After highlighting “a huge disparity” among Canada’s largest pension funds when it comes to reporting and action on climate priorities, a watchdog group is calling for broad-based regulation for the financial sector that would “level the playing field” and require Canada’s giant pension funds to produce credible climate plans, and be held accountable for meeting them.

Adam Scott, executive director of the climate-focused charitable initiative Shift, told The Hill Times that his team’s analysis shows some Canadian funds are “making major improvements and starting to do quite well,” but that this has laid bare “a huge disparity between the leaders and the laggards.”

The Jan. 18 report card from Shift, a project run by the charity MakeWay Canada, assigned overall letter grades ranging from B+ to D- to Canada’s largest pension funds based on the strength and credibility of different aspects of their climate plans. Collectively, Canada’s pension plans make up the largest pool of investment capital in the country, owning airports, pipelines, electrical utilities, and other infrastructure projects around the world.

“We mostly work with the beneficiaries of pension plans, to educate and empower them to engage their funds,” he explained, “But at a broader scale, what we’re also saying is we need to level the playing field here.”

Acknowledging that Canada’s major pension funds have been “allergic” to suggestions that politicians tinker with their individual mandates to force them to take climate considerations more seriously, Scott called instead for broad reforms to the entire financial sector that would require pension funds and other financial institutions to release credible climate plans and report on their progress towards achieving them.

“The laggards need to be brought up to speed,” he said. “Voluntary action alone isn’t going to cut it if Canada’s going to hit its Paris agreement targets.”

Shift graded 11 major Canadian pension funds on their climate plans, and chose four international funds to serve as benchmarks. Quebec’s major pension fund manager received the highest overall score among the Canadian funds, while Alberta’s received the lowest. Image courtesy of Shift

‘Half a billion dollars would be considered a small investment for some of these funds,’ says advocate

The report card assessed Canada’s 11 largest pension funds, which collectively manage more than $2.1-trillion—more than half of all pension wealth in Canada. “Half a billion dollars would be considered a small investment for some of these funds,” said Scott.

Because of their enormous scale and global reach, which first emerged in the late 1990s with the “Canadian model” of hiring independent financial professionals to manage investment decisions, Scott said Canada’s largest pension funds have significant influence over a wide range of companies and infrastructure projects around the world, especially in the many cases where the fund owns a company outright and has significant leverage over management’s decisions.

The Caisse de dépôt et placement du Québec (CDPQ), which manages $392-billion in assets, received a B+ overall on Shift’s report card, the highest grade among the Canadian pension funds assessed.

The report praised CDPQ for its September 2021 commitment to sell all of its $4-billion in holdings in oil producers by the end of 2022, a step that none of the other major pension funds have taken.

CDPQ spokesperson Kate Monfette said in an email the pension fund’s internal policies require that climate change and ethical investing considerations be included in all its investment analyses and in the decision-making process, and that the organization reports on its progress toward these objectives in its annual sustainable investing report.

Monfette added that the CDPQ takes the position that “all companies, public or private,” should follow the disclosure framework laid out by the Task Force on Climate-Related Financial Disclosures—a international body chaired by Michael Bloomberg—”with some adjustments for smaller companies that may not have adequate resources.”

Monfette did not specify whether CDPQ would favour broad federal or provincial reforms that would make such disclosures mandatory for all Canadian financial institutions, including pension funds.

A spokesperson for the Canada Pension Plan Investment Board (CPPIB), which manages the country’s largest pension fund, told The Hill Times in January 2022, when asked about the possibility of widening the fund’s mandate to include environmental and other considerations, that “shackling our investment framework to targets imposed by external pressure is precisely what the [1997] CPPIB Act sought to avoid.”

Scott explained that the Canada Pension Plan “is in a special situation where it has an incredibly simple mandate that is ironclad and prevents it from being directed by government to do anything,” adding that the organization is especially resistant to the idea of such political interference in its investment decisions.

“But what we’re talking about is broad financial regulation. So the whole market. Companies, federally-regulated, provincially-regulated entities,” he said. “It wouldn’t be about directing one fund to do one thing. It would be about the whole financial system.”

 

Report ‘lacks a sophisticated understanding of our respective fiduciary obligations,’ says Alberta pension fund spokesperson

The worst overall grade on the report card, a D-, went to Alberta Investment Management Corporation (AIMCo), which manages $168.3-billion.

The report acknowledged that AIMCo has outlined a process to engage on environmental, social, and governance (ESG) issues with the companies it owns all or part of, and to escalate those discussions if managers don’t make these concerns a priority. But the report also concludes that AIMCo has not articulated any goals, expectations, or timelines for this engagement process.

An AIMCo spokesperson said in an email that AIMCo “considers all aspects of Environmental, Social and Governance factors throughout the investment process,” and that “we remain committed to full transparency in how we do business.”

The spokesperson emphasized the uniqueness of AIMCo’s mandate, in that it invests “on behalf of 16 distinct clients and not just public sector pension funds,” and it has a fiduciary duty to produce long-term investment returns “in accordance with each of our clients’ unique investment policies.”

“​The report only helps to create further misperceptions of the rigor behind how Canada’s largest public institutional investors arrive at investment decisions and lacks a sophisticated understanding of our respective fiduciary obligations to those we serve,” concluded the statement.

Scott said Alberta industry has been “facing a slowly growing headwind” over the years in its efforts to find low-cost capital to fund the expansion of high-risk oil and gas projects, as global investors have been pressured to avoid such investments.

He said this cold shoulder from global investors has led to a backlash against ESG investing principles at the political level in Alberta. “There’s a well-founded concern that they’re going to be cut off from sources of low-cost financing,” he said.

The Alberta government’s focus on resisting this headwind and securing access to capital for its oil and gas industry has led to suggestions of pressure, directly or indirectly, on AIMCo to step in and pick up the slack by investing in provincial priorities.

AIMCo rejected such suggestions in a statement to The Hill Times, saying it “operates with complete independence” and at arm’s-length from the Alberta government.

The report also explored how pension funds address climate-related lobbying by the companies they own, but found only a few instances in which the funds clearly stated that they were asking their assets to refrain from lobbying against robust climate standards, or to refrain from membership in industry associations that do so.

“One of the key things an asset owner can do is ask that the companies they own do not lobby against climate action. It’s a very common request from climate leading institutions to companies they own,” said Scott.

Besides the letter grades and rankings, Scott said he encouraged the pension funds assessed in the report to look at it as an indication of what a credible climate plan should include.

“I want to be clear,” he said, “this isn’t an easy thing to do. Aligning a multi-billion-dollar pension fund with what needs to happen on climate is a lot of work. It’s a heavy lift. It’s going to take a while, but it requires a comprehensive plan for getting there and a real commitment to doing it.”

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