The University Pension Plan is rolling out a new climate strategy that aims to make its portfolio carbon neutral by 2040.
“I’m proud that we’ve set an ambition consistent with the challenge we face,” says Brian Minns (pictured), managing director of responsible investing at the UPP. “We’re going to deliver on our investment returns in a way that’s good for the environment and for our members’ well-being.”
The climate action plan, which was set out alongside the UPP’s 2021 annual report, also includes two interim targets. The institutional investor is aiming to reduce its total portfolio emissions by 16.5 per cent of its 2021 baseline by 2025 and by 60 per cent by 2030.
The target date is the most ambitious one set by a major Canadian pension investment organization, according to Shift Action for Pension Wealth and Planet Health. In a statement, it described the UPP as a “climate leader” in Canada’s pension sector.
“It’s clear that the UPP is listening to, learning from and acting on the concerns of its members, including those who are experts in climate science, sustainable finance and climate and energy policy. Several aspects of the UPP’s climate action plan demonstrate that the pension plan’s leadership has a better grasp of the urgency and severity of the climate crisis than that of other large Canadian public pension funds.”
Beyond the carbon reduction targets, the statement also highlighted the UPP’s disclosure of emissions resulting from oil, gas and mining assets that it doesn’t control but have an indirect impact on its value chain. According to Shift, this Scope 3 emissions disclosure is the first to be produced by a Canadian pension organization.
“The Scope 3 emissions disclosure was challenging. We calculated it within our portfolio based on a global standard that suggests including oil, gas and mining activities,” says Minns. “Some of the information included was based on reported emissions and, where those figures weren’t available, we relied on our own analysis. We amalgamated this on the total portfolio level, but its important to note there’s a lot of uncertainty and, likely, some double-counting.”
Based on the greenhouse gas emissions accounting and reporting standard for the financial industry, the disclosure pegged the portfolio’s total Scope 3 emissions at a million metric tonnes in 2021. In order to improve transparency, the UPP graded the quality of the data it received on a five-point scale across each asset class with lower scores indicating more reliable figures.
The information provided on public equities received a score of two, meaning its figures were provided by companies but not verified by third-party organizations. Fixed income, the asset class with the second-highest average, scored a three, indicating emissions were estimated by third-party data provider using physical activity data. The information used to asses alternative portfolios, including infrastructure, private equity, private debt and real estate, each received the lowest scores, meaning the figures were estimated by the UPP using geographic and industry averages.
According to Minns, this lack of clarity in private markets was one of the reasons the UPP joined the environmental, social and governance data convergence initiative, a cross-organizational association seeking to improve the private investment sector’s fragmented approach to collecting and reporting on ESG data. “This is something we’re committed to improving in the future.”
The report also noted the UPP has adopted a provision to remove companies involved in the mining of thermal coal or using it to produce more than 15 per cent, or 10,000 MW, of the electricity they produce. Shift recommended the proscription on thermal coal should be extended to include all fossil fuel producers.
“While the UPP is implementing a climate transition investment framework with a commitment to invest ‘only in new mandates and assets that align with a net-zero transition and reduce the emissions intensity of UPP’s assets,’ the fund does not explain how oil and gas investments are aligned with this mandate. . . . It is unclear why the UPP would treat oil and gas companies differently than it treats the thermal coal industry, which it has specifically excluded.”
According to Minns, the UPP’s approach is rooted in its goal of engaging with oil producers in an effort to reduce overall carbon emissions. “We’re developing a transition framework and will only be investing in companies consistent with a net-zero alignment. We started with thermal coal because of its footprint and the fact that there are a lot of cleaner alternatives.”
Sean Cleary, chair of the Institute of Sustainable Finance at Queen’s University’s Smith School of Business, also endorsed the climate action plan. “This is a legitimate and very impressive net-zero commitment by UPP,” he said in a press release. “It is ambitious in setting a 2040 net-zero target and pragmatic in recognizing that true impact lies in reducing emissions not just in the fund’s portfolio but in the real world. It demonstrates both strategy and substance — setting interim targets and establishing focused engagement efforts. It’s clear how UPP will move forward and how members and other stakeholders can hold them accountable. These are central components that are critical in a net-zero commitment.”
In addition to outlining the new climate action plan, the UPP’s annual report also noted its portfolio generated 5.7 per cent returns during the last six months of 2021.
By the end of 2021, the UPP managed $11.8 billion in assets, having assumed fiduciary responsibility for the asset portfolios and distinct investment programs of Queen’s University, the University of Guelph and the University of Toronto. In total, its investments generated about $600 million on behalf of its members. Its solvency ratio reached 111 per cent.
“I’m pleased to share that UPP is starting from a solid financial position — fully funded with a surplus and clear goals for performance and growth,” wrote Barbara Zvan, president and chief executive officer of the UPP, in the report’s preface. “As of Dec. 31, 2021, we managed over $11.8 billion in net assets on behalf of 37,000-plus members.”