A new coalition of investors and banks styled on Climate Action 100+ is targeting closer engagement with carbon-emitting firms.
Earlier this month, a coalition of Canadian investor associations launched a new organisation aimed at building closer engagement with some of the world’s most carbon-intensive firms.
Climate Engagement Canada (CEC), co-ordinated by the Responsible Investment Association, Shareholder Association for Research and Education (SHARE), the UN-backed Principles for Responsible Investment (PRI) and Ceres, has styled its collaborative investor engagement platform on the investor-led Climate Action 100+ initiative, but is more national rather than global in scope.
CEC investor participants will identify 40 of Canada’s highest greenhouse gas emitting corporations and engage to “encourage leading practices with respect to climate change risks and opportunities”.
The focus will be on companies that are not already covered by Climate Action 100+.
The program launched with 27 investors as founding participants collectively managing more than C$3 trillion (US$ 2.42 trillion) in assets.
These includes major names such as CIBC Asset Management, Healthcare of Ontario Pension Plan, RBC Global Asset Management and University Pension Plan Ontario (UPP).
The CEC’s development was inspired by Canada’s Expert Panel on Sustainable Finance, which in 2019 made a series of recommendations to align Canada’s financial system with a low carbon future. One of the Expert Panel’s recommendations was to establish a national engagement program, akin to CA100+, and drive a broader and more consistent dialogue with Canadian issuers.
“Climate change is a systemic challenge for investors and capital markets as a whole,” said Kevin Thomas, CEO at SHARE at the time of release. “It can’t be avoided, it can’t be hedged against, and it can’t be solved at an individual portfolio level. It requires ambitious, persistent collective action at a larger scale and faster pace. We’re bringing together the whole of the corporate balance sheet – shareholders, lenders, insurers, and others –to set a course for the biggest transition of our lifetime.”
Speaking to ESG Investor, Barbara Zvan, UPP chief executive and a former member of Canada’s Expert Panel on Sustainable Finance, said Climate Action 100+ was a perfect model to work with.
“It has been so impactful in bringing investors together to send a strong unified voice to companies,” she said. “But there are very few Canadian companies as part of it, so weren’t benefiting from engagement. We needed a targeted effort in Canada. That was the raison d’etre.”
Covid-19 delayed CEC’s formation, but the supporting associations got together late last year to ensure that there was a 2021 launch.
“We reached out to the concentrated number of investors in Canada. We put them in a room and asked them to give us some feedback. They were also keen to leverage the work of CA 100+,” Zvan said. “A lot of the guiding principles that drive it will be embedded in our platform. The need to focus on governance and strategy, considering just transition, setting measurable sector relevant targets, thinking about your advocacy. These will all resonate in Climate Engagement Canada.”
Patrick DeRochie, Senior Manager, Shift Action for Pension Wealth & Planet Health, which has been critical of Canadian institutional investors’ overall lack of action on climate change, regards the launch of the CEC as a positive development.
“We are encouraged that institutional investors and banks are getting serious about climate change engagement,” he said. “We also like the Climate 100+ model and this could fill a void here in Canada. We are really happy they are prioritising the climate, but engagement is not a means to itself. It needs to be meaningful and useful.”
Engagement by investors with firms that generate high levels of emissions can be gradual and time-consuming, with no guarantee of a positive outcome. The difficulties were highlighted this year when some Climate Action 100+ members backed an energy transition strategy from Shell which was widely criticised elsewhere.
“The coalition needs to be really clear what they are trying to do,” said DeRochie. “Are they going to get these big Canadian polluters to align their business model with the Paris Agreement and with 1.5-degree Celsius scenarios? Are they requiring oil and gas companies to reduce production and to get them to stop lobbying against climate action in Canada?”
DeRochie also recommends a sector-specific approach to engagement by Canadian investors, a tactic which is already in evidence among existing climate-focused investor initiatives, which have issued guidance and expectations for the electrical utility, food and beverage, and steel industries.
“Steel, aluminium and cement all actually have a credible pathway to decarbonisation by mid-century. Oil and gas companies – which will be a large chunk of the 40 – don’t,” he says.
Recent research from the Science-Based Targets initiative shows that Canada’s SP/TSX 60 is the index most dominated by fossil fuels among Group of Seven countries, a significant factor in the index tracking a warning scenario in excess of three degrees Celsius.
“There must be discussions about reducing production, a just transition for the workers and respect for indigenous rights. They must do this if they are going to be serious about engagement. We’d like to see some of the banks in the CEC stop lending to them as well and some of the pension funds putting the retirement money in.”
The record of Canada’s institutional investors on reducing financed emissions has been mixed at best, according to DeRochie, who suggests they will need to demonstrate greater commitment to addressing climate risks, alongside their engagement activities.
Last month, the Ontario Teachers’ Pension Plan (OTPP) Board, one of Canada’s largest public-sector pension schemes, said it would “reduce portfolio carbon emissions intensity” by 45% by 2025 and 67% by 2030 against 2019 levels. But other investors are yet to make similar commitments.
“Some have no exclusions on fossil fuels,” said DeRochie, noting the scale of the challenge faced by investors. “The CEC needs to focus on the lobbying and PR campaigns of the fossil fuel industry. It is the biggest obstacle to Canada’s fight against climate change. They have been very effective at obstructing, delaying, and weakening climate policy. The coalition needs to get the fossil industry to get serious about ending the lobbying which has made Canada a climate laggard. The weight of these financiers and investors needs to be put into making this change.”
Randy Bauslaugh, Counsel at Toronto-based law firm McCarthy Tetrault, said he would put Canadian institutional investors behind Europe but ahead of the US when it comes to climate change impetus. That drive is coming from a recognition of financial risk.
“Over the last four or five years, investment managers have become more on point,” he said. “They really see the financial implications of ESG. They now get that it is about financial management for a pension fund rather than ethical change.”
Thinking global; acting local
The CEC is finalising its governance structures, which will consist of a steering and a technical committee. It hopes that both will be set up sometime this year.
Once that is completed, the coalition will identify the 40 companies they wish to engage with. These include oil and gas firms, utilities, transportation, manufacturing, real estate, waste management and mining. Agriculture is one of the sectors CAC is “still thinking through”, according to Zvan.
“It would be great to get the first engagement this year but if not early next. We will be asking those companies: What is your governance? What is your strategy? What are your sector relevant targets? How do they compare with that sector to bring them along?” she said. “This is meant as a three-year programme. Hopefully if it goes well, we will extend this longer so we can set multi-year objectives for these companies to move along the transition.”
Zvan agrees that advocacy and lobbying on climate-related issues will also be a focus. “CA100+ looks at this and we will be asking the companies about partnerships they have and if they are supportive of the climate changes we need to make,” she said.
More specific objectives and priorities will emerge once the steering committee is up and running. “We’d like to get more financial participants in the coalition and perhaps expand to more than 40 companies,” added Zvan.
Bauslaugh commends investors for taken a pro-active stance. “There is a debate over whether you divest and sit on the sideline, cross your fingers and hope it all turns out well or engage to make sure that transition happens. The CEC is getting themselves a seat at the table.”
Zvan believes that the CEC can be a world-leader given that it is the first national engagement programme. “CA100+ is great but there are only 167 issuers [within its remit]. A lot don’t benefit from collective engagement. A national coalition can understand better the regional and cultural realities. We can lead here. The world can learn from us.”