For decades, Canada’s collective retirement savings have been heavily steeped in the fossil fuel sector. In recent years, climate-conscious investors, lawyers and activists warned that many of Canada’s pension funds were risking our future by continuing to pursue investing strategies that keep us on the pathway to catastrophic climate change. But tectonic shifts are happening behind the scenes even at Canada’s most conservative pension plans, as sustainable investing gains momentum worldwide. New research reveals that sustainable investing is becoming a key strategy for Canada’s largest pension fund managers.
Twelve of Canada’s biggest pension funds were analyzed by Corporate Knights, in partnership with the Smart Prosperity Institute and The Natural Step Canada. Over the past decade, these funds have quietly unloaded their fossil fuel stocks as their values have plunged, to the point where they now make up less than a few percent of total investments. Canadian pension portfolio exposures to fossil fuel stocks are down to a 10th of what they were 10 years ago, notwithstanding some controversial private equity investments.
For instance, the two largest funds in Canada (Canada Pension Plan and Caisse de dépôt et placement du Québec) have slashed the value of their fossil fuel holdings by more than 90% over the past 10 years, from more than 22% of total equity investments to less than 2% and 3% as of September 20, 2021.
On the flip side, we found that collectively, their self-defined environmentally sustainable investments have gone from negligible to more than $150 billion – 7% of their total assets – over the last few years.
Many pension funds are also taking a more active role with the companies they invest in, engaging on environmental, social and governance (ESG) issues ranging from board gender diversity to responsible lobbying and payment of taxes. Similarly, many funds are making efforts to improve their own governance by increasing management diversity. This involves aligning their own executive bonuses with ESG targets and increasing ESG competency on their boards.
Pension funds represent a major pool of Canada’s investment capital: the top 12 funds alone control $2.1 trillion, roughly equivalent to Canada’s entire GDP. Many stakeholders – governments, businesses, non-profits like Shift Action for Pension Wealth and Planet Health, and certainly beneficiaries – are increasingly interested in how pension funds are addressing the challenge of the transition to sustainability. A new tool called the Sustainable Investment Dashboard, developed by Corporate Knights with input from the Smart Prosperity Institute, The Natural Step Canada and a panel of experts, aims to highlight which pension funds are pulling their weight on these issues and which ones are falling behind.
As the transition to a climate-friendly economy speeds ahead, global investors are embarking on what is in all likelihood the largest reallocation of capital in our civilization’s history. This could be more than $100 trillion between now and 2050, according to Mark Carney, former governor of the Bank of England.
There still exists tremendous potential for pension funds to play an active ownership role in helping carbon-intensive companies leverage their assets to make the transition from “grey to green,” through initiatives like Say on Climate and Climate Engagement Canada. This engagement must be underpinned by an honest assessment of what kind of future companies are investing in. Many companies claim to be aligned with net-zero emissions, but if they are still plowing most of their growth investments into high-carbon assets, then net-zero is just a slogan.
Ziad Hindo, the chief investment officer for the Ontario Teachers’ Pension Plan (OTPP), told The Globe and Mail that Canadian pension funds need “a fundamental shift.” Some of Canada’s largest pension plans are realizing that they need to keep up with the pace of change and capture their fair share of clean-growth investment opportunities. They’ll need to boost their investments in low-carbon solutions to roughly 20% by 2025 and fully decarbonize across all asset classes. Given the multi-decade ripple effects of capital allocations made today, this will need to happen well before the 2050 net-zero target for the real economy.
This fall, Canada’s second- and third-largest pension fund managers raised the stakes, announcing plans to achieve net-zero emissions, and linked the objective to executive compensation at the funds.
In September, OTPP set targets to reduce portfolio carbon-emissions intensity by 45% by 2025 and by 67% by 2030, compared to their 2019 baseline. Critically, these targets impact all their assets across public and private markets, including external managers. The pension plan also committed to invest $5 billion in climate and transition solutions so far in 2021 and said they would boost their $30-billion portfolio of green investments.
Also in September, CDPQ updated its climate pledges to boost green assets from $36 billion to $54 billion by 2025 and achieve a 60% reduction in the carbon intensity of the total portfolio by 2030. The plan will also create a $10-billion transition envelope to decarbonize the main industrial carbon-emitting sectors and complete its exit from oil production (currently just 1% of its portfolio) by the end of 2022. Other pension funds are also developing net-zero action plans, which are not yet public. So this trend will almost certainly continue.
While it is encouraging to see the “Maple Revolutionaries” (as The Economist dubbed Canada’s large pension funds for their strong governance and performance track record) rising to the climate challenge, there is a risk that the lack of clear definitions and expectations could result in unnecessary costs, delays, lost opportunities and even risks to financial performance.
As the investment wave toward net-zero takes hold globally, now is the time to position Canadian pension funds (large and small alike) for success.
Toby Heaps is the co-founder and CEO of Corporate Knights.
Ed Waitzer is a lawyer and former chair of the Ontario Securities Commission.
Derek Eaton is the director of public policy research and outreach at the Smart Prosperity Institute.