A recent ruling on federal carbon pricing sparked a lot of loud talk on both sides of the aisle, but the impact on institutional investors will be muted, says Monika Freyman, a chartered financial analyst and the responsible investment leader for Mercer’s wealth business in Canada.
On March 25, the Supreme Court of Canada ruled that the federal government has the constitutional authority to impose minimum carbon pricing standards across the country. Ottawa will likely now push harder for all provinces and territories to impose a price on carbon, something that some jurisdictions (including Alberta, Saskatchewan and Ontario) have been strenuously resisting.
However, for the Canadian institutional investor community, this ruling is simply the latest in a long line of signals indicating that further moves to cap carbon emissions in Canada and beyond are inevitable, says Freyman.
“Institutional investors have been becoming a lot more aware of climate risks and opportunities, including these types of regulatory changes, for some time — and, for those that haven’t, I would say that it has become a real focus area in the last year or so. The big tipping point before the Supreme Court decision was the shift as well in the U.S. with the [President Joe] Biden administration coming on board . . . and committing to the Paris Accord, [and] we’re seeing region by region, country by country, countries are reaffirming and committing to capping carbon emissions.”
As a result, the Canadian ruling is being felt more as the confirmation of a trend than as a surprising new development, she says. And many institutional investors have already recognized that it’s important to understand of the trend towards a greater focus on the environment, as well as the importance of being well positioned to take advantage of the next generation of business models and technology, she adds.
Some — in particular university endowments and foundations with stakeholders driving a divestment approach — have been moving out of the oil and gas sector altogether in recent years. But many larger pension funds are instead focusing on engaging with companies to encourage climate-friendly transformation — and that engagement is extending well beyond oil and gas.
“It’s really looking across all major industries and companies,” Freyman says. “The energy industry is one industry — relatively small and it has been shrinking … There are going to be climate impacts in the way we grow food, the way companies can secure key commodities in supply chains [and] the way they source their electricity.”
Mercer stress tests portfolios under different climate scenarios and has reached the conclusion that investors are better off with regulation limiting rising temperatures to two degrees Celsius than without regulation than with little regulation which could lead to temperatures around the world rising further. Ultimately, the Supreme Court decision and developments along the same lines may deliver net long-term benefits to institutional investors, says Freyman.
“We see in our modelling that there are big risks if those regulations don’t come in to cap emissions. Then we have those big physical impacts from climate change.” In contrast, capping carbon emissions to address climate change “maintains a world where we know how to function, we know how economies can react [and] we have less unknowns to deal with. So, even though it’s a pain point for some industries . . . in the end, in terms of meeting long-term obligations, there’s more certainty.”