The ABCs of the Canada Pension Plan and its Contribution to Climate Change: A Primer
If you are working in Canada and eighteen or older, you are an investor in the Canada Pension Plan.
For every pay period, a deduction is made that is invested on your behalf by the Canada Pension Plan Investment Board (CPPIB). This primer is written to help you learn about how your money is invested.
Friends of the Earth thanks the Ken and Debbie Rubin Public Interest Advocacy Fund for their generous support of this project made through the Ottawa Community Foundation.
We acknowledge the dedication of Larry Meikle, John Bennett, and Morgan LaManna in creating this primer and especially thank Toby Heaps at Corporate Knights for his assistance.
Did you know that your Canada Pension Plan (CPP) contributions are, in part, invested in fossil fuels that are significantly contributing to global climate change? Some of these investments are in coal (a major contributor to global warming, when combusted), and the process of fracking for oil and gas (a process that consumes great quantities of water then pollutes it, and has been linked to an increase in the frequency of earthquakes where it’s practised).
Investments in fossil fuel-related entities that contribute to the devastating effects brought about by global warming and pollution can now be considered to be high risk investments. Some jurisdictions are now litigating against energy utilities in their midst who, through their combustion of fossil fuels, are emitting significant amounts of pollution and greenhouse gases (GHG) that increase the rate of global warming. The CPP is risking Canadians’ contributions when it invests in utilities that are becoming increasingly-subject to such litigation.
In another example, the CPP has significant investments of your money in major insurance companies–the same insurers who are having to pay out billions in dollars in claims to homeowners and business people who have suffered devastating losses due to severe weather effects–flooding, tornadoes, hurricanes–themselves the consequences of a warming planet. Again, your contributions are unnecessarily being subjected to risk.
If you are contributing to the CPP, you should be very concerned by the risky nature of many of the CPP’s investments–they are investing for your future. Bad investment decisions made by the CPP today will put your future pension benefits in jeopardy.
What is the Canada Pension Plan Investment Board (CPPIB), and how does it function?
In their own words:
“The Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits in the best interest of 20 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, Sao Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At June 30, 2018, the CPP Fund totalled C$366.6 billion.
For more information about CPPIB, visit: http://www.cppib.com
On October 15, 2018, Canada Pension Plan Investment Board (CPPIB) issued a press release entitled: “Canada Pension Plan Investment Board Sustainable Investing Report Highlights Push For Board Effectiveness.” This document is essentially a summary of the Board’s more lengthy “2018 Report on Sustainable Investing” issued earlier in 2018.
The 2018 Report, CPPIB’s 11th., lists five new focus areas they will now take into account when considering future investments. They are:
- Investee Board Effectiveness, including corporate governance and an emphasis on improving the gender composition of investee companies’ boards.
- Climate Change
- Human Rights
- Executive Compensation
The Report signals the CPPIB’s intention to expand its portfolio of renewable energy assets. While this is encouraging, there is no mention of the CPPIB divesting from some of their ‘dirtier’, past-century assets such as coal and fracking for oil and gas. This is a huge disappointment, as coal (and, in fact, all fossil fuels) contribute significantly to global warming while adding to the burden of air pollution. Investments in them carry enormous potential risks for the investors (in this case the CPPIB, which in essence is us), in terms of their being held responsible for the devastation their polluting assets cause, by litigation or other means.
Canada Pension Plan Investment Board (CPPIB) now holds more than $350 billion in assets which makes it the largest pension fund in Canada and a major international investor. It’s assets include: tobacco, real estate, mining, utilities, insurance, oil and gas, coal, railways, banks and other financial institutions. A listing of the CPPIB’s investments can be found on its website, at:
The only influence the federal government has is through the appointment of Board members. Making any changes to the CPPIB requires the consent of the federal government and seven of the provinces, a standard similar to amending the constitution.
In 2017 nearly 23.5 million Canadians between the ages of 18 and 65 contributed to the CPP. In the year 2016-2017, 5.6 million Canadians were receiving benefits from the Plan. This number continues to rise each year as the largest segment of the population, to so-called ‘Baby Boomers’, enter their senior years. Accordingly, CPP benefit expenditures increase each year and will continue to do so for the foreseeable future.
Individual Canadians who pay into the CPP and receive pensions from it have no say about the assets the CPPIB invests nor the ability to ask questions. The CPPIB is explicitly exempt from the Access to Information Act.
Although the CPPIB provides a list of its assets it is not governed by the same laws and regulations as other pension plans in Canada. According to Moin Yahya, law professor at the University of Alberta and co-author of Understanding the Regulatory Framework Governing Private and Public Pensions the CPPIB is not subject to regulations that lead to increased transparency. Further, there are almost no laws allowing for the CPPIB to be sued for bad governance.
Until the late 1990s the CPPIB was limited to loaning excess contributions to the Canada Pension Plan to the federal and provincial governments to be repaided a at commercial interest rates. This was accomplished with a modest staff of ten people. A decision was taken to take the fund global and allow it to invest Canada Pension Plan deductions like a private pension fund. Since then the staff has grown to 1200 with an operating budget of more than a billion dollars.
The asset portfolio has grown a slightly greater rate than the stock market in the last 20 years. Even so, the federal and provincial governments were required to substantially increase CPP payroll deductions for both workers and employers in 2016 to ensure adequate pensions in the future.
Fossil fuel producers or pipeline companies make up about 22% of the CPP’s Canadian investments, and about 6% of its foreign investments.
The CPPIB has extensive real estate assets; some of these are in danger of sustaining damage or losing their value due to climate change and the increase of severe weather.
Faculty of Environment professor Blair Feltmate, head of the Intact Centre on Climate Adaptation at Ontario’s University of Waterloo, is coordinating a national effort to make homes and communities more resilient to increased flooding. Feltmate believes that as climate change brings more extreme weather events, climate adaptation is key. He goes on to say, “A growing problem in Canada from Halifax to Victoria is the growing uninsurability of the housing market in this country. Where insurers find themselves in situations now where the flood risk is so high, with such repetition, that they simply can’t offer insurance coverage in many regions for water flooding in the basement.”
We as Canadians are the beneficiaries of the Canada Pension Plan(CPP), yet we have no say in how the Canada Pension Plan Investment Board (CPPIB) invests our contributions.
If you’re a Canadian who has worked and contributed to the CPP you are entitled to a pension when you reach retirement age, or in the event you become disabled.
The CPPIB is managed by board members appointed by the government. They are mandated to assess risk when they are considering an investment, but only in the traditional, financial sense. There is no requirement for them to consider “climate risk.”
The government needs to introduce legislation requiring all the funds the CPP collects be invested in line with the government’s climate change policy. France has recently introduced legislation requiring their institutional investors to disclose their exposure to climate risk, yet the CPP has no requirement to do so. The CPPIB’s investment decisions, and how they’re arrived-at, are not subject to public disclosure and the CPPIB is exempt from disclosure under Access to Information legislation. Assessment of climate risk should be considered in any investment decision, given the increasing threats posed by climate change. Significant climatic events such as wildfires, storms, and flooding are occurring with ever-greater frequency and intensity, and the losses from these catastrophes are a significant liability to insurance companies.
When Friends of the Earth Canada asked the financial research firm Corporate Knights to look into the investments of the five biggest public service pension funds, it turned out that they were foregoing on average $20 billion profit each and every year by not fully incorporating climate risks into investment decisions. It is estimated that the CPP likely missed out on $6.5 billion to over $7 billion in profits, by sticking with climate-warming industries.
Carbon, as carbon dioxide, is a major greenhouse gas contributing significantly to global warming, and climate change, yet the Canada Pension Plan Insurance Board (CPPIB) has investments in at least 35 coal companies globally.
All countries bound by the Paris Accord, including Canada, have set a target for 2030 that will limit the rise in global temperature to less than 2 degrees C. This will require a dramatic reduction in the emission of carbon dioxide and other greenhouse gases in the intervening years.
Carbon dioxide is generated primarily by the burning of fossil fuels through transportation, heavy industry, and electric power generation. Coal is the “dirtiest” of the fossil fuels. Canada has made a serious effort to convert its electric power plants from coal to “cleaner” fuels such as natural gas, and that process is nearly complete. On the world stage Canada has strongly urged other countries to move away from coal as a fuel. Yet the CPPIB has investments in at least 35 coal companies globally. Among them is Duke Energy, which has been fined millions for pollution. Clearly, the CPPIB’s investment criteria are not aligned with Canada’s climate change policies. The CPPIB needs to stop funding new fossil fuel projects.
Climate Change leads to climate risk, and this risk is not being assessed by the CPPIB in their decision-making.
On Friday, July 13, 2018, sovereign wealth funds managing more than $2 trillion met in Paris to lay out a strategy to pressure companies to be more climate-friendly, French officials said.
French President Emmanuel Macron is championing the initiative, bringing together the heads of six sovereign funds to thrash-out a pro-environment investment framework. Five of the funds are from oil-rich nations–Abu Dhabi, Kuwait, Saudi Arabia, Qatar, and Norway; New Zealand is the sixth.
The guidelines, which funds will ask the companies they invest in to meet, are expected to influence other big asset managers, French presidential advisers said.
“Beyond the colossal amounts these funds manage, it’s the snowball effect we’re betting on”, one advisor at Macron’s office said. “By getting them to make this joint pledge, there will be a ricochet effect spreading across global finance.”
Lawrence Yanovitch, a former Bill and Melinda Gates Foundation investment manager and an American national, will be coordinating the initiative. Yanovitch said, “The funds understood it was in their financial interest to take account of the risks of climate change in their investments and that most of the countries were already seeking to transition toward low-carbon economies.”
“They see a business opportunity”, he said. “Financial markets are risky because they don’t take these (climate) risks into account.”
“The guidelines will include obligations for companies to calculate their carbon footprints”, he said.
Yanovitch believes it is Macron’s commitment to the Paris Agreement, particularly in view of the fact that President Trump has pulled the U.S. out of the agreement, and Macron’s background as a former investment banker that encouraged the sovereign funds to work with France on the framework. “They see him [Macron] as a committed leader on climate”, he said. “He’s got the background; he’s a banker. He understood that the funds were the strategic entry point. If you motivate them, it will cascade down.”
This entire article, “Macron gathers world’s top sovereign funds to send climate signal” from Reuters.com, can be found at:
Jeremy Grantham, co-founder and chief investment strategist of Grantham, Mayo, and von Otterloo (GMO), a Boston-based asset management firm, has prepared a lecture he delivers entitled: “What Investors Need to Know About Technology and Climate Change: The Race of Our Lives.”
In a lecture accompanied by numerous slides of graphs, developed from data obtained from reliable sources, Grantham shows us how the effects of climate change are rapidly surpassing our ability to cope with these effects. Technological advances will not be adequate to meet the challenges we face as the global temperature continues to rise.
