The ABCs of CPP – P

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.”