Does the CPP math include climate risk we ask Canada’s Chief Actuary

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Did you know Canada has a Chief Actuary? We do and it’s his job to check the math of all the complicated financial schemes of the government. So, who better to make sure the Canada Pension Plan is protected from climate change risk? And, it turns out the Chief Actuary is doing a report on the CPP right now.

The Office of the Chief Actuary (OCA) announced it is commissioning an external peer review of its next Actuarial Report on the Canada Pension Plan (CPP), expected to be released in December 2016. These actuarial reports on the CPP are conducted every three years and are used by the federal and provincial ministers of Finance when reviewing and making recommendations on the CPP.

On behalf of Friends of the Earth Canada, I wrote to Canada’s Chief Actuary asking him to make sure our contributions and future pensions will survive all the challenges of climate change.  Here is what I wrote. (PDF)

FOE logo header
Monday, July 11, 2016


Jean-Claude Ménard
Chief Actuary
255 Albert St.
Ottawa, Ontario K1A 0H2                                    via e-mail:


“We can make a case that we might want an investment policy that will generate less volatile results,” Mr. Ménard said in a telephone interview. i

Re: Actuarial Report on the Canada Pension Plan (CPP) in 2016.

Dear Mr. Ménard,

Friends of the Earth Canada agrees with your concern for the investment policy of the Canada Pension Plan Investment Board. We are very concerned the risks to the fund presented by climate change are not being taken seriously enough by the CPPIB. Recent purchases of Encana and Western Petroleum assets suggest climate risk is being ignored. Therefore, we urge you to conduct a “2-degree stress test” on the fund as part of your actuarial report. This action would be well within the stated climate change policy of the federal government and in keeping with emerging international practice.

As you are aware Canada is party to the Paris Agreement on climate change and is committed to limiting global temperature rise to 1.5 degrees. It has done so because of the severe human, environmental and economic risks posed by global warming. The resulting market changes as we explain below require an expansion of the parameters of the 2016 Actuarial Report on the Canada Pension Plan (CPP).

The Paris Agreement was adopted by 195 countries, legally binding them to a global climate deal committed to limit global warming to well below 2 degrees Celsius above pre-industrial levels. If this agreement is to succeed it means that up to 2050, approximately 35 percent of known oil reserves, 52 percent of gas reserves and 88 percent of coal reserves are unburnable.ii A significant proportion of the oil and gas reserves that will not be burned include oil sands in Canada. Under this scenario, investors should be concerned about asset stranding and protecting portfolio value for beneficiaries.

Leading figures in the financial world are advising financial institutions to recognize these risks and take appropriate action. Climate related financial disclosure has emerged as a key issue for the Financial Stability Board (FSB) at the G20. Driven both by policy support and voluntary initiatives.

Notable policy support includes the French Energy Transition Law,iiiinitiatives in California and Sweden,ivFSB concern over climate related risk reporting have become more acute following the Paris Agreement at COP21 Global financial regulators are already responding to systemic and sector specific climate risk. G20 central banks, led by FSB Chair Mark Carney, are acting to address climate risk reporting gaps in the transition to carbon neutral energy systems, and the agreed upon phase out of fossil fuel.v The Prudential Regulation Authority at the Bank of England and the Dutch central bank have both committed to better aligning their systemic risk analysis with climate policy targets.viThe largest bank in the world, the Industrial and Commercial Bank of China, has announced that they will be introducing climate screening on their debt portfolio.vii The low carbon energy transition and green finance are the centre piece of China’s G20 Presidency.

Mainstream investors already consider a range of systemic and sector-based risk factors across their asset portfolios. These include major sovereign defaults, earthquakes in Tokyo, hurricanes in Florida, and tightening emissions standards in the automotive sector, among others. Like these other risks, understanding the investment implications of transitioning the economy and our energy system along the 1.5 – 2 degree emissions pathway and ultimately towards carbon neutrality is complicated.

It is time for Canada’s leading public investors led by the Canada Pension Plan to bring climate-based systemic and sector specific risk into their portfolio management and engagement decisions. At the sector level, mounting losses in the fossil fuel industry indicate a need for more robust risk assessment and reporting as climate targets accelerate the transformation of North American and international energy markets. The recent Suncor shareholder resolution shows that this may be starting to happen,viii  but not yet at the industry level. Most hydrocarbon companies continue to produce strategic plans consistent with 4-6 degree warming outcomes. As one of the world’s largest insurers, Aviva,ix  and economist Simon Dietz have pointed out,x  catastrophic warming of this level would destroy value across investor portfolios and the resulting weather extremes would likely make parts of the world uninhabitable.

Most Canadian institutional investors appear to be waiting for catastrophe or disruptive change to the climate or energy systems to happen before taking action. It is precisely this scenario that proper risk management is designed to avoid. It is time to look at the work of leading international investors who are already aligning their portfolios to prosper in a world that is transitioning towards a carbon neutral energy system. From the Montreal Pledgexi to the Norwegian sovereign wealth fund’s targeted divestment from high-risk fossil fuel companies,xii  the leaders are moving quickly.

