Canada’s pension funds must pick up the pace on climate

Despite progress to improve climate policies, some of Canada’s largest pension funds are still moving too slowly and betting unwisely against the energy transition, a new report indicates.

“We're seeing progress, but it's not nearly on the scope and scale of what's required to align with climate safety,” said Adam Scott, director of Shift Action for Pension Wealth and Planet Health. “There just needs to be a dramatic increase in the speed and ambition from all Canadian pension funds on climate.”

Shift Action’s annual pension climate report card, released Feb. 27, grades Canada’s 11 largest pension fund managers, which collectively manage over $2.2 trillion, on the quality, depth and credibility of their climate policies. Overall, their current policies and investment portfolios are not aligned with a climate-safe future and do not protect the retirement savings Canadians entrust them to invest, it found.

“The idea that pension funds can continue to invest in fossil fuels to marginally cut their emissions is really dangerous. And it shows that they don't really understand what the transition means, ultimately,” Scott said in a phone interview with Canada’s National Observer.

Last summer, historic wildfires set Canada ablaze and filled the air with smoke. Wildfires and extreme weather events are made more severe and more frequent by climate change, which is driven, in large part, by humans burning fossil fuels like coal, oil and gas.

The 172-page report details investment decisions made by different pension funds and says many of these decisions expose them to financial risk.

Canada’s largest pension fund — the Canada Pension Plan (CPP) — “is holding somewhere between $21 [billion] and $63 billion in fossil fuel assets,” said Scott. “There's really no good way to know because they don't disclose their holdings very well,” he added, noting that Shift Action’s estimate is based on tracking announcements over time.

In 2023, CPP made “significant new investments in very high-risk fossil fuel assets,” said Scott. CPP had a 49 per cent equity interest in Aera Energy when the company merged with California Resources Corporation, another California gas giant, in early February. Now, CPP has an 11 per cent stake in California’s largest oil and gas company.

“That is, fundamentally, a bet on the continued expansion of that company's oil and gas production in California, which means it's specifically a bet against the energy transition,” said Scott.

California’s oil and gas regulator recently proposed regulations to ban fracking. The regulator was directed to do so nearly three years ago by Gov. Gavin Newsom, who also asked the California Air Resources Board to look at pathways to phase out oil extraction across the state by no later than 2045.

“California is specifically looking toward restricting, through policy, the growth of fossil fuel companies, so Canada Pension Plan is invested very aggressively in the wrong direction here,” said Scott.

“If they lose that bet, if the energy transition proceeds as it should in line with what we need for a safe climate, they will lose potentially millions of dollars in the assets that Canadians have invested.”

“Pension funds have to care about whether or not we actually solve the crisis” because their returns are tied to the growth of the global and Canadian economy, which is already threatened by the climate crisis, said Scott.

“They're some of the largest allocators of capital on the planet. They're very important if we're going to actually hit the Paris Agreement targets,” said Scott. “We need all of these funds and all of their capitals to be directed in the right direction. The idea that that's not part of their job is wrong because the collective action required to address the crisis is the only thing that's gonna make it possible for them to meet their pension obligations.”

Once again, the Caisse de dépôt et placement du Québec (CDPQ) was the top-rated Canadian pension fund in Shift Action’s annual report with a B+. CDPQ manages more than 48 public pension and insurance plans, including the Quebec Pension Plan. It completed its divestment of oil production, refining and coal mining in 2022.

The report also highlights significant progress made by two pension funds: Ontario Municipal Employees Retirement System (OMERS) and Healthcare of Ontario Pension Plan (HOOPP), both of which improved a full letter grade, from a D+ and D, respectively, to a C+ and a C.

The Canada Pension Plan Investment Board (CPP) was the only fund with a slightly lower score on one metric than the previous year, due to its executives making statements that undermine its climate communications. CPP manages $576 billion on behalf of about 21 million Canadians. Outside of Quebec, every working or retired Canadian is a member of CPP.

Some comments about continued investment in oil and gas were made last November in Calgary by president and CEO John Graham, who told an audience the fund will “continue to look for additional investment opportunities in Alberta, in both traditional and renewable energy.”

Scott noted this was likely part of efforts to keep Alberta from exiting the Canada Pension Plan, as Premier Danielle Smith threatened to do last year.

“Sooner or later, we just have to actually speak the truth about what's going on, instead of trying to make political statements,” he said.

When companies promise to use green energy or carbon capture for their fossil fuel operations, that should be a red flag to pension funds, he added. If fossil fuel companies invest heavily in carbon capture technology, “it could actually increase the financial risk of owning the company because it makes the company's operations more expensive without fundamentally addressing the core problem, which is that we're moving away from oil and gas,” said Scott. Federal and provincial governments are also providing subsidies for carbon capture technology.

The second annual report card includes three international pension funds of vastly different sizes, funds and geographies leading on climate to illustrate that “much more detailed and sophisticated climate action is possible from pension funds,” said Scott.

The report also found seven of the 11 pension managers analyzed have at least one director or trustee who is also a director or executive of a fossil fuel company. For example, Ontario Teachers’ Pension Plan (OTPP), which scored a B overall, has a board member, Deborah Stein, who is also a director at four fossil fuel companies: Parkland Corporation, NuVista Energy, Washington Gas and Trican Well Service. Some current and retired Ontario teachers have been working with Shift Action to oppose Stein’s appointment to the board.

OTPP is the only fund in the report that specifically identifies board members who have climate experience, expertise or qualifications. It identified four members with such experience, though Shift Action could not identify what relevant qualifications two of them had.

Natasha Bulowski / Local Journalism Initiative / Canada’s National Observer