Grantham’s lecture is delivered under six sub-headings. They are:
- “The Race of Our Lives: Climate Change Accelerates”
- “Climate Change: But Greener Technologies Also Accelerate (Resulting in De-Carbonizing the Economy)”
- “Climate Change: But Now the Terrible News, Feeding the 12 Billion (The impact on food sufficiency of: [i] population growth (plus increasing wealth); [ii] climate change; [iii] soil erosion (and many related factors)”
- “Other Problems Facing ‘Big Ag’: [i] water availability; [ii] urban expansion; [iii] bug and pathogen immunity; [iv] toxic environment (a 75% loss of flying insects); [v] global distribution of phosphates reserves [which are critical to agriculture].”
- “Climate Change: Problems With Capitalism. [i] the Sixth Great Extinction; [ii] toxicity affectings humans; over 50% loss of sperm count in developed world; [iii] complete inability of capitalism to deal with externalities, tragedies of the commons, and the very long-term; [iv] the Devil and the Farmer.”
- “And Finally the Peril of Divestment.”
Grantham provides a quote from James Romo, CEO of NextEra Energy, under the heading: “Alternative energy will crush fossil fuels–on cost!”
Romo says: “Without incentives, wind is going to be a $0.02 or $0.03 product early in the next decade. Battery storage will be $0.01 on top of that. And when you look at… coal and nuclear, today, operating costs are around $0.03. New wind and new solar, without incentives and combined with storage, are going to be cheaper than the operating cost of coal and nuclear in the next decade. That is going to totally transform this industry.”
With compelling evidence Grantham delivers a powerful message on why we need to do what we can to limit the increase in global climate change, while preparing for the effects of an increase nonetheless.
The entire Grantham lecture can be found at:
The economic models that inform climate policymaking vastly underestimate the economic risks associated with a warming climate and these models are fatally flawed writes David Roberts, a writer on energy and climate change issues, in an essay entitled: “We are almost certainly underestimating the economic risks of climate change: The models that inform climate policymaking are fatally flawed”, for Vox.com.
Roberts goes on to say: “One of the more vexing aspects of climate change politics and policy is the longstanding gap between the models that project the physical effects of global warming and those that project the economic impacts. In a nutshell, even as the former deliver worse and worse news, especially about a temperature rise of 3° Celsius or more, the latter remain placid. The famous [Dynamic Integrated Climate-Economy] (DICE) model created by Yale’s William Nordhaus shows that a 6° rise in global average temperature–which the physical sciences characterize as an “unlivable hellscape”–would only dent global GDP by 10%.”
Roberts draws the conclusion: “Policymakers want to know how much climate change will hurt the economy. They want to know how much policies to fight climate change will cost. Models provide them with answers. Right now, models are (inaccurately) telling them that the damage cost will be low and policy costs will be high.
Policy mobilization on climate change is going to fight a headwind as long as policymakers are getting those answers from models.
We need models that negatively weigh uncertainty; properly account for tipping points; incorporate more robust and current technology cost data; better differentiate sectors outside electricity; rigorously price energy efficiency, and include the social and health benefits of decarbonization.
One, such models would be more accurate, better at their task of informing policymakers. And two, they would justify far more policy and investment to fight climate change than has been seen to date in the U.S. or any other major economy. We shouldn’t let the blind spots and shortcomings of current models undermine political ambition.
Save the models, save the world.”
David Roberts’ entire essay can be found at:
The Canada Pension Board Investment Board (CPPIB) suggests it would be unreasonable to expect them to divest themselves of all investments in fossil fuel companies, yet Ireland has just chosen to take this measure, in July 2018.
The CPPIB should remain invested in profitable, law-abiding, progressive companies who are making a significant effort to reduce their carbon footprint and are embracing green technologies for example–providing that they can first pass a meaningful climate risk assessment.
In 2018 the year began with New York City divesting from fossil fuels. In July 2018, Queens College, Cambridge divested, and a few days earlier it was the Church of England threatening to divest from fossil fuel companies, if they don’t align with the Paris Agreement by 2023; few believe that alignment will occur.
Ireland has now joined the chorus. In July 2018, the government of Ireland became the first nation on earth to commit to fully divesting from fossil fuel companies, says Bill McKibben of 350.org, in his document “Ireland’s on the Right Side of History–What About Canada?” McKibben goes on to say that once the bill has been ratified in its parliament: “…Ireland’s €8 billion sovereign fund will start to ditch all its oil, coal and gas assets. This is exactly the kind of leadership we need in the midst of a climate crisis.”
A report released this month [July 2018] by the Institute for Energy Economics and Financial Analysis (IEEFA) details the growing rationale for divesting from the fossil fuel industry. The report–”The Financial Case for Fossil Fuel Divestment”–is aimed primarily at trustees of investment funds that continue to hold stakes in a sector that is freighted with risk and is not likely to perform nearly as well in the future as it has historically–regardless of whether oil prices rise or fall.
Kathy Hipple, an IEEFA financial analyst and co-author of the report, said fund trustees everywhere have a pressing fiduciary duty to re-examine their investment commitments to fossil fuel holdings.
“Given the sector’s lacklustre rewards and daunting risks, responsible investors must ask: ‘Why are we in fossil fuels at all?’” Hipple said. “The sector is ill-prepared for a low-carbon future, based both on idiosyncratic factors affecting individual companies, as well as an industry-wide failure to acknowledge, and prepare for, an energy transition that is gaining momentum and changing the very nature of how energy is produced and consumed.”
The report describes divestment “…as a proper financial response by investment trustees to current market conditions and to the outlook facing the coal, oil and gas sectors.” It concludes that “…future returns from the fossil fuel sector will not replicate past performance.”
It details how the global economy is shifting toward less energy-intensive models of growth, how fracking has driven down commodity and energy costs and prices, and how renewable energy and electric vehicles are gaining market share.
And it cautions that fossil fuel companies’ exposure to litigation on climate change and other environmental issues is expanding and notes that campaigns in opposition to fossil fuel industries have become increasingly sophisticated and potent.
The report makes three key points:
- “The fossil fuel sector is shrinking financially, and the rationale for investing in it is untenable. Over the past three and five years, respectively, global stock indexes without fossil fuel holdings have outperformed otherwise identical indexes that include fossil fuel companies. Fossil fuel companies once led the economy and world stock markets. They now lag.”
- “A cumulative set of risks undermines the viability of the fossil fuel sector. Climate change is hardly the only challenge facing the fossil fuel industry. The broader factors bedevilling balance sheets stem from political conflicts between producer nations, competition, innovation, and attendant cultural change. These risks can be grouped into a few broad categories, such as “pure” financial risk; technology and innovation risk; government regulation/oversight/policy risk, and litigation risk.”
- “Objections to the divestment thesis rely upon a series of assumptions unrelated to actual fossil fuel performance. Detractors raise a number of objections to divestment, mostly on financial grounds, arguing that it would cause institutional funds to lose money or that it would undermine their ability to meet their investment objectives, thus ultimately harming their social mandates. Such claims for a dangerous basis for forward-looking investment and are a breach of fiduciary standards.”
Tom Sanzillo, IEEFA’s director of finance and the lead author of the report said, “Historically, fossil fuel companies were drivers of the world economy and major cntributors to the bottom line of institutional funds. This is no longer the case. Whether oil prices are rising or falling the investment thesis cannot replicate the sector’s strong past performance. In the new investment thesis, fossil fuel stocks are now increasingly speculative. Current financial stresses–volatile revenues, limited growth opportunities, and a negative outlook–will not merely linger, they will likely intensify. Structural headwinds will place increasing pressure on the industry, causing fossil fuel investments to become far riskier.”
For thirty years financial institutions like the Canada Pension Plan Investment Board have given lip service to climate change while continuing to invest in coal, oil and gas literally fueling climate change and indirectly funding climate deniers. This has spawned a global divestment movement calling for the complete divestment from fossil fuels. Doing so will hasten the replacement of fossil fuels by depriving them of capital while making capital available for investment in the growing renewable energy.
The entire IEEFA report can be found here:
Divestment can be viewed entirely in economic terms which is how institutions like the Canada Pension Plan Investment Board that argue sell off fossil fuel assets will reduce the profits in short term and not impact fossil fuels and other investors will replace them. The Canada Pension plan says it prefers “engagement” and uses its shareholder status to push companies to improve their environmental performance. Ignoring the fact that the product of even the cleanest fossil fuel company is the cause of climate change.
The real questions divestment raises are moral. Should we profit today from the destruction of the climate. The Canada Pension Plan Investment Board despite its pronouncements on focusing only financial issues does take moral positions on other issues such as landmines, human rights and gender parity. Why is climate change not treated the same way?
The CPPIB holds biennial general meetings open to to public. In 2018 there will be nine meetings in cities across Canada, from October 9 through November 30.
The document: “Briefing: Pension Funds’ engagement with fossil fuel companies” produced by Friends of the Earth England, Wales and Northern Ireland (March 2018), outlines five arguments for engagement often used by funds. Each argument is listed here, accompanied by related questions that should be asked of the CPPIB at their public meetings.
- Engagement Goals
One argument for engagement often used by pension fund managers is: “Engagement is effective at achieving change.” The questions that should then be asked of the CPPIB are:
- What are the current goals of engagement with fossil fuel companies? What assessment have you made of these companies’ progress towards those goals?What is you planned response if these goals are not met?
- Do the fossil fuel companies you’re investing in support a Paris-compliant strategy? (ie., are they committed in working towards a global temperature increase of <2 degrees C.?)
- A Paris-compliant strategy for a fossil fuel company would be to commit to no new fossil fuel capital expenditure by the end of 2019, a managed decline in production, and a commitment to reduce their overall GreenHouse Gas (GHG) footprint to zero by 2050, with compatible interim milestones for 2025, 2030, and 2040. Will you commit to strengthening your engagement strategy in line with these goals and deadlines, and divest if companies do not set these goals?
- Shifting Engagement Focus
Another argument for engagement commonly used by pension fund managers is: “If we divest, we will lose power to engage with the relevant [fossil fuel] companies.” The CPPIB should then be asked the questions:
- Has the CPPIB conducted analysis of where it can most effectively use its limited capacity for engagement on climate change issues?
- Will the CPPIB commit to setting a rapid “end-game” situation for its engagement with fossil fuel companies, and, if these companies do not respond, divest and redirect its engagement resources into engaging with government and companies in the automotive, power generation, and heavy energy-using sectors?
- Incentive for Fossil Fuel Companies to investment more in clean energy sources
A third argument for engagement often employed by pension fund managers is: “We work with fossil fuel companies to increase their positive (ie., green) investments.” If presented with this argument from the CPPIB, they should be asked this question:
- We support efforts to increase the percentage of cleaner investments; we consider this to be an essential element of a comprehensive strategy to protect funds from climate change risks. Will the Board commit to producing an overarching climate change strategy for the CPPIB, covering all risks?
- Could the CPP meet its obligations without the dividends it receives from fossil fuel companies?
Another argument for engagement is encompassed by the quote: “We need the money we get from the fossil fuel companies’ annual dividends.” If presented with this article, the appropriate question to ask in response would be:
- Will the Board produce and implement an analysis of how it could meet its short-term financial obligations without investment in risky fossil fuels?