Market regulation of climate risk reporting and climate science have not yet converged. But they are converging. This work is being led by the G20 Task Force on Climate Related Financial Disclosure (TCFD). As we already see in France,xiii as capital markets and climate goals come into alignment, investors who continue to hold high-cost hydrocarbon assets stand to lose a lot of money. The shareholder value destroyed and creditors left with nothing in the US coal sector indicates what a disorderly transition to carbon neutrality could look like.xiv  Investor scrutiny of US banks’ bad loans to shale gas companies has yet to play out in here in Canada.

Our largest banks continue lending to bankrupt oil sands operators, repeating industry reassurances of a cyclical oil price recovery.xv  Canadian insurers appear similarly unprepared for the energy transition that is being led by the market and supported by the Paris Agreement. Due to weak public reporting, it is unclear how large insurers are acting to identify and evaluate their potential investment exposures as the low carbon energy transition gathers pace.xvi

All this feels a lot like July 2007 when Charles Prince, then chief executive of Citigroup reminded those concerned about the build of bad debt in the mortgage market that “when the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”xvii

Just like Mr. Prince, it is possible that those who believe they are good at timing or riding out hydrocarbon market volatility may be in for an unpleasant surprise as rapid growth in renewable energy and associated technological breakthroughs with policy action on Paris Agreement targets.

Few investors and companies are considering or indeed carrying out strategic planning for these alternative, deep decarburization pathways. As national and local governments in Canada, the US, and Mexico begin to act in concert to reduce emissions,xviii getting fossil fuel reserves out of the energy system as rapidly as possible and dealing with the social and economic disruption this will cause will present fiduciary investors with both a challenge and an opportunity.

The Canada Pension Plan as Canada’s largest public fund has a leadership role to play in the energy transition. The 2016 Actuarial Report is an important tool for the CPP and its 19 million contributors to better understand the shortcomings of its present approach to climate risk, and to point the way towards a safer and more prosperous future.

We would be glad to provide any additional information or assistance you require.


Signature_John Bennett, Senior Policy Advisory, Friends of the Earth




John Bennett
Senior Policy Advisor


CC Finance Minister Bill Morneau


ii Mclade & Ekins (2015) ‘The geographical distribution of fossil fuels unused when limiting global warming to 2 degrees C:’ http://www.collectif-scientifique-gaz-deschiste. com/fr/accueil/images/pdf/texteschoisis/McGlade_et_al-2015-Nature.pdf

iii ‘California Approves Bill Requiring Calpers to Divest From Coal’ (05 09 2015):; California Air Resources Board ‘Zero Emission Vehicle (ZEV) program’:

iv 2 Degrees Investing (2015) ‘French Energy Transition Law Summary Translation:’

v Task Force on Climate-related Financial Disclosures:; ‘Phase I Report, FSB Task Force on Climate Related Financial Disclosure’ (2016):

vi Prudential Regulation Authority (2015) ‘The impact of climate change on the UK insurance sector’; ; Advisory Scientific Committee to the European Systemic Risk Board (2016) ‘Too late, too sudden: transition to a low-carbon economy and systemic risk’

vii ‘China’s largest bank to screen loans for environmental risk’ (23 06 16):

viii Shareholder proposal No. 1 regarding ongoing reporting on Suncor’s initiatives respecting climate change was approved with 98.18% of shares represented at the meeting voting in favour: Yet the company still appears to be betting on a “burn it all” future scenario. The company just took over Canadian Oil Sands and announced they bought another 5% stake in Syncrude which puts them just over 50% ownership in the company, which will see them take over as operator from Imperial Oil.

ix Aviva and The Economist Intelligence Unit (2015) ‘The cost of inaction: recognising the value at risk from climate change’

x Dietz et al. (2016) ‘Climate value at risk of global financial assets’

xi By signing the Montréal Carbon Pledge, investors commit to measure and publicly disclose the carbon footprint of their investment portfolios on an annual basis.

xii ‘Norway’s $860 Billion Fund Drops 52 Companies Linked to Coal’ (14 04 2016)

xiii UNEP-FI (2016) ‘French Energy Transition Law: global investor briefing’

xiv Carbon Tracker (2015) ‘The US Coal Crash’

xv ‘Bank of Montreal CEO plays down the impact of oil price slump’ (05 04 2016):

xvi Comparative analysis on US insurance industry provides context for concern in Canada. See Mercer (2016) ‘Assets or Liabilities? Fossil Fuel Investments of Leading U.S. Insurers:’

xvii ‘When Dancing Ended, and Disaster Set in’ (07 02 2013):

xviii ‘The President’s Climate Action Plan’ (2013):; ‘John Kerry Remarks at Bloomberg New Energy Finance Summit’ (06 04 2016):

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