How pension funds choose to invest has significant bearing on how we collectively address the climate emergency and the needed transition from fossil fuels, says a report released today by the Corporate Mapping Project and the Canadian Centre for Policy Alternatives, BC Office.
By not taking necessary action, the Canada Pension Plan — one of Canada’s largest pools of investment capital — is imposing heavy economic costs on future generations, delaying necessary shifts in investments to account for climate change and disregarding a legal mandate to avoid undue risks, says the report, Fossil Futures: The Canada Pension Plan’s Failure to Respect the 1.5-Degree Celsius Limit.
The Canada Pension Plan Investment Board (CPPIB) is among the world’s largest pension funds and it is not investing with the 1.5-degree Celsius limit on global average temperature rise in mind, which has consequences for pension holders and the planet say authors James Rowe, Steph Glanzmann, Jessica Dempsey and Zoë Yunker.
“Within its public equities portfolio, the CPPIB has over $4 billion invested in the top 200 publicly traded fossil fuel reserve holders (oil, gas and coal),” says James Rowe, associate professor in the University of Victoria’s School of Environmental Studies and a co-investigator with the Corporate Mapping Project.
“To stay within 1.5 degrees, these companies can extract only 71 billion tonnes of carbon dioxide yet the companies the CPPIB is invested in have 281 billion tonnes in reserve, meaning they have almost four times the carbon reserves that can be sold and ultimately burned to stay within 1.5 degrees,” he explained.
In April 2016, Canada was among 195 countries that signed the Paris Agreement, committing to “holding the increase in the global average temperature to well below two degrees Celsius above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 degrees Celsius.”
Reserves are factored into current company valuations, which means the CPPIB has invested billions of dollars in companies whose financial worth depends on overshooting their carbon budget.
“This is a moral and ecological failure and also a financial risk,” says Steph Glanzmann, a recent forestry graduate from the University of British Columbia. “As energy generation shifts away from fossil fuels, investors who do not respond could be left with ‘stranded assets’, meaning their investments will no longer be profitable.”
In its 2019 Financial System Review, the Bank of Canada included climate risk in its analysis for the first time.
Canadian fossil fuel companies and their investors are especially exposed to stranded asset risk because most of the oil produced in Canada is high-cost, carbon-intensive bitumen from the Alberta oil sands. Yet, the CPPIB has investments in the biggest oil sands companies, the authors explain.
“In Canada, the fossil fuel sector has been very successful at getting a seat at government decision-making tables, both provincially and federally, and CPPIB board directors and staff are entangled with the oil and gas industry,” says Zoë Yunker, a student in the University of BC’s Graduate School of Journalism and a research assistant with the Corporate Mapping Project.
The report suggests that formal relationships between CPPIB board members, staff and fossil fuel companies bring the interests and perspectives of those companies into the CPPIB’s decision-making. This is dangerous because the self-interest of fossil fuel companies contradicts the changes that governments and investors need to make if 1.5-degree warming is to be avoided, the authors write.
“The CPPIB may be breaching its fiduciary duty as it has as much legal duty to future beneficiaries as it does to current ones,” says Jessica Dempsey, associate professor in the University of BC’s Geography department and a collaborator with the Corporate Mapping Project.
“By failing to invest with the 1.5-degree limit in mind, the CPPIB is contributing to accelerating climate change that will impose heavy economic costs on future generations. In fact, the CPPIB may be falling short of its mandate to maximize long-term investment returns and may be vulnerable to a class action lawsuit brought on behalf of young Canadians,” she explained, noting that at the October 25 climate strike in Vancouver featuring Greta Thunberg 15 young Canadians announced they had launched a class action suit against the federal government over climate change.
The report makes a number of recommendations for the CPPIB and legislators, including that the CPPIB should carry out a portfolio-wide risk analysis in the context of the climate emergency and disclose all findings to pension members. It also recommends moving towards fossil fuel divestment while reinvesting capital into renewable energy sources. It calls on the Canadian government to require all public pension funds to fully disclose their climate risk—including all fossil fuel holdings—as California recently did.
The Corporate Mapping Project is jointly led by the University of Victoria, Canadian Centre for Policy Alternatives (BC & Saskatchewan offices) and the Parkland Institute. This research was supported by the Social Science and Humanities Research Council of Canada (SSHRC). Authors are James Rowe, Steph Glanzmann, Jessica Dempsey and Zoë Yunker.