- Managing Risks
A fifth argument for engagement is frequently offered by pension fund managers, when the topic of managing risks is introduced. Fund managers are often heard to say: “It is financially risky to divest. We agree that these [fossil fuel] companies will devalue in the future, but not now; we will have time to sell our shares later.” If presented with this argument, the appropriate questions to ask would then be:
- Is engagement being pursued by the CPPIB as a risk-reduction strategy? If so, what specific measures are you asking for, what timeframes are you giving companies to have implemented them, and what are you prepared to do if they do not act?
- Are you in breach of your fiduciary duties if you hold fossil fuel stock, knowing the financial risks?
- What advice have you sought on climate risks, and when? Do your mandates and contracts with advisors reflect the necessity to consider climate risks, and how often are you updating this advice?
- If you state that there are financial risks from divesting fossil fuel stocks, will you publish your analysis of what these risks are?
- Has the Board assessed whether the fossil fuel companies’ forecasts for future fossil fuel demand are accurate? What is the Board’s view on these companies’ consistent under-forecasting over the last decade, of renewable energy growth?
- What is the Board’s response to the March 2018 Carbon Tracker report that trillions of dollars of fossil fuel capital expenditure are at risk if the world moves onto a <2 degree trajectory, compared to a >3 degree trajectory that Shell and BP use as their central planning scenario?
The CPPIB has no designated Chief Risk Officer, a key executive who plays a critical role balancing operations and risk. According to Jason Mercer, a Moody’s analyst, “That absence sets it apart from other major government pension plans and other major Canadian financial institutions such as banks and insurers.” “ A Chief Risk Officer plays devil’s advocate to other members of management who take risks to achieve business objectives”, Mercer said. “The role provides comfort to the board of directors and other stakeholders that risks facing the organization are being seen independently.”
Michel Leduc, head of global public affairs at CPPIB, said CPPIB officials have created a framework that doesn’t rely on a single executive to monitor risk. Leduc said the pension organization has an enterprise risk management system that runs from the board of directors , through senior management, to professionals in each of the pension’s investment departments. “This decentralized model ensures that individuals closest to the risks and best equipped to exercise judgement have local ownership over management of those risks”, Leduc said.
A June 1, 2018 report by Trillium Asset Management, a Boston-based sustainable and responsible investment firm, Trillium reported that a financial analysis of the Massachusetts Pension Reserves Investment Trust (PRIT) revealed the loss of $79 million on its $1.6 billion fossil fuels equities for the five years ending June 30, 2017. According to Trillium: “The analysis was released just as legislators failed to pass…a petition which would divest PRIT from coal holdings.” PRIT’s coal stocks alone lost $25 million during this five year period.
Matthew Patsky, CEO of Trillium Asset Management, commented: “The Fund’s loss of over $79 million dollars in a 5 year period is significant and directly impacts the strength of the pension fund and our state’s ability to meet its obligation to its retirees. The opportunity cost loss of $1 billion incurred by PRIT staying heavily invested in fossil fuel investments, especially coal–which has been in secular decline for years–is staggering. Our public employees’ pension fund would be healthier today if its managers had taken steps to divest from these volatile investments years ago.”
Barbara Madeloni, President of the Massachusetts Teachers’ Association (MTA) stated: “Investing in companies that contribute to global warming and the destruction of our planet is completely against the values of educators. Every day, educators consider how their work contributes to a better future for their students. That is why members of the MTA voted in favor of directing their pension plan to divest from coal and fossil fuel companies.”
“As human service workers, we work every day to protect the Commonwealth’s most vulnerable and to ensure a safer, brighter future for its children. We do not want our own hard-earned retirement money undoing that work by investing in companies that degrade our earth and harm our future”, said Peter MacKinnon, president of the public sector union SEIU, Local 509.
“At a time when the Trump administration is handing the fossil fuel industry an unprecedented amount of power and attempting to to reverse to so-called “war on coal”, Massachusetts has a clear opportunity to respond–by divesting the pension fund from coal”, said Darcy DuMont, a retired teacher and MassDivest Coalition organizer.
The Trillium report goes on to say: “There is widespread support for divestment. Five public sector unions–SEIU Local 509, SEIU Local 888, the Massachusetts Nurses Association, the Boston Teachers’ Union, and the Massachusetts Teachers’ Association–have endorsed divestment, along with close to 50 legislators and dozens of religious, community, and student groups. Fourteen towns and cities across the state have passed resolutions in support of divestment. The California Public Employees’ Retirement System has divested from coal, in compliance with a 2015 law that required it and the California State Teachers’ Retirement System to divest from coal by July 1, 2017.”
The Task Force on Climate-Related Financial Disclosure (TCFD) was established in 2015 by the former Governor of the Bank of Canada and now Governor of the Bank of England, Mark Carney. It was created in response to the G20’s request to better understand the financial implications of climate change. Chaired by Michael Bloomberg, the TCFD is pushing companies to publicly disclose their climate-related risks and opportunities. There are over 200 signatories to the Task Force.
The TCFD bridges the gap between the corporate and finance communities as it invites companies to disclose how climate-related issues can impact their business. The latter then helps investors, lenders and insurers to better assess climate-related risks and opportunities in their decisions.
The TCFD signatories commit to disclose their activities across four main areas, including:
- Governance: how companies are governing climate change-related risks and opportunities
- Strategy: looking into what actual and potential impacts climate change can make on business, strategy, and financial planning
- Risk Management: identifying the process an organisation is using to identify, assess, and manage climate-related risks
- Metrics & Targets: to assess and manage climate-related risks and opportunities
The ultimate purpose of the TCDF is to enable sustainable investments. Chairman Bloomberg goes on to expand:
“Increasing transparency makes markets more efficient and economies more stable and resilient.”
The U.K.-based firm Acclimatise is a climate change advisory and analytics company specialising in climate change adaptation and resilience building. In conjunction with the UN Environment Program’s Finance Initiative (UNEPFI), a global partnership between United Nations Environment and the financial sector, sixteen of the world’s leading banks, among them Canada’s Royal Bank of Canada (RBC) and TD Bank Group, were chosen to pilot methodologies that aim to help the banking industry understand and manage the physical risks and opportunities of climate change in their loan portfolios. Their report, entitled: “New Methodologies to Help Banking Industry Assess Physical Risk and Opportunities of Climate Change” has been recently [July 2018] published.
The methodologies demonstrate that physical risks will worsen if the global economy continues on its current greenhouse gas emissions pathway. Future negative impacts could be reduced somewhat, but not avoided completely, if strenuous and rapid efforts are made globally to cut emissions.
Dave McKay, President and CEO of the Royal Bank of Canada (RBC) said: “RBC believes climate change is one of the most pressing issues of our time and we have an important role to play in supporting the transition to a low carbon economy. We are committed to advancing best practices in climate-related disclosures, assessing climate-related risks and opportunities, and supporting our clients in doing the same.”
Nicole Vadori, Head of Environment for TD Bank Group said: “At TD Bank Group we believe that as the transition to a low-carbon economy unfolds, having a firm understanding of climate-related risks and opportunities will be important to help sustain healthy and balanced growth. An interesting area of development is the role of technology in assessing the impacts of a changing climate. In piloting the Financial Stability Board’s climate-related recommendations we collaborated with Bloomberg MAPs to assess the ability of data visualization tools to contribute to the assessment process and will continue to explore its applications.”
By applying the methodologies, banks can begin assessing physical climate risks on key credit risk metrics for climate-sensitive industry sectors. The guidance also sets out how banks can start to evaluate opportunities to support their clients in becoming more climate-resilient.
These methodologies were originally piloted for agriculture, energy and real estate portfolios. They can now be used by banks to assess a wide range of sectors in their loan portfolios.
The new methodologies are available for public download, from:
It is imperative that government pension funds consider the very real risks to their clients’ financial assets resulting from climate change. If they do not plan for climate-related financial risk, the results could be disastrous–not only for pensioners but for our economy.
According to a recent article by Laura Sisk-Hackworth appearing in the San Diego Free Press, “[Bill] SB 964 Will Require Largest U.S. Pensions to Report on Climate Risk”, a landmark bill in the California legislature (SB 964), defines climate-related financial risk in law for the first time and requires the boards of the two largest public pension funds in the nation to report on this risk every three years. Commencing in 2020 and for every three years thereafter until 2035, the funds’ boards will be required to report on the exposure of their fund to climate-related financial risks, including risk resulting from investments in publicly-traded companies that are carbon-intense, such as utilities, coal, oil, and gas. In addition to reporting on risk, these reports must include discussions of their fund’s alignment with the Paris climate agreement and California’s policy goals.
The importance of this bill is that it gives the public a way to respond to the boards’ consideration of climate risk and its investments in key industries. It also prevents state employees and the economy from potentially devastating financial losses that could result from climate change. If the state did not plan for climate-related financial risk the results could be disastrous–not only for pensioners but for the economy.
Sisk-Hackworth goes on to say that bill SB 964’s definition of climate-related financial risks is perhaps its most important aspect. The bill describes numerous risks, that fall under four categories. These are:
- Physical Risks
These arise from the physical impacts of climate change, such as the risks to physical property assets and the economy due to severe weather and sea level rise. An increase in severity and frequency of extreme weather is sure to challenge public health, and economic and financial systems.
- Litigation Risks
Companies whose businesses have contributed to climate change may also be sued for damages and mitigation of future harm, causing the company to lose value; this is defined as litigation risk.
According to the Columbia Law School Climate Change Litigation Database, a total of 16 cases have been pursued in the U.S. with plaintiffs seeking damages from fossil fuel companies for climate-related losses. In addition, 22 climate-related public trust cases have been recorded in this database. As more and more cases go to court, the risks to companies and their shareholders grow.
- Regulatory Risks
As governments change policy and legislation to transition to a greener economy one
tactic may be to prohibit carbon-based fuels from being extracted and burned, resulting in
stranded assets for companies that have invested in fossil fuel reserves.
- Transition Risks
Tied to regulatory risk is transition risk. This risk results from economic shifts favouring
certain companies during the transition to a low-carbon economy. If carbon-reliant
companies don’t transition enough of their business to invest in renewable power sources
they will be left behind in the new economy, to the financial detriment of their
The entire article may be found at:
The website: “Top 1000 Funds.com” has just published an excellent article by Amanda White entitled: “Pension Funds Want ESG Guidelines.” To follow is a summary of this article.
The Organization for Economic Co-operation and Development (OECD) states that Environmental and Social Governance factors (ESG) are “indicators used to analyse the investment prospects of a company, [evaluating their performance based on] environmental, social, ethics and corporate governance criteria”. To incorporate ESG indicators, pension funds should identify environmental, social, and governance risks related to the purpose of the company or project in which they intend to invest. Some examples are:
- Environmental Risks: physical risks caused by environmental change.
- Transition Risks: changes in policies, laws, markets, technology, investor’s feelings, and prices.
- Liability Risks: legal or moral responsibility to cover financial losses caused by events environmental change has induced.
- Social Risks: related to working conditions, including slavery and child work, local communities, indigenous communities, conflicts, health problems and security.
- Governance Risks: related to the remuneration of executives, bribes and corruption, political lobbying and donations, diversity and the board of director’s structure, fiscal strategy, etc.
