Canada

Big finance considers climate change a major investment risk. Is your pension prepared?

For years, Toronto high school teacher Natasha Bartels didn't think much about what her pension plan was invested in. She's more than a decade from retirement; it all seemed pretty theoretical.

But concern about climate change had her taking a closer look at where the $221-billion Ontario Teachers Pension Plan — the third largest in Canada — has her money.

"I'm a middle class person with middle-class income, and my pension is definitely large and powerful," said Bartels.

While the plan has recently committed to net-zero emissions by 2050, Bartels isn't happy it has more than $6 billion invested in fossil fuels now.

"Climate change is escalating, and our pension plan is part of it," she told CBC Radio's What on Earth program. 

If you have a pension, chances are you're invested in fossil fuels, too. Whether or not that worries you from a climate perspective, there's a growing sense in the financial world that "climate risk is investment risk," and companies not planning for a world with net-zero greenhouse gas emissions may be a bad bet.

Investors — including some of the largest asset managers in the world — are demanding more information from companies to gauge now who might still make a profit in a low-carbon economy in the future, said Danielle Fugere, president and chief counsel of shareholder advocacy group As You Sow. 

"Over time, the financial community is saying this is not a risk we want to live with," she said.

Toronto high school teacher Natasha Bartels says she doesn't want her pension money invested in high-pollution industries, both because of her own concern about climate change and because of the risk they won't be profitable in the future. (Submitted by Natasha Bartels)
 

CPP fossil fuel investments rise

While the Ontario Teachers' Pension Plan says it plans to finance "climate solutions that replace fossil fuels and reduce emissions," the largest pension fund in the country — the Canada Pension Plan — seems to be taking a different approach.

It has increased holdings in fossil fuels, according to a recent analysis led by University of Victoria associate professor in environmental studies James Rowe.

Rowe and colleagues dug into the public equity holdings of the CPP Investment Board, which invests retirement funds for some 20 million Canadians, to see how that part of its portfolio has changed since Canada signed the Paris Agreement in 2016.

Even as oil and gas shares fell in value, the pension fund bought more in 2020, said Rowe.

"We found that instead of decreasing the number of shares they hold in oil and gas companies, the CPP has actually increased their total number of shares," Rowe told What On Earth host Laura Lynch.

From 2016 to 2020, the number of shares fluctuated widely but increased overall in that period by 7.7 per cent, the analysis found.

CPP Investment Board fossil fuel public equity holdings, in millions of shares

This graph, from the analysis led by University of Victoria professor James Rowe, shows the number, in millions of shares, of the CPPIB's public equity holdings in fossil fuel companies since 2016 when Canada signed the Paris climate agreement. (Submitted by James Rowe)

"For us, that simply doesn't indicate that the institution is currently serious about energy transition, which is deeply concerning," said Rowe. 

"You might be doing all kinds of action in your daily life or with your vote to support action on climate change … but when you're asleep at night, your retirement monies are actually being put towards the reverse."

James Rowe, an associate professor of environmental studies at the University of Victoria says the CPP Investment Board's recent investments in fossil fuels suggest it's not serious about transitioning to renewable energy and tackling climate risks. (Submitted by James Rowe)

Investing for transition?

The CPPIB's own data shows fossil fuels make up the lion's share of its energy portfolio, with $11.6 billion in assets in 2020 compared to $6.6 billion in renewables — although the renewable segment more than doubled in the past year.

The investment board says fossil fuels only make up a small portion — about three per cent — of its overall $475 billion in assets under management.

Board chair John Graham recently told the Financial Post the CPPIB has no plans to divest from fossil fuels, but the board declined to provide a statement to CBC on the issue.

"I have no trouble with the idea of investing in some fossil fuels in a way that transitions the economy," said Janis Sarra, a law professor at the University of B.C. and principal co-investigator of the Canada Climate Law Initiative, which has also examined the CPPIB's holdings. 

But Sarra said she hasn't seen the CPPIB make enough efforts toward a low-carbon economy.

"Canada Pension Plan is something we're all invested in ... it's massive, and it has a public obligation, in my view, to be taking a lot more measures."

Assessing and disclosing climate-related risk is something more and more companies are beginning to do, largely out of necessity and pressure from shareholders as well as some big names in the world of finance. (Ryan Remiorz/Canadian Press)

'Climate risk is investment risk'

There was a time when climate change — or any environmental issues — were considered a niche concern in financial circles.

