Canadian Pension Funds Feel the Heat on Climate

Beneficiaries ask funds to demonstrate integration of climate into investment and risk strategies by year-end.

Canada’s ten largest pension fund boards have been sent letters requesting information on how they are meeting their legal fiduciary obligations to beneficiaries in the face of growing climate-related financial risks. Signed by beneficiaries of the funds, the letters were drafted in collaboration with Shift, Canadian environmental organisation Environmental Defence and law charity Ecojustice.

The funds have been asked to demonstrate how they are managing climate risks and aligning their investment strategies with a pathway to achieving broader climate safety, in order to protect their beneficiaries’ interests. They have until 31 December to respond.

“Pension fund beneficiaries are asking their pension funds to be transparent about their policies and actions to date so beneficiaries can determine if their fund is meeting these requirements,” said Andhra Azevedo, a lawyer at Ecojustice.

Many funds continue to behave as if their fiduciary duty prevents them from changing their investment strategies to account for climate, Shift said. As a result, many of Canada’s largest pension funds are “inadequately” disclosing their investments and climate risks.

A ‘Legal Framework for Impact’ report prepared by law firm Freshfields Bruckhaus Deringer for the Principles for Responsible Investment recently reviewed the legal barriers to investing for sustainability impact in major jurisdictions including Canada. The firm noted that current laws allow for the pursuit of sustainability goals alongside an institutional investor’s other fiduciary duties to a significant extent.

“Pension funds must assess and act decisively to limit their exposure to climate risks of else potentially face legal consequences,” said Azevedo.

Last year, Australian pension fund, the Retail Employees Superannuation Trust (REST) agreed to incorporate climate-related financial risks in its investments and commit to net-zero by 2050. This follows a suit filed in 2018 by a pension fund member, who argued that REST was violating the Corporations Act 2001 by failing to provide information on climate-related risks.

In June, Canadian pension fund trustees were warned that they must consider climate change as part of their legal responsibilities by the Canada Climate Law initiative.

Caisse de dépôt et placement du Québec (CDPQ) and the Ontario Teachers’ Pension Plan (OTPP) are the only two of the ten funds to have committed to net-zero greenhouse gas (GHG) emissions by 2050 and published interim targets.

Leading by example

Shift has welcomed CDPQ’s recent move to exclude investments in oil producers from its portfolio by the end of 2022, as well as its commitment to invest US$10 billion to help decarbonise high-carbon industries.

“However, it should be acknowledged that, if oil is too risky for the climate and Quebecers’ pensions, then so are ongoing investments in fossil gas,” Shift said.

Following OTPP’s net-zero pledge in January, the board recently announced its intensions to reduce portfolio carbon emissions intensity by 45% by 2025 and 67% by 2030 against 2019 levels. It will also grow its investments in companies generating clean energy and contributing to the transition.

The OTPP also issued its first green bond in Q4 2020, with proceeds from the €750 million 10-year bond earmarked for environmentally and socially responsible assets.

With COP26 climate talks beginning in November, pension funds will continue to face “increasing pressure to create and implement investment strategies aligned with the goals of the Paris Agreement”, said Shift.

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