The International Organization of Pension Supervisors (IOPS) is an independent international body representing entities involved in the supervision of private pension systems all over the world. The IOPS has 86 members and observers from 75 jurisdictions and territories.
It has been noted by IOPS that there is an increasing interest in ESG matters from many of the members; a recent survey of members found ESG one of the issues where IOPS should set standards. Accordingly, the IOPS is now developing draft guidelines on the application of ESG factors in the supervision of pension fund investment.
Global Sustainable Investment Alliance data shows that $22 trillion of assets were professionally managed under responsible investment strategies in 2016, up from $13.3 trillion in 2012. This fast growth signals that all institutional investors are starting to incorporate, or at least consider, ESG factors in their investment decisions.
Because pension funds should be focussed on long-term goals, according to a lifecycle approach, it is essential that pension fund providers or managers start considering structural long-term factors in their investment decisions, such as environmental and social conditions.
According to IOPS, the following are main reasons to invest in companies or projects that consider ESG factors:
- Such companies seem to be associated with better long-term yields
- They usually promote an improvement in the relationship between long-term risk and return
- They have positive environmental and social effects on the country
- ESG factors can be integrated into investment prospects without sacrificing diversification or returns
Evidence seems to indicate a positive or neutral relationship between financial performance and the consideration of ESG factors.
A 2015 meta-study by the Journal of Sustainable Finance & Investment found that in 90% of their studies there was a neutral or positive relationship between financial performance and the inclusion of ESG factors. It seems natural that companies that follow governance best practices, such as having a board with real independent members, adequate equity structure and aligned incentives between manager and shareholders, would have a greater probability of getting a higher yield. Also, if companies take care of internal issues such as gender equality, diversity, water and environmental care, they will probably have better yields in the long term because these are characteristics associated with a well-managed company.
ESG factors have been gaining more relevance in the portfolio composition of institutional investors, including pension funds. BNP Paribas conducted an ESG global survey in 2017, and found that 79% of global institutional investors now incorporate ESG factors. Among those who do, half invested nearly 25% of their portfolios in specific strategies based on ESG criteria. That proportion is expected to increase to 50% or more by 2019.
The entire article can be found at:
Investments in fossil fuels have traditionally been profitable and secure investments but many major pensions funds are now moving away from them due to their significant contributions to climate change–yet the Canada Pension Plan Investment Board (CPPIB) has recently invested invested at least $5 billion in the fossil fuel industry, and is more concentrated in this industry than are other leading pension funds.
We all need energy. In investment circles predicting future success is often no more sophisticated than projecting the past into the future. But why is the CPPIB more concentrated in energy than are other leading pension funds?
The CPPIB has given no indication that it intends to address climate risk in its investments. It has recently invested at least $5 billion in the fossil fuel industry.
Over the past two years CPPIB has purchased a pipeline owned by Devon Energy in Northern Alberta, and Penn West’s assets in Saskatchewan. It has since invested heavily in a Texas drilling company, a North Sea offshore drilling company, and, more recently, the CPPIB made a major investment in Kinder Morgan only two weeks before the federal government approved its controversial Trans Mountain Pipeline. These could prove to be very risky investments. Some analysts believe the widely unpopular Trans Mountain Pipeline will never be constructed, due in part to the current depressed price of oil on the world market, as well as First Nations and environmental concerns.
The CPPIB’s equities in the energy sector may suffer losses, if the global price of oil declines or there are bankruptcies in this sector. Coal equities in particular could be vulnerable to major losses, as more countries continue to move away from coal as an energy source.
Fracking (more properly called hydraulic fracturing) to obtain oil and gas has become a contentious procedure due to the vast amount of fresh water the process uses, then leaves behind polluted. It’s also been linked to a rise in the frequency of earthquakes, yet in 2016 the Canada Pension Plan Investment Board (CPPIB) created a new fracking venture named Crestone Peak Resources, in which it holds a 97% interest.
Hydraulic fracturing, or fracking, has revolutionized oil and gas production around the world and especially in the United States. The industry is now predicting fracking will return the United States to self-sufficiency. It is not without controversy and more importantly environmental impact. The most definitive study of fracking in Canada conducted by the the Council of Canadian Academies (the only definitive study on fracking in Canada) found: “...that well-targeted science is required to ensure a better understanding of the environmental impacts of shale gas development. Currently, data about environmental impacts are neither sufficient nor conclusive.”
Three provinces: Quebec, New Brunswick and Nova Scotia have placed moratoriums on fracking fearing environmental impacts including earthquakes, groundwater contamination, gas leaks into neighbouring water wells and the impacts of traffic and pipeline construction.
Fracking is a well stimulation technique in which rock is fractured by a pressurized liquid. The process involves the high-pressure injection of ‘fracking fluid’ (primarily water, containing sand and often minerals) into a wellbore to create cracks in the deep-rock formations through which natural gas, petroleum, and brine will flow more freely. In addition, intensive fracking operations in places like Oklahoma have led scientists to believe it may be behind the upsurge in the number of minor earthquakes and tremors being felt there.
Not content to just being invested in oil companies, the CPPIB bailed-out energy giant Encana to the tune of $900 million by purchasing its fracking rights in Colorado. It then purchased the drilling rights from another company to create a new venture in 2016 called Crestone Peak Resources, retaining 97% ownership. The value of the company has now plummeted to $543 million, a $357 million (U.S.) loss.
Fracking in Colorado is highly-contentious, as communities across the state demand more localized control over drilling projects. Does a 97% investment in a foreign fracking company appear to be a low-risk investment to you? The CPPIB obviously feels it is.
Fracking contributes to global warming, pollution, and is hazardous to human health. The following are twelve good reasons for abandoning fracking, courtesy of “Frack Free Colorado”. They are:
- Health: People who live within a ½ mile radius of a fracking well have a 66% higher cancer rate (Colorado School of Public Health)
- Global Warming: Up to 9% of methane produced from fracking seeps into the atmosphere. Methane is 100x more potent as a greenhouse gas than carbon dioxide (Dr. Ingraffea: Dwight C. Baum Professor of Engineering at Cornell University)
- Ozone: Ground level ozone in some rural places, where there is fracking, is worse than ozone levels in downtown L.A. (Wyoming Dept. of Health)
- Gag order(s): A gag order in the state of Colorado prevents your doctor from informing you if you have fracking fluids in your blood, making it much harder for you to get well (Colorado State website: cogcc.state.co.us/forms/pdf_forms/form35.pdf)
- Poisoned Water: More than 5,000 spills have been registered with the Colorado state website, and approximately 43% of these have contaminated groundwater
- Water Depletion: Each well uses approximately 3-8 million gallons of water over its lifetime, according to Dr. Jeffery Time.
- Toxic Chemicals: Of the 300-odd chemicals presumed in fracking fluid, 40% are endocrine-disrupting, ⅓ are suspected carcinogens, and ⅓ are developmental toxicants. Over 60% of these chemicals can harm the brain and nervous system (Colborn T, Kwiatkowski C, Schultz K, and Bachran M. 2011. Hum Ecol Risk Assess)
- “The Halliburton Loophole”: Currently, natural gas drilling is exempt from the U.S. Safe Drinking Water Act (SDWA). Natural gas companies do not have to disclose the chemicals used during hydraulic fracturing. This 2006 amendment to the SDWA has become known to its critics as “The Halliburton Loophole”, named for the megalithic U.S. oil services firm, Halliburton. With this amendment the U.S. Environmental Protection Agency (EPA), is effectively ‘off-the-job’ (2005 Energy Policy Act)
- Methane: Methane levels in water sources that are close to fracking wells can be so high that tap water in surrounding homes has been known to light on fire (Josh Fox, Gasland)
- Earthquakes: According to the U.S. Geological Survey, a sharp rise in seismic activity in the middle of the U.S. is the result of injecting water into deep underground wells for hydraulic fracturing (U.S. Geological Survey)
- Volatile Organic Compounds (VOC’s): VOC’s burn-off from fracking fluid tanks. Some of these chemical compounds cause endocrine disruption leading to genetic mutation in unborn children, while others cause cancer in adults (“The Endocrine Disruption Exchange” (TEDX), Theo Colborn)
- Leaking Wells: 6% of fracking wells leak in their first year, and 50% leak over 30 years (“The Sky is Pink” Pinskyny.com)
Hydraulic fracturing is a dangerous, unhealthy, environmentally-disastrous process, that by its nature is fraught with great financial risks for investors. The CPPIB must divest itself of its fracking entity, Crestone Peak Resources, and any other fracking investments it may hold.
The Canada Pension Plan Investment Board (CPPIB) announced on June 11, 2018 that it plans to issue Green Bonds, (also known as climate bonds), becoming the first pension plan in the world to do so. These designated bonds are intended to encourage sustainability, and to support climate-related or other types of special projects.
According to the CPPIB’s website, “Since their introduction in 2007, Green Bonds have become mainstream in the financial community with the annual issuance of Green Bonds reaching $155 billion in 2017, a 78 percent increase over 2016. Annual issuance is expected to reach $250-$300 billion in 2018, and increase to $1 trillion by 2020 according to the Climate Bonds Initiative.”
Green bonds come with tax incentives such as tax exemption and tax credits, making them a more attractive investment compared to a comparable taxable bond. This provides a monetary incentive to tackle prominent social issues such as climate change and a movement to renewable sources of energy. To qualify for green bond status, they are often verified by a third party such as the Climate Bond Standard Board, which certifies that the bond will fund projects that include benefits to the environment.”
They go on to say: “The World Bank is a major issuer of green bonds…World Bank green bonds finance projects around the world, such as India’s Rampur Hydropower Project, which aims to provide low-carbon hydroelectric power to northern India’s electricity grid.”
The CPPIB’s website states:
“CPPIB has announced plans over the past year to invest more than C$3 billion in the renewable energy sector, as it works to ensure the CPP Fund is well-positioned for the expected global transition to a lower-carbon economy.
CPPIB’s Green Bond Framework defines three categories as eligible for investment from Green Bond proceeds:
- Renewable Energy (wind and solar);
- Sustainable Water and Wastewater Management; and
- Green Buildings (LEED Platinum certified).”
They go on to say: “Any Green Bonds issued in Canada will be issued on a private placement basis only to certain qualified accredited investors.”
Funds-Europe.com reports “One of Sweden’s major institutional investors–the AP4 pension fund–has built a portfolio of green bonds that totalled 401 million Euros at the end of 2017.
Niklas Ekvall, chief executive of the fund, said in a report: “AP4 believes that transparent reporting of climate-related risks and opportunities contributes to a faster transition to a low fossil fuel society.”
The Canada Pension Plan Investment Board (CPPIB)’s financing of fossil fuels, in particular coal and “dirty oil” such as that extracted from the tar sands, can lead to serious health problems. Asthma sufferers and those with other with lung issues are particularly vulnerable to the particulates released into the air when coal is burned, and dangerous hydrogen sulphide gas from oil and gas wells is released and inhaled.
There are fourteen coal-fired generating stations in Canada, in five provinces: Nova Scotia, New Brunswick, Manitoba*, Saskatchewan, and Alberta.