Tessa Hebb, now a distinguished research fellow at Carleton University in Ottawa who studies sustainable finance, remembers presenting at conferences in the 1990s.

"I would find many people in the financial community would sort of pat me on the head and say … 'There, there, dear, don't worry your head about this,'" she told What On Earth.

But today, Canadian securities regulators call climate change-related risks "a mainstream business issue" and the biggest big-money people agree. 

Larry Fink, CEO of BlackRock, the world's largest asset manager, has told companies they need to disclose climate risk and make plans for a low-carbon transition. (Shannon Stapleton/Reuters)

"Climate risk is investment risk," wrote Larry Fink, chairman of the world's largest asset management firm, BlackRock, in a letter to CEOs last year.

Mark Carney, former governor of the banks of Canada and England, has made climate-related financial disclosure a focus of the COP26 UN climate meeting in Glasgow this year.

And the U.S. Securities and Exchange Commission is currently taking public input on whether such disclosure should be mandatory — citing investor demand.

One part of that shift, says Hebb, is "weird weather," such as flooding, droughts, fires and storms — the physical risks from climate change that businesses have to plan for. Losses from extreme weather, insurers say, already amount to $2 billion a year in Canada and are expected to double in the next decade.

But there's also a growing awareness of transition risks — in other words, how changing climate policy will affect the profitability of high-emission activities.

Companies whose value relies on pulling oil, gas or coal from the ground may find their assets 'stranded' in a low-carbon economy, warned former Bank of Canada governor Mark Carney, who is now the UN Special Envoy on Climate Action and Finance. (Todd Korol/Reuters)

In a now-famous speech at Lloyds of London in 2015, Carney laid out how most of the proven oil, gas and coal reserves would have to stay in the ground if governments take action to limit warming to well below 2 C above pre-industrial levels. 

"If that estimate is even approximately correct, it would render the vast majority of reserves stranded, literally unburnable, without expensive carbon capture technology, which itself alters fossil fuel economics."

Companies that rely on burning fossil fuels will lose value, he said, a "potentially huge" risk to investors, and — if it happened suddenly — economic stability.

Then, as now, Carney is arguing investors need more information from companies to prepare for that and to figure out who is likely to weather the change.

"Companies would not only disclose what they are emitting today," he told the insurance executives, "but how they plan their transitions to a net-zero world of the future."

TransAlta's WindCharger project is the first utility-scale lithium-ion battery storage facility in Alberta. University of B.C. law professor Janis Sarra says some Canadian energy companies are already planning for a low-carbon transition. (Kyle Bakx/CBC)

What can information do

There's been momentum since then to do something, including an industry-led task force on climate-related financial disclosure and pressure from institutional investors such as BlackRock for companies to use that and other measures to reckon with their climate risk.

But the actual type of disclosure is voluntary, and their is no universal standard for assessing and disclosing climate risk, which "can lead to confusion, indecision, and greenwashing," Carney wrote in November.

That makes it difficult for investors to compare year to year or company to company. Carney is pushing to change that.

Carney has been advocating for global standards for measuring climate risk and mandatory disclosure of climate-related financial risks. He has made climate-related financial disclosure a focus of the COP26 UN climate meeting in Glasgow this November. (Tolga Akmen/Pool via Reuters)

As for protecting the actual climate — and not just a pension plan or asset manager's portfolio — information can only do so much without policies to cut emissions.

But Sarra says disclosing climate risk and shifting investments toward a low-carbon economy is key.

"I really want to leave a world for my grandchildren that is not only healthy, the air quality is good .. but that we have an economy that is really offering them opportunities going forward," she said.

"If we're not really pressing and pushing for the finance part of this to take place, we're not going to reach the kinds of goals that we need to reach."

The costly destruction from extreme weather, including when superstorm Sandy hit the East Coast in 2012, is part of why the financial world now considers climate risk a mainstream business issue.

About the author

Lisa Johnson is an editor and senior writer at CBC News and a producer of CBC Radio's What On Earth. She enjoys making sense of complicated things and has also reported for CBC TV and radio in B.C., with a specialty in science, nature, and the environment. Get in touch at Lisa.Johnson@cbc.ca or @lisasj.

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