Millions of pensions exposed as Canadian investors fall behind on climate risk management

The world is moving rapidly towards a lower carbon energy system. In Paris in December, 195 countries adopted the first-ever universal, legally binding global climate deal, committing to limit global warming to well below 2 degrees Celsius above pre-industrial levels, with a further goal of working toward a 1.5-degree limit.

If this agreement is to succeed it means that up to 2050 approximately 35 per cent of known oil reserves, 50 per cent of gas reserves and 88 percent of coal reserves cannot be extracted and burned. A significant proportion of the oil and gas reserves that will not be burned include costly to extract Canadian oil sands. Under this scenario, investors should be concerned about asset stranding and protecting portfolio value for beneficiaries. They should also be preparing for the investment opportunities that will arise in the low carbon transition.

Yet many of Canada’s biggest investors remain in denial about climate change risk as pension funds gamble with the financial security of millions of pension savers, as revealed in the annual global benchmark report on the industry from the Asset Owners Disclosure Project (AODP).

The Global Climate 500 Index finds that 11 Canadian institutional investors with funds worth over CAD$350 billion, including nine pension funds, have taken no action to mitigate climate change risk to their portfolios despite warnings from Mark Carney, Governor of the Bank of England and chairman of the international Financial Stability Board (FSB), that climate action could leave high-cost fossil fuel producers and other high carbon investments as worthless stranded assets. The Index rates the world’s 500 biggest asset owners on how well they are managing climate risk in their portfolios, grading them from AAA to D while those taking no action are rated X. Canada has 26 institutions on the list and the highest-rated, the Ontario Teachers Pension Plan with $131 billion in funds under management, only achieves a CCC rating.

According to AODP CEO Julian Poulter, “Justin Trudeau is showing leadership on climate change, after years of drift, but he must now make sure Canadian financial institutions act on global warnings about the financial risks it poses. Pension funds and insurers that choose to ignore climate change are gambling with the savings and financial security of millions of people.”

Poulter stresses that “if Canada is to remain an advanced economy at the end of the low carbon transition, it needs to invest in a plan B quickly. Only Canada’s pension funds have sufficient capital to ensure that Mr Trudeau’s climate policies can be implemented and that Canada emerges as a clean economy leader.”

Christiana Figueres, Executive Secretary of the UN Framework Convention on Climate Change (UNFCCC), has a clear message for investors sitting at the bottom of the AODP Index:

“The Paris Agreement has set out the path, direction and ultimate destination for the global economy. Increasing numbers of asset owners understand this and more are coming to that realization. I would encourage all of them to pick up the pace and ramp up their ambition in respect to a low carbon transition—it is the key to reducing risk and securing the health of their investment portfolios now and over the long term”.

Climate change moving up the global financial agenda, but not in Canada

Climate change has become a central issue for international financial markets. Mark Carney, Governor of the Bank of England and Chairman of the G20 FSB, has warned that climate change action could make huge reserves of coal, oil and gas unburnable stranded assets threatening investors with huge losses and destabilising markets.

The FSB has set up a task force led by former New York Mayor Michael Bloomberg to recommend how large investors and the companies they invest in, including banks and other financial intermediaries, should report the potential impact of climate change on their bottom line.

It is time for Canadian pension funds and our national financial regulators to act, particularly those who say they are responsible and long-term oriented, but have been ignoring the investment implications of the Paris climate agreement. In coming weeks, the climate risk and low carbon business transition shareholder resolutions at Chevron, Exxon Mobil, and Southern Company will be the litmus test for investors who publicly identify themselves as being responsible and “long-term.”