(* the Brandon Generating Station in Manitoba burns coal and/or natural gas)
The U.S. has approximately 1,200 coal-fired generators, at 450 facilities. The populations of Central and Eastern Canada are downwind from a number of them.
Coal-fired power plants are among the greatest sources of pollution. They are the biggest industrial emitters of mercury and arsenic into the air. They emit 84 of the 187 hazardous air pollutants identified by the U.S. Environmental Protection Agency (EPA) as posing a threat to human health and the environment.
Coal plants also emit cadmium, chromium, dioxins (one of the most toxic substances known to Man), formaldehyde, furans, lead, nickel, deadly polycyclic aromatic hydrocarbons (PAH’s), volatile organic compounds (VOC’s) including benzene, toluene, and xylene. Emissions include gases such as hydrogen chloride and hydrogen fluoride. Small amounts of radioactive materials such as radium, thorium, and uranium are also emitted.
Burning coal in power plants emits two gases: sulfur dioxide (a significant contributor to global warming), and nitrogen oxides. These gases combine with precipitation in the atmosphere to form acid rain. The burning of coal also produces particulate matter.
According to the U.S. website “Tox Town” (https://toxtown.nlm.nih.gov/text_version/locations.php?id=155), “The hazardous emissions from coal-fired power plants cause serious human health impacts. Arsenic, benzene, cadmium, chromium compounds, TCDD dioxin, formaldehyde, and nickel compounds are listed as carcinogens…by the National Toxicology Program. Furan and lead are listed as ‘reasonably anticipated to be human carcinogens.’”
“Hazardous air pollutants emitted by coal-fired power plants can cause a wide range of health effects, including heart and lung diseases such as asthma. Exposure to these pollutants can damage the brain, eyes, skin, and breathing passages. It can affect the kidneys, lungs, and nervous and respiratory systems. Exposure can also affect learning, memory, and behaviour.”
“Mercury pollutes lakes, streams and rivers, and accumulates in fish. Nearly all fish and shellfish contain [some level of] mercury. “
“People who live near coal-fired power plants have the greatest health risks from [airborne] pollution. Many pollutants, such as metals and dioxins, may attach to fine particles and travel hundreds or even thousands of miles.”
Property insurers are finding it increasingly difficult to provide property owners with affordable insurance in some locations due to the increased severity and frequency of severe weather events in recent years–everything from flooding to hurricanes, tornadoes and tsunamis. Given the risks insurance companies are exposed-to they are being viewed as a less-attractive and a higher risk investment than before, yet the Canada Pension Plan Investment Board (CPPIB) recently purchased part of the ailing U.S.-based giant AIG Canada, for $1.1 billion (U.S.).
An investment like the CPPIB’s in AIG Canada would likely not have been undertaken by financial institutions such as the Norwegian Pension Fund Global, the Dutch healthcare pension fund, or the French insurer AXA, who must all include climate risk as a factor in their investment decisions.
Canadian Underwriter.ca has prepared a paper entitled: “Premiums Likely to Rise as Insurers Forced to Pay Up for Massive Storms.”
According to their paper, “Home owners should prepare to pay more for property insurance as the severe weather trend that has battered the country during the past year is expected to continue.” Pete Karageorgos, manager of consumer and industry relations at the Insurance Bureau of Canada states: “There are more and more storms happening, and we’re seeing extreme weather events that happened once every 40 years…that can now be expected to happen once every 6 years.”Karageorgos went on to say: “Trends for the last few years have been that we’re seeing storms occur with greater regularity so the amount of claims that have been presented have been averaging about a billion dollars a year over the last three years or so.”
Intact Financial Corp., one of Canada’s largest property and casualty insurers, raised premiums by 15 to 20 per cent during the past few months as catastrophic losses and weather-related claims have risen. “From water to wind, the impacts of climate change coupled with urban growth, aging municipal infrastructure and the greater prevalence of finished basements are posing new challenges to the industry,” said Impact spokesman Gilles Gratton.
Catastrophic losses insured by Intact over the last three years represented between 10 per cent and 20 per cent of Intact’s total claims costs in personal property, Gratton added, noting that water damage, wind and hail claims now represent more than 50 per cent of the company’s insured losses in personal property.
According to the Insurance Bureau of Canada, the amount of insured damage resulting from extreme weather in Canada grew from less than $200 million in 2006 to $1.2 billion in 2012.
The entire paper can be found at:
In 2017 Les Amis de la Terre France (Friends of the Earth France), in a coalition with a number of other environmental groups under the banner “Unfriend Coal” issued a report entitled: “Insuring Coal No More: An Insurance Scorecard on Coal and Climate Change.”
In their Scorecard, Unfriend Coal stated that: “Coal is by far the biggest source of CO2 emissions. In its annual review of global action on climate change, the UN has just called for a stop on new coal power plants and an accelerated phase-out of existing plants as key steps towards achieving the goals of the Paris Agreement and limiting average temperature increases to well below 2 degrees Celsius. The International Energy Agency’s pathway for a 2 degree transition also requires 99% of global coal generation to be phased out by 2050.”
Insurance companies are increasingly pulling out of the coal sector in response to climate change. In 2015 the large French insurer AXA became the first global insurer to reduce investment. Now, fifteen insurers are collectively divesting about $20 billion from coal companies, and some are ceasing to underwrite coal. The Scorecard poses the question:
“Is coal becoming uninsurable?” The insurance companies are among the ultimate managers of risk in our society. With total assets under management of approximately $31 trillion, they are also one of the world’s largest groups of institutional investors. With their underwriting and investments they play a major role in shaping the world’s industrial development. Through their role as underwriters, insurers play an essential role for the continued construction and operation of coal projects. Without the coverage of their significant natural, commercial, legal and political risks, major coal mines, ports, and power plants could not be funded, built or operated.
Unfriend Coal goes to say: “Insurance companies have a vital self-interest in avoiding catastrophic climate change. 2017 is on track to become the worst climate disaster year for the insurance industry, and growing areas–for example exposed coastal properties–are becoming uninsurable. A representative from the British insurer Aviva says: “Left unchecked, climate change will render significant portions of the economy uninsurable, shrinking our addressable market.”
The Unfriend Coal campaign holds insurers to account for their action (or inaction) on coal and climate. In June 2017, a coalition of thirteen organizations engaged in the campaign asked twenty-five of the leading insurance companies around the world to stop underwriting coal, divest their assets from the coal sector, prepare longer-term plans to exit all fossil fuels, and scale up their support for clean energy solutions. By underwriting and investing in coal and other fossil fuel projects, insurance companies contribute to the kind of catastrophic climate change from which they are supposed to protect their customers.
Seventeen of the twenty-five insurance companies responded–a 68% participation rate. From their responses, and additional relevant information from industry surveys, company literature, and corporate websites, a scorecard was devised to assess how insurance companies are performing on coal and climate change.
To prepare their Scorecard, the Unfriend Coal campaigners asked the insurance companies to undertake the following actions by October 2017:
- “Develop and adopt publically available policies not to underwrite any new coal exploration, coal mining, coal power plant or coal infrastructure projects, and not to offer any insurance, including renewing existing policies, to companies that meet any one of the following criteria:
- they derive at least 30% of their revenues or power generation from coal;
- they produce, trade or consume at 20 million tons of coal annually;
- they plan investments in new coal mines, power plants or infrastructure.
Workers’ compensation policies, which directly benefit workers in the coal industry, should be exempt from this policy.”
- “Publically exclude offering any insurance coverage to the Adani group of companies and partner companies associated with the Carmichael coal mine in Australia, one of the world’s largest coal mining projects.”
- “Develop and adopt a publically available policy to divest, within six months, any assets from companies that meet any of the criteria above. They should divest such holdings from investments on their own accounts, and no longer offer respective holdings to external investors whose assets they manage.”
- “Beyond October 2017, develop a plan to divest from and cease underwriting other fossil fuel technologies (oil, gas and associated infrastructure) for their business to become fully compatible with the goals of the Paris Agreement.”
- “As they divest from coal and other fossil fuel projects, scale up investments in clean energy companies that follow international human rights and social and environmental standards in their projects, at a corresponding pace.”
The Unfriend Coal report scores the response of the twenty-five insurers to this appeal for action on coal and climate change.
The entire report can be found at: www.unfriendcoal.com
It will be challenging, but not impossible, to effect a change in the judicial mandate of the Canada Pension Plan Investment Board (CPPIB) that will mandate them to consider climate risk in their investment decisions. A change in the mandate of the CPPIB can only be made with the approval of the federal finance minister, and approvals from at least seven of the ten provincial finance ministers.
The CPP Investment Board (CPPIB) was established by an Act of Parliament in December 1997. The CPPIB is accountable to Parliament and to federal and provincial ministers who serve as the CPP stewards. They are, however, governed and managed independently from the CPP itself, and operate at arm’s length from governments.
The CPPIB mandate is based on a governance structure that distinguishes them from a sovereign wealth fund. They have an investment-only mandate, that, according to them “…is unencumbered by political agendas and insulated from political interference in investment decision-making. Our management reports to an independent Board of Directors.”
The mandate is set out in legislation. It states that:
- “We [CPPIB] invest in the best interests of CPP contributors and beneficiaries.
- We have a singular objective: to maximize long-term investment returns without undue risk, taking into account the factors that may affect the funding of the Canada Pension Plan and its ability to meet its financial obligations.
- We provide cash management services to the Canada Pension Plan so that they can pay benefits.”
On the topic of sustainable investing, the CPPIB informs us that: “…we consider and integrate Environmental, Social and Governance (ESG) factors…risks and opportunities…into our investment decisions. Given our legislated investment-only mandate, we consider and integrate both ESG risks and opportunities into our investment analysis, rather than eliminating investments based on ESG factors alone.”
The CPPIB’s timid policy is to engage companies they invest in to be forthcoming about disclosing the investment risks associated with their activities, including those activities that may significantly contribute to global warming. Canadian should expect and demand more from the CPPIB in this regard. Climate risk assessment should be fundamental to its investment choices, and these assessments should be public documents.
The Canada Pension Plan Investment Board (CPPIB) has billions of dollars invested in real estate, financial institutions that lend to home builders and home buyers, and the insurance companies that insure these buyers. Two U.S. lenders declared bankruptcy in 2009 and 2010 leaving the CPPIB with a loss of over $2 billion and many more are likely to follow, given the recent increase in the frequency and severity of extreme weather events.
With global warming bringing rising sea levels, many coastal communities at-or-near sea level are in danger of having their properties submerged. This poses a huge potential risk to the CPPIB.
Submerged homes are not merely a possible future threat–in the Borough of Queens, New York, communities surrounding Jamaica Bay such as Hamilton Beach, Broad Channel, and Howard Beach, among others, have streets that are now permanently under water. And that water is rising.
Home builders, those who lend money to them, and the insurance companies who insure properties may face severe financial downturns, even bankruptcy, should these conditions continue and worsen as scientists expect they will. It would not be the first time that the CPPIB has had a commercial lender that it was invested-in file for bankruptcy.
In November of 2009 the U.S.-based CIT Group, a century old lender to hundreds of thousands of small-and-medium-sized businesses filed for bankruptcy. Theirs was the 5th. largest bankruptcy in U.S. history.
