In recent years, we’ve seen amplified discussions and debate about the financial materiality of climate change and the role of governments, industry, and the financial community in its response. Much of this debate was crystalized within the Paris Agreement, a legally binding international climate change treaty which entered into force in 2016, where 196 nations committed to keep global warming to well below 2°C, which, in turn, requires greenhouse gas emissions to reach net zero no later than 2050.

That may seem long into the future, but for pension plans and other institutional investors, it is a much closer horizon. By design, pension plans are future-oriented. Their purpose is to deliver secure retirement income to members today and for generations to come. Plan members need both a dependable retirement income and a stable world to retire into. Research has consistently demonstrated that climate change is a pressing threat to this stability. In fact, a recent study from the Institute for Sustainable Finance indicates that under a 2°C warming scenario, the financial damages in Canada could total $2.8 trillion by 2100. It is unlikely that there will be any long-term economic winners in a climate-changed world, and, in fact, more change will make things worse.

Generational Responsibilities

This fact makes responsible investing and action on climate change non-negotiables for a pension plan. As long-term investors with generational responsibilities, pension plans need to stay ahead of the curve and proactive in protecting the sustainability of the fund, through any array of future scenarios.

At the University Pension Plan Ontario (UPP), developing a Climate Action Plan was a key strategic priority. We see the materiality of climate change as two-fold: our ability to realize adequate investment returns and provide retirement benefits depends on a stable climate and UPP’s investments affect the stability of the climate.

When it came to developing our response to climate change and our net- zero approach, we set our sights beyond our own portfolio, knowing we need emissions to decline in the real world as well. The action plan focuses on driving down greenhouse gas emissions in the real economy while hitting portfolio emission reduction milestones for 2025 and 2030 on the path to a net-zero port- folio by 2040 or sooner. While 2040 may seem ambitious to some, or disconnected from the timelines set by others, it was an important and deliberate choice in positioning our investment portfolio ahead of the changes that need to occur. This is how we manage risk, maximize opportunities, and position the plan up for strong, sustainable long-term performance.

In developing our climate action plan, we were greatly encouraged by the many resources and actions already available to institutional investors. Here, we offer some of our learnings and considerations for unlocking opportunities and mitigating climate risks while delivering the pension promise.

Climate Transition and Resilience

Getting to a net-zero economy will require an array of tools and significant change from all corners of our economy. Portfolio emissions need to decline, but moving high-emitting assets from portfolio to portfolio does not lower their emissions, nor contribute to the necessary reduction in real world emissions. The challenge – decarbonizing a portfolio from within ‒ requires focused investment in activities that will move the transition needle. A taxonomy that verifies which assets are consistent with the goals of the Paris Agreement can be an essential tool for building investor confidence and positioning climate change opportunity and risk management as business-as-usual in financial services. That paradigm shift is a key imperative in keeping the global temperature rise to below 1.5°C and improving the resilience and competitiveness of the economy in the global low-carbon transition.

A taxonomy is a ‘translation tool’ providing users ‒ such as investors, companies, and other financial institutions – a disciplined and consistent approach to labeling and evaluating the climate credentials of economic activities in connection with investment and business decisions.

Barbara Zvan, UPP’s president and CEO, is leading the Taxonomy Technical Experts Group of Canada’s Sustainable Finance Action Council. The group is working to outline the experiences and needs of financial market participants in green and transition investing. The broad-based consultations could inform the design and implementation of a Canadian taxonomy that reflects our economic context while complementing, and building upon, the frameworks developing around the world, such as the European Union’s taxonomy for sustainable activities or Japan’s Basic Guidelines on Climate Transition Finance.

Once implemented, a Canadian taxonomy would help crystalize the opportunity for investors to finance and support activities that lower emissions and improve resiliency in the real world, including in key resource and industrial sectors of the economy that may other- wise be overlooked. Along with leveraging Canadian and other global taxonomies in their analysis, investors should join the global taxonomy dialogue and discuss with their investment managers and other financial services providers their desire to invest in green and transitioning assets.

Policy Advocacy

By participating in direct and collective advocacy with policymakers, investors can help encourage the conditions for a well-managed climate transition, including the necessary improvement and standardization of climate-related disclosures to enable informed evaluation and decisions. There are many opportunities for investors to collaborate and amplify their voice through industry initiatives like the UN-convened Net-Zero Asset Owner Alliance, which consists of 71 members with more than $10 trillion in assets, or the Global Investor Statement to Governments on the Climate Crisis, signed by 532 investors representing nearly $39 trillion in assets.

Effective regulatory frameworks that align with the Paris Agreement are essential to increasing the private capital flows needed to advance climate resilient, net-zero transition. Investors can play a key role in capital allocation and stewardship to support activities that generate sustainable jobs and economic growth. Dedicated policy advocacy will help governments understand what investors need to meet their fiduciary duty of generating long-term returns and benefit from the new opportunities presented by the transition to a net-zero economy.

Engagement

When investors stay at the table and set clear expectations for companies they own and the external managers they partner with, they can encourage and support the transition to more resilient, net-zero world. We need to encourage these same parties to provide us and other market actors with sufficient climate-related disclosures to support informed investment decisions and help evaluate progress against decarbonization targets.

There are many tools available to investors to assist and amplify their engagement efforts, including Climate Engagement Canada, Climate Action 100+, and the Institutional Investors Group on Climate Change. Partnership with these groups can help ensure engagement activities are informed by science and that investor requests are aligned and consistent wherever possible.

Engaging external investment managers in dialogue not only establishes investor expectations, but also provides the opportunity to encourage managers’ bilateral and collaborative engagement with companies they own on behalf of their clients to promote multi-tiered alignment on climate objectives.

While challenging, targeting net-zero portfolio emissions by 2040 is prudent and our way of delivering a sustain- able pension promise while helping a more rapid decarbonization of the global economy. Climate stability is essential for pensions, members, and the community we all share.

We offer the above key learnings from developing our Climate Action Plan, recognizing that the coming transition will present risks and opportunities for investors of all sizes. This is not a challenge solved in isolation and concerted action and partnership amongst financial leaders is no longer a nice to have, it is necessary in fulfilling our collective fiduciary duty.

Brian Minns is the Managing Director, Responsible Investing at University Pension Plan Ontario (UPP).