Pension tension


Dear Mr. King:

As representatives of Labour in the House of Commons, may we ask whether it is your intention to introduce at this session legislation with regard to (a) Provision for the unemployed; (b) Old Age Pensions. We are venturing to send a similar inquiry to the leader of the opposition.

Yours sincerely,

J.S. Woodsworth

A.A. Heaps

Ninety years ago, my great grandfather A.A. Heaps and J.S. Woodsworth, the two lone labour members of Parliament, sent the above now famous letter to Prime Minister Mackenzie King. King was sympathetic philosophically to old age pensions, and in a receptive mood pragmatically given that he needed the support of Heaps and Woodsworth in the minority parliament. A deal was struck. When King’s government won a strong mandate in the 1926 election following the bizarre King-Byng affair, he made good on his promise by introducing legislation that became the Old Age Pensions Act in 1927. It entitled British subjects aged 70 or over who had lived in Canada for 20 years to a maximum of $20 per month.

Fast forward to today, and Canada’s pension funds are the envy of the world. The top 10 have a staggering $1.1 trillion in assets. They have been dubbed “maple revolutionaries” by The Economist magazine for their independence, efficiency and foresight to embrace long-term aligned but non-traditional real asset classes like infrastructure (six of the top 20 investors in the world herald from Canada), and real estate (four of the top 20 investors from Canada).

But for some reason when it comes to tackling climate change risks, Canadian pension funds give the appearance of being out to lunch. In a recent survey of the world’s 500 largest investors by the Asset Owners Disclosure Project examining how funds manage climate risk, Canadian funds collectively ranked 11th behind the United States, Britain, France, China, Brazil and Australia. Of the 120 global investors representing $10 trillion in assets who have committed to publicly disclose their portfolio carbon footprint via the Montreal Carbon Pledge, Canada’s top 10 pension funds are missing in action. While baking climate risk considerations into investments is on the core agenda of the G20 this year, the $282 billion Canada Pension Plan Investment Board’s 2015 139-page annual report failed to mention the word “climate” once.

There are three good reasons for Canada’s top funds to get their acts in gear: diversification, stranded asset risks and the law.

First, as CPPIB chair Heather Munroe-Blum clearly explains, “the CPP Fund is by its nature heavily tied to Canada’s fortunes. …  As a result, CPPIB has long recognized that it is prudent to diversify by investing a sizable portion of the Fund outside of the country for the benefit of Canadian beneficiaries.” Beyond regions, diversification also applies to sectors, and the Canadian economy (and by extension, CPPIB’s contribution inflows) is still heavily dependent on fossil fuels, so it would be prudent to balance this out by investing less in fossil fuel companies than a typical investor from a non-oil-dependent economy. Rick van der Ploeg and Samuel Wills at the Oxford Centre for the Analysis of Resource Rich Economies suggest that major funds domiciled in oil-dependent economies like Canada should hedge their exposure to volatile fossil fuel prices by holding fewer assets that are positively correlated with oil, such as oil and gas stocks, and more assets that are negatively correlated with oil, including, over the long term, green energy.

We are in the midst of an energy transition and coal (which accounts for over 40 per cent of global greenhouse gas emissions) is being pushed off a cliff. The Dow Jones Coal Index is down 93 per cent over the past five years. But the CPPIB continues to cling to coal, with 1.5 per cent of its portfolio invested in at least 34 companies which derive over 30 per cent of their output or revenue from thermal coal. The $248 billion Quebec-based La Caisse, in contrast, has quietly sold off many of its thermal coal miners due to unacceptable risk.

CPPIB’s investment policy restricts its investments to “businesses that would be lawful if carried on in Canada.” For instance, the CPPIB does not invest in companies that are not in compliance with Canada’s Anti-Personnel Mines Convention Implementation Act or companies that are not in compliance with Canada’s Prohibiting Cluster Munitions Act. As of November 23, 2015, burning coal for electricity is illegal in Canada’s most populous province. The Ontario Ending Coal for Cleaner Air Act sets maximum fines for anyone who violates the ban and enshrines the health and environmental benefits of making coal-fired electricity illegal in law. According to its most recent disclosures, the CPPIB has yet to react to this development.

Memo to CPPIB from Corporate Knights: As plan members, may we ask whether it is your intention to update CPPIB’s investment policies this year with regard to (a) hedging the fund’s sector exposure to volatile oil prices; (b) taking a view on the energy transition so we don’t chase coal all the way to its grave; (c) following the law of the land. We are venturing to send a similar inquiry to the Minister of Finance to consider requiring mandatory climate stress tests for the finance sector, and the alignment of portfolios with the energy and ecological transition that Canada and 194 other countries agreed to in Paris.

As the tallest tree among the maple revolutionaries, we expect you to lead the way.

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