Similarly, in April 2010 U.S.-based Pacific Coast National Bancorp, a lender to small-and-medium-sized businesses and consumers, filed for bankruptcy.
From these two bankruptcies alone, CPPIB suffered unrecoverable losses of over $2 billion.
While the Canada Pension Plan (CPP) may be pretty much immune from direct litigation, some energy companies are facing litigation over environmental degradation; cities are now holding fossil fuel companies accountable for impacts within their jurisdiction, and some citizens in the U.S. have joined class-action lawsuits against local polluters all greatly increasing the risk involved in investing in such companies, as the Canada Pension Plan Investment Board (CPPIB) routinely does.
If a company, and its directors and officers, are fined or charged by a regulatory body, or sued in civil court, this poses a substantial risk for those invested in that company and for those invested in the insurers who insure those directors and officers (‘D&O’ liability insurers).
According to Canadian Underwriter, a class action lawsuit by shareholders against five directors and officers of a Vancouver-based mining firm may reach the Supreme Court of Canada.
Directors and officers are at risk of being sued by shareholders if the company’s share price drops; in such cases, D&O liability insurers can be on the hook for millions. In some instances, shareholders may allege that the company and its individual directors and officers misrepresented the financial health of the company at the time the shareholders bought stock in the company.
One such lawsuit is in the works against SouthGobi Resources Ltd., a Vancouver-based coal supplier publically listed on the Toronto Stock Exchange.
SouthGobi gets its revenue from coal mining in Mongolia. The company would stockpile coal in a yard where customers would pick it up. Initially SouthGobi recognized revenue when the coal was dropped to the stockpile. It later changed its accounting method so that revenue was recognized only after the customer loaded coal to their trucks from the stockpile.
Some of their Mongolian customer were not paying their bills and in late 2013 SouthGobi restated its results from previous years. Their share price dropped by 18%. The firm said at the time in a press release that some public statements made earlier were “no longer accurate and should not be relied upon.”
Shareholders of SouthGobi sued the firm, its officers, and directors. In 2015 Ontario Superior Court Justice Edward Belobaba found that a 2013 press release from SouthGobi announcing a restatement of earlier financials “was never put to the Board of Directors before being released and was drafted exclusively” by management.
In 2017, the Court of Appeal for Ontario, in a unanimous decision, granted the shareholder plaintiffs leave to proceed with their lawsuit against individual directors and officers of SouthGobi, in addition to the corporation itself. SouthGobi has appealed this ruling to the Supreme Court of Canada.
The full text of this article, entitled: “Judges at odds on liability of directors and officers in shareholders’ lawsuit” by Greg Meckbach of Canadian Underwriter can be found at:
The Montreal Pledge was launched in September 2014; pension and investments fund managers from around the world who are signatories to the Pledge, including Canada, have agreed to measure, disclose, and reduce the carbon footprint of their investments, yet the Canada Pension Plan Investment Board (CPPIB) has failed to disclose to the public if they are meeting their commitment to the Pledge.
The Pledge is supported by the Principles for Responsible Investment (PRI) and the United Nations Environment Programme Finance Initiative (UNEP FI). Overseen by the PRI, it has attracted commitment from over 120 investors with over $10 trillion (US) in assets under management, as of the United Nations Climate Change Conference (COP21) in December 2015, in Paris.
Support for the Montreal Carbon Pledge comes from investors across Europe, the USA, Canada, Australia, Japan, Singapore and South Africa. CDC Quebec is one of many Canadian signatories.
The Pledge allow investors (asset owners and investment managers) to formalize their commitment to the goals of the Portfolio Decarbonization Coalition. Over $100 billion (US) has been committed to this at COP21.
Severe weather events are being noted with increasing frequency around the globe, with some areas being particularly vulnerable–the Texas Gulf Coast is one such area.The one-two punch of Hurricanes Harvey and Irma in Texas during the summer of 2017 caused damage of about $354 billion (CDN) to the hardest hit districts, West Houston And Galleria. The Canada Pension Plan Investment Board (CPPIB) is the pending owner of 2.8 million square feet of office space in these districts.
These include hurricanes, an increase in rainfall and associated flooding, tornados, major storms, high winds–and with each year these events increase in number, and severity. Some areas that used to experience “100 year floods” are now seeing these floodwaters almost annually. With these extreme events come huge recovery costs–for homeowners, governments, investors (commercial buildings) and insurance companies. The CPPIB has investments in insurance companies and in commercial buildings; some of these buildings are in areas frequently affected by severe weather.
Two of the hardest-hit areas of the Coast by Harvey and Irma were areas with a large density of commercial buildings–West Houston and Galleria. The CPPIB is the pending owner of nearly 2.8 million square feet of office space in these districts. It’s not unreasonable to assume that insurance costs for these properties may spike, or insurers may even refuse to insure them. The threat of these risks undermines the value of these assets.
World oil reserves will be depleted in a few decades, if oil demand continues its steady increase. Alternatives are available and the time to think about what we’ll use to replace oil is now, while there’s still time to phase-in alternative green energy sources such as wind, solar, geothermal, and more.
Or more correctly: “the 21st. UN Conference of the Parties” (COP21), for discussing climate change).
In April 2016, a majority of the world’s countries, including Canada, met in Paris where they pledged to reduce their greenhouse gas emissions, with a goal of keeping the rise in global temperature below 2° Celsius compared with preindustrial times–and an aspirational goal of limiting the increase to only 1.5°C. Canada and the UK are leading the way in encouraging other countries to phase-out or eliminate their coal-fired power plants, yet the Canada Pension Plan Investment Board (CPPIB) currently has $12 billion in coal assets, and is bidding on more.
Each country commits to its own targets. The targets are not legally binding, and must be updated by countries every five years. Before they go into effect, each country’s government must ratify their pledged goal.
The U.S. government signed the Agreement under Barack Obama’s term as the U.S. President, but current President Trump has pulled the U.S. out of the deal. Since then, many US states and municipalities have stepped-up to the plate to enact plans to reduce their own greenhouse gas (GHG) emissions.
Canada is one of a total of 195 countries that are eventually expected to become signatories to the Agreement. Canada ratified the Paris Agreement on October 5, 2016, following a vote in Parliament. The Paris Agreement entered into force on November 4, 2016.
At COP21, Prime Minister Justin Trudeau pledged that Canada will reduce it carbon emissions to 30% of 2005 levels, by the year 2030. This was the target that was first established by his predecessor, Stephen Harper. In addition, Canada announced it has pledged $300 million to the Mission Innovation initiative for clean technology development, and has pledged $2.65 billion for emissions-reduction programs for developing countries.
In addition to the 2°C temperature goal and efforts to limit the rise to 1.5°C, the Paris Agreement also aims to foster climate resilience and lower greenhouse gas development, as well as making climate flows consistent with a pathway toward a lower carbon future. As required under Article 4(19) of the Paris Agreement, Canada submitted its long-term low greenhouse gas development strategy to the United Nations Framework Convention on Climate Change (UNFCCC) on November 19, 2016 at COP 22. This mid-century climate change strategy looks beyond 2030 to start a conversation on the ways we can reduce emissions for a cleaner, more sustainable future by 2050.
At the summit’s end, Climate Change and Environment Minister Catherine McKenna said the completed Paris Agreement would set the international framework for the federal government’s climate deal with provinces. Prime Minister Trudeau met with the premiers some months later in B.C. to hammer-out a consensus but was not able to. The premiers agreed only to to broad emissions-reduction strategy and not the national minimum carbon price the Trudeau government was seeking.
As it stands today (November 2018), the federal government, as part of its Paris commitment, will introduce a national minimum carbon price to become effective on January 1, 2019. At this time the premiers of four provinces have announced their opposition to this carbon tax–the premiers of Alberta, Saskatchewan, Manitoba, and Ontario. A court challenge to the tax has been launched by these provinces.
What Does the Paris Accord and Global Warming Mean for the Canada Pension Plan Investment Board (CPPIB) and other Investors?
Failure of the world’s nations to meet the goals set out in the Paris Accord (limiting an increase in global temperature to at least 2° C, and ideally 1.5° C) means one thing to large investors like the CPPIB: Risk. Particularly when it comes to investments in fossil fuels that are contributing to the increase in global temperature.
The British financial think tank Carbon Tracker has released a report concluding that $2 trillion (US) in coal, oil, and gas reserves will be uneconomical if the world succeeds in keeping the global temperature increase to 2° C.
Carbon Tracker says Canada’s fossil industry is particularly vulnerable due to its high cost of production. It forecast that about $220 billion worth of the country’s fossil fuel reserves (most notably Alberta’s Tar Sands) would become ‘stranded’, in a two-degree world.
Oil sands producers hoping to see the Trans Mountain Pipeline built to move their product to tidewater and those who are planning to build liquified natural gas (LNG) plants in British Columbia will find it difficult to compete with lower-cost suppliers around the globe as climate policies drive down demand for fossil-based energy according to James Leaton, a co-author of the report.
Former U.S. Vice President Al Gore, speaking at the Paris summit in 2015 said the financial community has yet to adequately assess the climate risk, even as the world is moving more quickly than many realize to reduce the demand for fossil fuels and expand the investment in renewable energy that will cut the demand for coal and oil, in particular.
“Investors need to look at the pattern that is unfolding, lest they be trapped holding stranded assets,” Mr. Gore said.
The British-based consultancy Wood Mackenzie is less pessimistic about the future of fossil fuel prices, as they are more pessimistic than Carbon Tracker about the planet’s ability to reach a two-degree world. According to Wood Mackenzie, “There would be some difficulty in our view in reaching that two-degree scenario, given what we know about demographics and what we know about economic growth,” Paul McConnell, director of research for the firm’s global trends unit, said in an interview.
Bank of England Governor and Chair of the International Financial Stability Board (FSB), Mark Carney, was also a speaker at the Paris summit. He, and Michael Bloomberg, founder of the media company Bloomberg LP, have together launched an effort to provide information that the capital market will need to assess risk and opportunities in a carbon-constrained world. According to Mr. Carney, Mr. Bloomberg will be leading a task force to develop voluntary financial risk disclosure guidelines that will ensure consistent information for investors, lenders, insurers and other stakeholders.
“This ideally is going to be the one-stop shop for the right principals around climate [change] so that there can be a true market in transition towards a low-carbon economy…There are a wide range of views amongst investors and providers of capital about the urgency of the issues, about the right technologies to back, about which companies are doing better and which are doing less well…But they don’t have the information to express their views. The point of this is to solve that market failure,” said Mr. Carney.
As chair of the FSB, Mr. Carney has led an effort to highlight the growing risk to the financial sector– as well as the businesses more broadly–from the transition away from fossil fuels and from the worsening impacts of climate change.
The Group of 20–the heads of government and finance ministers from the EU and nineteen other leading and emerging economies–asked the FSB to assess the implications of climate change on the global economy, and financial risk.
In a speech Mr. Carney listed three types of threats:
- physical, or impacts from weather-related events such as floods, droughts and storms
- liability issues arising from investors suing companies for failing to disclose risks or parties who suffer loss claiming compensation from those they hold responsible
- transition issues, in which assets–especially fossil fuel reserves–are revalued due to the transition to a low-carbon economy
Mr. Bloomberg has stated that disclosure of climate risks is a crucial component of a functioning financial market.
