If members of the UBC Board of Governors read the news, they will have seen a recent letter from Larry Fink, chief executive of BlackRock, one of the world’s largest investors with $6 trillion under management, to chief executives. The letter argues that generating sustainable returns over time requires a sharper focus on environmental and social factors, and comes on the heels of Blackrock’s published assessment on climate-related investment risks.
Speaking in London this week, Mary Schapiro, former chair of the US Securities and Exchange Commission echoed Blackrock’s concerns over investment risk management linked to climate change, stating that “investors are desperate for this information... and are actively seeking out clear and honest and comparable data about climate risk so that they can make decisions about where to allocate their capital, and compare companies within an industry and across industries.” The former SEC chair's concerns are echoed by Aviva, one of the world's largest insurers, who acknowledge that “the full impact of climate change has the potential to affect the value of our entire portfolio of assets.”
What does all of this talk on systemic climate risk mean for investment fiduciaries – pension trustees, and UBC BoG members in particular? According Jane Ambachtsheer, Global Head of Responsible Investment at Mercer Investments and an advisor to the G20 Financial Stability Board’s climate risk task force: "The ball is now in the court of the world’s fiduciaries – strong governance is a prerequisite for the effective management of climate risk." In other words, climate change is a systemic risk to endowment assets and the law requires BoG members to address it as such.
The UBC BoG members should be assessing and managing climate-related investment risks to the endowment
The BoG is brimming with fossil fuel industry expertise which should be brought to bear on their prudent portfolio climate risk analysis. First, there is Chancellor Lindsay Gordon, former President and CEO of HSBC Bank Canada, who should be familiar with the legal parameters of the fiduciary duty of prudence. Corporate directors have similar duties to their shareholders, and HSBC has written extensively on carbon asset risk, including a 2015 report analysing ‘How investors can manage increasing fossil fuel risks.‘ The HSBC report provides details on how fossil fuel assets and related infrastructure investments may become stranded – rapidly lose value – as a result of three factors: climate change regulation, changing energy economics, and energy innovation. While at HSBC, Mr Lindsay was also a member of the bank’s Global Risk Management Committee, so he should intimately familiar with their research on climate change investment risk, including the 2013 report, “Oil & Carbon Revisited: Value at Risk from 'Unburnable' Reserves.”
Then there is Martha Piper, the interim BoG president. Piper was formerly on the Board at Transalta, a heavily coal-exposed Alberta power utility whose management team now acknowledges the risk that its coal assets will be stranded. The company has recently been pushed by investors to provide a plan for transitioning its business model to focus on renewable energy. Piper was also, until recently, on the Board at the Bank of Montreal, which is struggling to manage write-downs (losses) in its oil and gas portfolio. As climate policy compounds losses linked to low oil prices, Piper will be aware that the financial risk to banks and other large investors may spread from fossil fuel companies into the mortgage market and retail lending – this sounds like a systemic risk that BoG members should be considering...
Stuart Belkin, another board member, was the Chair of the Mohawk gas station chain, before its acquisition by Husky Energy, and should therefore be aware of how changes in the energy market, and a transition to lower carbon energy technologies, could create risks to the BoG’s business as usual investment strategy.
BoG member Fiona Mcfarlane is a former managing partner at the BC practice of accounting and professional services firm Ernst & Young (EY). EY provides portfolio decarbonisation metrics for international and Canadian clients, and publishes extensively on the need for institutional investors to develop climate strategies and to use associated metrics in their risk assessment. A recent EY report highlights that their clients’ increased concern over “stranded assets (i.e., those that lose their value prematurely due to environmental, social or other exogenous factors) reveal that investors’ concern over this risk might be more widespread than many expect.” One would expect Mcfarlane to have drawn on her EY accounting and risk management expertise to lead the BoG’s assessment of climate risk in a prudent and diligent manner.
BoG member David Sidoo may be living a stranded assets nightmare – he has sat on the board of a number of private and public oil exploration and production companies who could be teetering on the brink of financial implosion amidst sustained weak oil prices. His CEO role with junior exploration company East West Petroleum and past work with American Oil and Gas mean that he should have the pulse of the oil and gas sector and would therefore be aware of the risks to the endowment from overexposure to declining industries and high-cost fossil fuel producers.
Former BoG Chair John Montalbano headed up Canada's largest investment bank at the Royal Bank of Canada's asset management arm. Royal Bank Global Asset Management is heavily invested across the global fossil fuel sector and is involved in most underwriting transactions in the Canadian oil sands industry. Montalbano's investment experience and access to industry knowledge, as well as his bank's work on stranded assets suggests he would have raised these issue with the BoG's Investment Committee prior to his departure last year.
Collectively, the BoG members have a wealth of insider knowledge and expertise on fossil fuel companies and other carbon-exposed assets. Their apparent decision to ignore material climate risks to these sectors in their endowment investment strategy indicates that perhaps: (a) they know something giant global investors like Blackrock and Aviva do not; or (b) that they are not doing their jobs as fiduciaries. Fiduciary duties are legal duties imposed on people who exercise discretionary power on behalf of others who have reposed their trust and confidence in those people. In choosing how to allocate the endowment funds, or in their appointment investment managers to do so on the BoG’s behalf, the members are acknowledging these legal duties.
BoG members’ primary fiduciary duties to endowment beneficiaries are twofold: they have a duty to act prudently and a duty of loyalty. Other fiduciary duties spring from these two primary obligations. The fiduciary duty of loyalty requires BoG members to act in the long-term interests of the fund, to disclose relevant information, and to keep beneficiaries informed of emerging risks to fund assets. The question now is – have Mr. Gordon and the other BoG members met the legal standard of care required of them under BC law in relation to climate risk assessment at the endowment?
Fiduciary duty after Paris – wilful blindness is no longer an option for BoG members
As the BoG’s own lawyers have stressed in a legal memo published last week:
…in British Columbia, the Trustee Act requires a trustee to exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments... trustees are required to make decisions on an informed basis, after conducting appropriate due diligence including retaining specialized advice where it is relevant to the decision at hand.
Based on the energy transition that is now underway and the shareholder value destruction that has occurred in the North American and international fossil fuel sectors, one assumes that the BoG has instructed its investment managers to consider climate risk in their investment decision-making process. Concerned beneficiaries (and UBC donors) should ask to see the investment mandates provided by the BoG to their investment managers to clarify if BoG members are indeed conducting appropriate due diligence and retaining the specialised advice required by law.
The BoG lawyer’s memo on fiduciary duty continues, with reference to the BC Trustee Act:
Provided that a trustee invests pursuant to “a plan or strategy for the investment of the trust property, comprising reasonable assessments of risk and return, that a prudent investor could adopt under comparable circumstances” trustees are not liable for any particular investment loss.
Under current circumstances, with Lindsay Gordon’s own bank acknowledging that high-cost fossil fuels and coal companies in OECD economies are in terminal decline, a “prudent investor” would be able to clearly articulate a portfolio climate and carbon risk strategy to preserve scheme assets in the best interests of their beneficiaries. Many are already doing so. Yet the BoG appears to have failed to undertake even basic due diligence on climate risk, in apparent breach of their duty of prudence.
In addition to the duties of loyalty and prudence, BoG members have a duty of impartiality. According to BoG lawyers:
[at] a minimum, the duty of impartiality implies that short-term interests ought not to be privileged over long-term interests, requiring sufficient attention to systemic risks.
In their apparent decision to ignore climate risks to the endowment fund, and to instead take short-term bets on carbon-exposed investments that will almost certainly lose value as 195 countries implement the Paris Agreement emissions reductions targets, the BoG members appear to be in breach of the duty of impartiality.