term absolute emissions reduction targets.
- A concrete plan to phase out fossil fuel investments
With scientific consensus unambiguously calling for the rapid phase out of fossil fuels, the time for pension funds to profitably sell their fossil fuel assets is now.
The OMERS recently sold its stakes in a U.K. gas pipeline operator and a Chilean gas terminal, though the organization doesn’t have a policy on fossil fuel phase out, making its intentions unclear. The Caisse has committed to phasing out all of its investments in oil producers by the end of 2022, unlike the AIMCo, which is “taking advantage of divestment of oil and gas assets by some institutional investors.”
- An immediate exclusion on any new fossil fuel investment
The International Energy Agency has warned that a net-zero pathway requires an end to new investments in fossil fuels and related infrastructure.
The Caisse’s portfolio excludes oil producers and, like the Investment Management Corp. of Ontario, it has indicated that it’s limiting investments in thermal coal. Other Canadian pension funds have fallen behind on exclusions, in stark contrast to the Netherlands-based Stichting Pensioenfonds ABP, the default funds in New Zealand’s national pension scheme and investment funds for many of Europe’s largest cities.
- Requirements and timelines for owned companies to be transition-ready
Engagement in the hopes that climate-wreckers will become renewable energy converts isn’t working.
A comprehensive engagement program must prohibit owned companies from lobbying against climate action and require the incentivization of absolute emissions reductions through capital expenditure plans and compensation structures. Companies that don’t transition must face financial consequences.
In Canada, the Ontario Teachers’ earns a nod for the transparency and credibility of its engagement program, with specific timed targets for moving to a net-zero aligned pathway. However, it continues to hold fossil fuel assets without credible net-zero transition pathways. PSP has stated that it aims to reduce its holdings in “carbon intensive assets that lack transition plans” by 50 per cent by 2026. It has a target to reduce the emissions intensity of the portfolio by at least 20 per cent by 2026, relative to a 2021 baseline. It has also announce plans for half of its portfolio’s footprint to have a science-based plan to reduce its emissions by 2026.
Canadian pension funds need to follow the example set by the ABP, which divested from fossil fuel producers after determining they weren’t transition-ready, and the New York State Common Retirement Fund, which excludes companies without “viable transition strategies.”
- Targets and timelines for investments in climate solutions
To generate returns in a functioning financial system on a livable planet, pension plan sponsors need to allocate significant capital to solutions that can ward off the systemic risks posed by the climate crisis.
To date, the Caisse aims to hold $54 billion in “green assets” by 2025 and PSP Investments aims for $70 billion by 2026. The CPPIB aims to hold $130 billion in “green and transition assets” by 2030.
The definition of green assets is open to interpretation. Currently, the category may include high-risk carbon offsets, grey or blue hydrogen, carbon capture and storage for fossil fuel production and even fossil gas infrastructure, none of which have a profitable future if Paris Agreement goals are met.
Pension funds such as the OMERS are publicly announcing their climate-friendly investments, but have yet to commit to hard numbers. The HOOPP has reported nearly $2 billion loosely categorized under “climate solutions” with no public plans or targets for scaling up these investments.