“It’s critical that industries and investors understand the risks posed by climate change, but there is currently too little transparency about those risks,” Mr. Bloomberg said.
Accounting giant KPMG LLP reviewed the climate disclosure of 250 of the world’s largest corporations and found a wide variation in the level of reporting and methods employed.
“It is all but impossible to accurately compare one company’s performance with another’s,” KPMG partner Wim Bartels said in the report. “And few [of the companies] publish sufficient information for their progress to be easily tracked.”
Canada’s largest pension funds say they do take carbon risk into account as they plan their portfolio mix, invest in new assets and manage those investments.
The Canada Pension Plan Investment Board (CPPIB) has said they constantly assess the risk to their long-term assets, not just in the oil and gas sector but across the board.
Michel Leduc, a CPPIB spokesman, said “Disclosure of those risks has improved dramatically in the past decade though more work can be done…The river flows in one direction and that’s basically more and better and clearer disclosure.”
Quebec has been the leader in Canada, for recognizing the risks posed by climate change and including these risks in their investment decisions. The Caisse de Depots Quebec is the second largest pension plan in Canada, after the Canada Pension Plan (CPP). It has reduced the carbon footprint of its investment portfolio by 25%.
In their September 18, 2018 article entitled: “Too Many Investors Still See Climate Action as Anti-Profit, Says Quebec Pension Fund Boss” by Carl Meyer, National Observer reported that Michael Sabia, president of Caisse de depot et placement du Quebec, one of Canada’s largest pension funds, is claiming that too many investors are still seeing climate action as a restraint on profit when that’s not the case.
Sabia made these remarks to a room full of foreign government officials and private sector leaders on the eve of a meeting of G7 environment, oceans, and energy ministers in Halifax, during the opening of a meeting on the “new climate economy.”
He went on to say, “Too many investors, even long-term oriented investors today, still see climate change as a constraint–something that forces them to make a choice, to compromise their returns, and therefore runs counter to their fiduciary obligations to their clients.”
“As long-term investors, collectively, we need to think differently, because addressing climate change is not only about what you stop doing–more importantly, it’s about what you start doing.”
Sabia didn’t name specific investors or governments at the meeting, but spoke about the trillions of dollars in economic gains that studies have shown will be available to nations that shift to a low-carbon economy.
In a 2017 report Friends of the Earth Canada and Germany’s Urgewald listed Quebec’s Caisse de depot pension plan as one of the top investors in new coal power plants overseas. Meanwhile, our federal government has been pushing to phase-out coal power worldwide.
Asked by National Observer after the meeting whether the group had discussed investments in coal power, Marc-Andre Blanchard, Canada’s ambassador to the United Nations said “we discussed infrastructure in a very wide sense.”
“We discussed the necessity to build resilient infrastructure, low-carbon infrastructure, the fact that there are many opportunities in renewable energy,” he said.
In June, La Caisse and Ontario Teachers’ Pension Plan announced a partnership with the Canadian government and several financial services companies in G7 countries to come up with a unified approach to disclose climate-related risks, among other objectives.
The pension plan also produced a climate change strategy in 2017, committing to a 25 per cent decrease in carbon pollution per dollar invested by 2025, a 50 per cent increase in “low-carbon investments” by 2020 and to “factor climate change into all our investment activities and decisions.”
Michael Sabia has worked at high levels in both business and government–he once served as a deputy secretary in the Privy Council Office. He also said that consumer attitudes and buying patterns are now changing.
“Climate change is becoming a popular issue, a people’s issue. We see this frequently–we see it in the companies we invest in,” he said. “How? Because their growing concern is to ensure that their brands are seen by the public to be on the right side of this defining issue.”
He said across industries as diverse as real estate, agriculture, transportation and electronics, there has been progress on reducing emissions, “but frankly, not enough.”
As an example of the scope he envisions, he said at least 50,000 megawatts of new wind power is being installed annually, the same as produced in a year by Hydro Quebec, which he said was the fourth-largest hydro producer in the world. Meanwhile, solar power’s price is five times lower than a decade ago, and in several countries, such as India and China, solar is cheaper than coal and gas plants.
Sabia also took aim at governments, noting that while some have introduced carbon pricing and reformed their tax code to address climate change, “obviously, in other countries, governments are going to need to demonstrate greater leadership on this issue.”
And, he noted the urgency of climate change, compounded by “growing economic pressure on the middle class and the related issues of the rise of populism and trade protectionism around the world.”
“Climate change is real; it’s gone beyond the point of being a risk,” said Sabia.
“We see its impact every day–heat waves and drought in Europe this summer; record temperatures; 33 degrees Celcius north of the Arctic Circle in Finland…in North America, pretty extreme weather events, deadly hurricanes, floods, wildfires.”
Marc-Andre Blanchard, Canada’s UN ambassador, spoke to delegations from 60 countries for a discussion hosted by the UN secretary-general focusing on sustainable finance. According to Blanchard “In G7 economies the private sector controls most capital, so how it responds to the climate crisis can have a big impact.
“We need close partnership to ensure immediate action on disclosure, developing green financial products, building resilient infrastructure, and investing in sustainability”, he said.
Unlike Norway and Holland, there are no regulations in Canada to ensure that the Canada Pension Plan Investment Board (CPPIB) considers the risks due to climate change and global warming in making their investment decisions. The only influence the federal government has is through the appointment of Board members. Any changes to the CPPIB requires the consent of the federal government and seven of the provinces, a standard similar to amending the Constitution.
An international group of large institutional investors have become signatories to the United Nations’ Principles for Responsible Investment (UNPRI) organization. As signatories, these member institutions agree to follow a set of six voluntary and aspirational investment principles that offer a choice of possible actions for incorporating environmental, social, and governance (ESG) issues into investment practice, contributing to developing a more sustainable global financial system.
As part of their mission, in 2016 PRI published a document: “Sustainable real estate investment: Implementing the Paris Climate agreement–an action Framework.” The Framework sets out to identify key drivers and overcome the most common barriers to action for integrating ESG and climate change risks into real estate investments.
According to the Framework, investment buildings consume around 40% of the world’s energy and contribute up to 30% of its annual greenhouse gas (GHG) emissions.
A stress test is a way of assessing man’s impact on climate. What will happen if the global temperature increases by 1.5° C. ? By 2° C. ? More ? An increased average global temperature will hasten the melting of the polar ice caps and mountain glaciers, leading to a rise in sea levels that will inundate low-lying coastal areas and a number of South Pacific islands. No responsible investor, including the Canada Pension Plan Investment Board (CPPIB), should be investing in any commodity that, when used, will contribute to global temperature increase.
In May 2018 the California Department of Insurance (CDI) has announced that it plans to conduct a climate-related financial risk stress test and analysis of reinsurance companies’ investments in fossil fuels, which it claims will be the most comprehensive test of its kind for the insurance sector, and the first in the U.S.
The CDI has engaged 2° Investing Initiative, and established partner of European financial regulators on the topic, to conduct the analysis for companies in California’s insurance market, which account for around $100 million in annual premiums. The analysis covers re/insurers with over $500 billion in fossil fuel-related securities issued by power and energy companies, $10.5 billion of which consists of investments in thermal coal enterprises.
California Insurance Commissioner Dave Jones said: “The climate-related financial risk to insurers’ investments in thermal coal, other fossil fuels and fossil fuel enterprises should not be ignored.”
“As a financial regulator, I want insurers to consider climate-related financial risks, including risks to their investments.. In order to make sure they are considering these risks, we have undertaken an analysis of the climate-related risk to insurers’ investments.”
2° Investing’s forward-looking scenario analysis has determined that thermal coal presents long-term financial risks for investors, despite any short-term fluctuations in market price and policy signals.
Cynthia McHale, Director of Insurance at the sustainability nonprofit organisation Ceres, also commented on the CDI’s plans: “Ceres applauds the leadership and foresight of CDI’s Commissioner Dave Jones, and encourages all insurers to incorporate 2° scenario analysis into their business strategy.”
“2° scenario planning strengthens an insurer’s assessment of climate risks and opportunities, and positions the insurer to adapt and prosper in a carbon-constrained future.”
Individual insurer reports will also be sent out to all participating companies which will explain how investment plans align with different climate scenarios, where the individual insurer ranks among its peers, and which securities are driving the climate risk exposure of their investment portfolios.
Butch Bacani of the United Nations leads the PSI, the largest collaborative initiative between the UN and the insurance industry. He said: “This pioneering work by CDI on scenario analysis to assess transition risk in insurers’ investments is yet another testament to California’s commitment to promote climate risk transparency and sustainable insurance markets, in line with the aims of the Financial Stability Board’s climate risk disclosure recommendations, The Paris Agreement on Climate Change, and the Global Climate Action Summit in California this year. This is leadership in action.”
According to the Carbon Tracker Initiative (CTI), “Stranded assets are now generally accepted to be fossil fuel supply and generation resources which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (ie., meet the company’s internal rate of return), as a result of changes associated with the transition to a low-carbon economy.”
We must discourage the Canada Pension Plan Investment Board (CPPIB) from investing in any assets that have the potential to become stranded.
The chief executive of the Canada Pension Plan Investment Board (CPPIB), Mark Machin, appeared before the House of Commons finance committee on June 11, 2018, informing the committee that the Board has been consulted by the federal government’s financial advisor about the possibility of the CPPIB investing in the Trans Mountain Pipeline. He told the committee, “There’s been no political pressure applied.”
It’s safe to assume that whenever the federal government goes to the CPPIB with a ‘request’ the ‘pressure’ is implied, as the government appoints the members of the CPPIB board.
Mr. Machin has said he thinks it ‘likely’ that he and his fellow board members will ‘take a look’ at the stalled pipeline project, because, “…there are a limited number of investment opportunities of its [the pipeline’s] magnitude.” Machin went on to tell the finance committee that, “…the Canada Pension Plan Investment Board has had both good and bad experiences with pipelines and will use its usual approach [editor’s emphasis] when deciding whether to put money into Trans Mountain.”
It’s time to tell Mr. Machin that the Board’s ‘usual approach’ (looking only at the financial quality of the asset) is insufficient.
All issues associated with the pipeline that are not profit-related, including environmental and social issues, are deemed to be ‘outside the CPPIB’s mandate.’ But these areas are rife with risks–financial, social, and environmental.
If the CPPIB were to invest in the Trans Mountain Project today, exactly what would they be buying-into? Speculation and promises aside, the existing Trans Mountain Pipeline is an outdated, 1960s era single pipeline joining the oil fields of Alberta to tidewater in British Columbia. It has been the source of many leaks during its lifetime, the most recent one in June 2018.
Before the Government of Canada’s recent purchase of the pipeline from the U.S. firm Kinder Morgan for $4.5 billion, Kinder Morgan had secured leases for much of the land an expanded pipeline would traverse. In additional, they were able to negotiate agreements with indigenous chiefs of some, but not nearly all, of the indigenous tribes whose lands the pipeline will cross.
