Canada’s 10 largest pension funds now have nearly $1.9 trillion in assets under management, a pool of capital approaching the size of Canada’s entire annual GDP. How these pensions decide to invest their funds is a major factor in how quickly Canada – and the world – can achieve the Paris Agreement goal of limiting global heating to 1.5℃ or less.
But despite their recent signs of progress on climate risk analysis and reducing the carbon footprint of their portfolios, Canada’s pension funds continue to pursue investing strategies that keep us on the pathway to catastrophic and irreversible climate change and put the savings of millions of Canadians at risk.
First, credit where credit is due. There is growing evidence that the managers of our retirement savings are waking up to the unprecedented risks of climate change.
Canada’s pension giants have acknowledged climate change as a material risk to their portfolios. They have hired climate experts, taken early steps to understand the risks of the climate crisis and are measuring the baseline carbon footprint and carbon intensity of their portfolios. They are also starting to recognize the financial opportunity of investing in climate solutions, ramping up investments in renewable energy, clean technology and sustainable agriculture. And last year, they joined together to call for voluntary climate-risk disclosure from companies.
Some of Canada’s largest pensions have even begun setting targets. In January, the $221-billion Ontario Teachers’ Pension Plan (OTPP) committed to net-zero emissions by 2050. The Ontario Municipal Employees Retirement System (OMERS) set a goal of reducing the carbon intensity of its $105-billion portfolio by 20% below 2019 levels by 2025. The British Columbia Investment Management Corporation (BCI) pledged to invest $5 billion in “sustainability bonds” by 2025 and reduce the carbon exposure of its public equities portfolio by 30% below 2019 levels. Most notable is Canada’s current pension fund climate leader, the Caisse de dépôt et placement du Québec (CDPQ), which became the first Canadian pension fund to set a net-zero target in 2019, increased its low-carbon investments by 80% between 2017 and 2020, reduced its portfolio carbon intensity by 38% five years ahead of schedule, linked employee compensation to climate targets, and has begun unwinding its holdings in high-risk climate polluters like Exxon.
These are all encouraging developments, but none of Canada’s pension funds have gone far enough to protect their portfolios from the financial risks of climate change while working to ensure that their members have a livable planet to retire on.
Without clear, transparent and ambitious targets and timelines for decarbonizing their holdings in line with a 1.5℃ emissions pathway, including detailed plans to align their portfolios with the required rapid transition away from fossil fuels, efforts to protect member retirement savings in a carbon-constrained future fall short of their legal fiduciary duty and climate safety.
A plan with short- and long-term goals is required. OMERS’s and BCI’s 2025 emissions intensity targets are of little value without a long-term framework to decarbonize their entire portfolios in less than three decades. The OTPP announced its net-zero commitment six months ago but has been completely silent on short-term details since. Most other Canadian funds have thus far refused to establish targets of any kind.
The lack of clear climate plans is particularly troubling considering Canadian pension funds’ exposure to high-risk companies and infrastructure, especially those pursuing fossil fuel expansion that is incompatible with climate safety.
In 2017, the Canada Pension Plan purchased an offshore gas company in Ireland that faces an offshore-gas permitting ban. In 2019, the Alberta Investment Management Corporation bought a 65% stake in TC Energy’s Coastal GasLink pipeline, in the face of unwavering Indigenous opposition and growing market uncertainty. Last year, OPTrust announced that it would finance the construction of a new fossil gas plant in Alberta with questionable prospects in the face of a rising carbon price and clean energy competition. Just months before its net-zero commitment in January, the OTPP joined a consortium to buy a US$10.1-billion stake in the Abu Dhabi National Oil Company’s gas pipeline network. OTPP also bought a joint 69.4% stake in Italy’s second-largest gas pipeline network, just as the EU considers plans to phase out fossil fuels. And just this month, the CDPQ became the majority owner of Énergir, Quebec’s main fossil gas distributor. In recent years, five of Canada’s six largest pension funds increased their holdings in oil sands companies, all of whom have explicitly committed to increasing production of long-lived, high-cost, high-carbon oil.
These are not the actions of climate leaders. With the International Energy Agency stating that a 1.5℃ emissions pathway requires no new fossil fuel expansion, these are all examples of risky investments in climate failure. By investing in fossil fuel expansion while preemptively taking important risk-mitigation tools like divestment off the table, Canadian pension funds are still headed in the wrong direction.
Already, investors with more than US$15 trillion in assets, including more than 100 major global financial institutions, have pledged to partially or fully divest from fossil fuels. The U.S.’s third-largest pension fund is ending investments in fossil fuels by 2025. In the U.K., pension giant NEST committed to phase out investments in thermal coal, oil sands and Arctic drilling; halve its portfolio’s carbon emissions by 2030; and decarbonize by 2050. Here in Canada, the University of Waterloo is cutting the carbon footprint of its endowment and pension portfolio in half by 2030 and targeting carbon-neutrality by 2040.
To be taken seriously on climate, Canadian pension funds must end new investments in fossil fuel expansion, phase out current oil, gas, coal and pipeline investments by 2025 and establish a plan to decarbonize their portfolios by 2040. Instead of fossil fuel investments, Canada’s pensions should ramp up their capital allocation to climate solutions and develop a robust engagement policy that requires polluters to align their business models with the Paris Agreement.
So far, Canada’s largest pension funds have failed to commit to do what is necessary to protect our retirement savings. To do so, they’ll need to do better at helping the world avoid catastrophic global heating.
Patrick DeRochie is senior manager at Shift Action for Pension Wealth and Planet Health, a charitable project that tracks the investments and climate policies of Canadian pension funds and mobilizes beneficiaries to engage their fund managers on the climate crisis.