Are pension fund boards & execs “clinging to dangerous myths” about oil & gas?
Canadian pension funds are showing incremental progress, but continue to fall behind their international peers when it comes to the quality, depth, and credibility of their climate policies, finds the Canadian Pension Climate Report Card by Shift Action for Pension Wealth and Planet Health, a charitable initiative that works to protect pensions and the climate by bringing together beneficiaries and their pension funds to engage on the climate crisis.
Far more work is needed to ensure Canadian pension managers fulfill their fiduciary duty to invest in plan members’ long-term interests and protect Canadians’ retirement security in a pathway aligned with the Paris Agreement goal of limiting global heating to 1.5°C.
“Pension funds are moving slowly in the right direction, but not nearly at the speed or at the level of ambition that's going to be required both to protect the pension funds from growing climate risk, which is now quite substantial, or to allow Canada to actually meet its climate goals,” says Adam Scott, executive director of Shift Action for Pension Wealth and Planet Health. “It will not be possible for Canada or the world to meet the targets we've set without the participation of the largest asset owners like these pension funds.”
Despite 2023 being one of the hottest years on record with continued emissions of greenhouse gases and extreme weather events, reaction to these climate shocks did not translate into commensurate action from Canada’s largest pension managers. The report says it is troubling that pensions funds are not protecting their members’ retirement security by aligning their investments with safe emissions pathways and developing and implementing credible climate plans. Pension funds have an inherently long-term investment horizon and a fiduciary duty to protect the interests of all of their members, including their youngest contributors, who won’t be retiring for several decades. These contributors are especially vulnerable to climate risks, meaning that ambitious climate plans are required immediately.
Still no emission reduction targets
Four of the eleven Canadian pension funds in the report still do not have emissions reduction targets for 2030 or 2050. Developing and implementing credible, climate-aligned plans is urgently needed to protect both Canadian pensions and the wider financial system from the worsening climate crisis.
Shift’s benchmark measured incremental progress from most Canadian funds in 2023. The biggest improvements came from the Ontario Municipal Employees Retirement System (OMERS) and the Healthcare of Ontario Pension Plan (HOOPP), funds that were previously far behind but in 2023 finally released climate strategies. The Canada Pension Plan Investment Board (CPPIB), on the other hand, was the only fund manager with lower scores in 2023, due to a pattern of problematic public statements and new fossil fuel investments that are not aligned with a credible, science-based net-zero plan.
Canadian pensions, CPPIB in particular, continue to flow billions in Canadians’ retirement savings into the primary cause of the crisis: fossil fuels. Rather than heeding expert advice from the International Energy Agency and acknowledging the scientific consensus on the need for the phase-out of fossil fuels, pension managers continue to place high-risk bets against a safe climate future. Shift’s report documents a pattern of pension fund executives and boards clinging to dangerous myths about the future role of oil and gas in the energy transition. This risks pension members’ retirement savings becoming tied up in stranded assets.
Perhaps Canadian pension funds' penchant for fossil fuels should not be surprising. The report found seven of the 11 pension managers analyzed have at least one director/trustee who is concurrently a director or executive of a fossil fuel company.
“Canadian pension funds haven’t been able to recognize that they can no longer invest in new fossil fuels,” says Scott. “It's something that just hasn't been recognized in the Canadian financial sector in the way that it has globally. This is one of those difficult truths about climate action in 2024 is that we can't be making new investments in the causes of the climate crisis.”
Scott adds that investing in fossil fuels is also incredibly financially risky. “There's a very significant risk of stranded assets going forward as the energy transition picks up speed.”
Falling behind international peers
The report also evaluates and contrasts three leading international pension funds investing on behalf of members in the US, France, and the Netherlands, revealing that even the highest-ranked Canadian funds continue to lag their international peers.
Leading international pension funds recognize there is no credible or profitable pathway for engaging fossil fuel producers to act in line with climate safety. These international funds have each moved to screen out new fossil fuel investments while phasing-out existing holdings, shifting an increasing share of capital into safer, cleaner, and rapidly growing investments in climate solutions.
While many Canadian pension funds put increased emphasis in 2023 on climate engagement of held companies, the quality and ambition of these engagement strategies varied widely. Effective climate engagement is an essential tool for pension funds to align their portfolios with climate safety, but few funds are realistic about its limitations. Short of a managed phase-out of production and early retirement of assets, alongside plans to return capital to shareholders, fossil fuel companies do not have credible or profitable Paris-aligned transition pathways. The UN secretary-general's High-level Expert Group on Net-Zero Commitments, chaired by former environment minister Catherine Mckenna, has been clear that non‑state actors “cannot claim to be net zero while continuing to build or invest in new fossil fuel supply.”
Scott admits that part of the reason Canada is falling behind is due to a lack of regulation around climate risk, especially compared to other regions such as Europe. “In Canada, the regulations are very weak. The Canadian regulatory system is way behind and this is something that we [Shift] are working on as well. At the moment, we don’t have mandatory reporting on climate risk in Canada. We don't have a standardized taxonomy for what is defined as green or as transitioned in Canada, but those rules are coming along slowly.” He says regions with better regulations around climate will arguably have an investment performance advantage.
“Right now, we have a voluntary system and we are seeing these some of these large pension plans moving forward on this,” says Scott. “I will say there's a positive note here to say that these some of the large pension plans, the ones that are ranking better in our report card, are putting in place climate plans that will help model what regulation should look like eventually. This actually shows regulators that it's very possible and very doable. It just needs to become normalized in the market. That's what we're asking for; if these large asset owners have good, credible climate plans in place and set those expectations for their portfolios, that has a cascade effect.”
As the global climate crisis worsens and the energy transition ramps up, Canada’s pension managers must rethink the ways they invest the retirement savings entrusted to them, says Shift. Managing the associated risks and opportunities requires pension managers to develop and implement credible climate plans and policies that defensively guard against losses, proactively capture opportunities, and fully align their overall investment and stewardship strategy with climate science.