This is what the CPPIB would be investing-in–nothing more. Before a spadeful of earth can be turned the project will face lawsuits attempting to halt its construction from the Province of British Columbia, and from the many First Nations tribes that were not consulted and have not given permission for the pipeline to cross their lands. The court battles could potentially last for decades.
If the Government of Canada cannot find a buyer for the pipeline (and it’s by no means certain that it can), the only way it will be built is if it’s undertaken by the federal government. Some experts believe the expense of expanding the pipeline could cost the Canadian taxpayers as much as $20 billion. If the giant Kinder Morgan corporation found the Trans Mountain Pipeline to be ‘too risky’ an investment, given its uncertainties, why would anyone else, including Canadian taxpayers, want a stake in it?
The CPPIB must be clearly told that the people of Canada do not want their pension funds invested in this risky pipeline expansion project.
Oil from Canada’s tar sands requires an enormous amount of energy and water to extract it from the sand it’s mixed with. This makes it among the most expensive oil in the world to produce. At current and projected prices for oil, it’s by no means clear that extracting oil from the tar sands can continue to be done profitably. The waste water left behind by the extraction fills tailing ponds with oily, polluted water that kills wildlife, mostly birds, who interact with it. Then there’s the contentious issue of pipelines. The Canadian government desires to see a pipeline built to carry bitumen from Alberta’s tar sands to a port on B.C.’s West Coast. This pipeline, named the Trans Mountain Pipeline, is being opposed by a number of Canadians, particularly those from B.C., including First Nations groups–all of whom will potentially be affected if the pipeline crosses their lands. It is far from certain that this pipeline will ever be built.
A number of people, most recently American Al Gore, have called the tar sands “Dirty Oil”, for the harm its extraction does to the environment.
Yet with all of these risks, real and potential, the CPPIB continues to invest in the tar sands, seemingly without concern.
Pension funds in Europe that are heavily invested in utilities have been losing money, because many utilities have lagged-behind and have failed to adapt to renewable energy technologies fast enough. Some fossil fuel-burning power utilities in the U.S. have come under litigation from local municipalities, due to their toxic emissions. The Canada Pension Plan Investment Board (CPPIB) needs to assess these risks, and take them into account when considering investments in utilities.
According to Bloomberg Finance and referenced in the report: “The Effects of Weather Events on Corporate Earnings Are Gathering Force” by S&P Global Ratings and Resilience Economics,
Electric and Gas utilities are significantly affected by the following weather factors:
- Warm winters (and mild summers) reduce demand for residential energy consumption required for space heating (or cooling).
- Drought reduces available water for hydroelectric power generation.
- Summer heat waves cause energy demand and spot price spikes, which impair load serving entities.
- Extremely hot ambient temperature increases risk of electricity transmission outage.
- Winter cold snap causes natural gas and electricity demand spike, resulting in shortage and creating need for expensive alternatives
What would a ‘victory’, for Canadians, our country and our planet look like? In part, it would see a Canada where Canada Pension Plan (CPP) assets are not exposed to unnecessary climate-related risks, as they are now. The CPP would be financially stable, and its investment arm, the Canada Pension Plan Investment Board (CPPIB) would be investing in a positive, sustainable, green future.
Evidence of the impact of climate risk can be found across all sectors of the economy, geographies, and seasons. In June 2018, a Standard & Poors Global Ratings report stated, in part:
“…The effect [of severe weather events] on corporate earnings is becoming more visible. There is growing demand among both equity and fixed-income investors for better reporting and disclosure of climate-related risks. As such, we expect that investors will focus even more on determining which companies, sectors, and geographies are most exposed to climate risks, and how management teams plan to manage such risks.”
The Canada Pension Plan Investment Board (CPPIB) needs to be among those investors planning for how they will manage these risks.
Climate risk is a surprisingly prevalent topic of discussion for the CEO’s of publically traded companies, and management teams are becoming increasingly accountable for understanding and mitigating the impact of climate risk. CEO’s and other top company executives often cite climate and weather as a risk factor beyond the control of management.
A recent (June 2018) report by S&P Global Ratings in collaboration with the Bermuda-based climate risk management specialist Resilience Economics set out to determine the prevalence and materiality of climate risk for companies in the S&P 500 index, for the financial year 2017.
Among their discoveries, they found that “Climate change will continue to increase the incidence and severity of both chronic and acute weather events, which could lead to a more material impact on companies’ earnings.” Of seventy-three S&P 500 companies surveyed, only eighteen companies (4%) had quantified the effects. For the companies who did, the average materiality on earnings was a significant 6%. In S&P Global Ratings’ view, the effect of climate risk and severe weather events on corporate earnings is meaningful. They go on to add: “If left unmitigated, the financial impact could increase over time as climate change makes disruptive weather events more frequent and severe.”
Quantifying and reporting climate risk has far-reaching consequences for companies. It is likely that we’ll see institutional investors build climate risk factors into their portfolio selection processes, thereby placing greater emphasis on climate when directing investments. S&P Global Ratings found that “…some of the largest global institutional investors hold meaningful stakes in the 708 companies that have disclosed a weather impact on earnings.” In addition, “Eleven companies disclosed a quarterly climate impact on earnings of more than $35 million in financial year 2017.”
The report cites Bloomberg Finance as its source for Examples of Climate Exposure. Eight sectors were assessed to determine the risks they may face from climate-related events. Some of their findings were:
- Any one or a combination of drought , excessive rainfall, extreme heat or frost increases the risk of crop failure.
- Seasonal and annual variability of wind speed, rain or stream flow introduce volatility into renewable energy generation.
- Intermittent nature of wind causes mismatch between energy demand and supply in power markets with high wind capacity, which in turn leads to negative electricity prices and grid problems.
- Extreme climate leads to construction delays for wind farm projects, onshore (due to high wind speed) and offshore (due to high wave height and wind speed).
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- Excessive rainfall or snow storm leads to event cancellation or disruption of access to event venues.
- Extreme rainfall events cause mine floods or disrupt access to mine.
- Unseasonable climate leads to reduced demand for seasonal products such as apparel.
- Snow storm disrupts store operations (especially impactful during holiday sales periods).
- Fewer than normal snow events reduce demand for snow removal service.
- Unexpectedly high number of snowstorms cause budget overruns for municipalities and building operators.
- Sustained extreme cold or frost days impact winter construction activities, causing project delays.
- Excessive rainfall causes work cancellation.
The report found that more companies are becoming vulnerable to climate change and severe weather events, but few are proactively mitigating the effects on both earnings and credit ratings. Under the sub-heading: “Climate-Related Factors Are Becoming More Significant In Our Credit Analysis”, S&P Global Ratings summarized: “…the increase in negative rating actions due to climate change risk signals that companies are being adversely affected by climate risk…climate issues are becoming increasingly important in terms of their influence on credit ratings.”
Exxon -Mobil is the world’s largest oil company, based in the U.S. In 2015, former Canada Pension Plan Investment Board (CPPIB) CEO Mark Wiseman was quoted as saying: “I don’t think we’d go buy Exxon, but we might buy a piece of it if it were for sale.” Exxon-Mobil is a company that not only contributes to climate change directly–it has paid for research to be performed by climate deniers.
The next generation–those who are not yet contributing to the Canada Pension Plan (CPP)–have no say in the CPP’s value system. They will certainly have to pay more in contributions than the current generation is, and for that they may receive fewer benefits.
Youth are rightfully concerned about their future. They wonder if the planet will continue to be livable, should global warming proceed unabated. They also wonder if their CPP will be there for them upon retirement.
In the US, a group of twenty-one youth aged 10 to 21 years are taking action. They have organized under the banner: “Our Children’s Trust”, and in 2015 the group brought a constitutional climate lawsuit against the US government.
Their lawsuit, Juliana v. U.S., asserts that: “…through the government’s affirmative actions that cause climate change, it has violated the youngest generation’s constitutional rights to life, liberty, and property, as well as failed to protect essential public trust resources.”
After a three year battle in the courts, on July 30, 2018 the U.S. Supreme Court unanimously ruled in favour of the twenty-one youth plaintiffs. The Court denied the Trump administration’s application for stay, preserving the U.S. District Court’s earlier trail start date of October 29, 2018. The Court also denied the government’s “premature” request to review the case before the district court hears all of the facts that support the youth’s claims at trial.
If you wish to follow this case as it proceeds through the U.S. court, you can do so through Our Children’s Trust’s website, at:
To ensure the increase in global temperature remains below 2° C. and Canada meets its Paris Accord commitments, the Canada Pension Plan Investment Board (CPPIB) will need its portfolio to have a net zero carbon footprint.
Carbon neutrality, or having a Zero net carbon footprint, refers to achieving net zero carbon emissions by :
- reducing carbon emissions as much as possible, while
- balancing a measured amount of carbon released with an equivalent amount sequestered or offset, and/or
- purchasing carbon credits to make up the difference,
Carbon neutral status is commonly achieved by a carbon-emitting entity in two ways:
- Balancing carbon dioxide released into the atmosphere from the burning of fossil fuels, with renewable energy that creates a similar amount of useful energy, so the carbon emissions are compensated. Alternatively, the choice can be made to use only renewable energies that don’t produce any carbon dioxide. This choice would be lead to a post-carbon economy.
- Carbon offsetting, by paying others to remove or sequester 100% of the carbon dioxide emitted from the atmosphere (for example, planting trees), or by funding ‘carbon projects’ that should lead to the prevention of future greenhouse gas (GHG) emissions. Other methods of carbon offsetting include purchasing carbon credits, the ‘credits’ coming from carbon emitters who have exceeded their goals for reducing their carbon emissions. Carbon credits are bought to remove (or ‘retire’) them, through carbon trading. The ‘Cap and Trade’ mechanism to address carbon emissions in Ontario under the former Kathleen Wynne Liberals was a carbon offsetting scheme.
There are two categories of emissions: Direct, and Indirect. For example, a power generating utility burning fossil fuels has both direct emissions of carbon (from its smokestack), and indirect emissions (the carbon emitted by all the end users of the power utility’s electricity). Generally, direct emission sources must be reduced and offset completely, while indirect emissions from purchased electricity can be reduced with renewable energy purchases.
A number of international institutions and companies are totally carbon neutral, or are working towards that goal. Among them are the United Nations, TD Bank, and the Bank of Montreal. The only country thus far to have achieved total carbon neutrality is Bhutan. In 2011, British Columbia announced they had officially become the first provincial/state jurisdiction in North America to achieve carbon neutrality in public sector operations–every school, hospital, university, Crown corporation, and government office measured, reported, and purchased carbon offsets on all their 2010 GHG emissions, as required under provincial legislation. Many more initiatives are planned, to neutralize the province’s emissions beyond the public sector.
For the CPPIB to have a Zero net carbon portfolio it would need to invest only in companies that themselves have a zero net carbon footprint, and divest themselves of current investments in companies that are not achieving this goal. This is the goal the CPPIB should be striving to work towards. The CPPIB should ideally want to make themselves carbon neutral, by purchasing credits to offset their carbon footprint, eg. by buying carbon credits to offset their use of electricity, air travel, etc.