New scorecard marks pension schemes down on exclusion and engagement policies, amid calls for increased regulation of climate plans.
The “extreme entanglement” of Canada’s largest pension schemes with the country’s fossil fuel producers has been cited as a key reason why they lag global peers in decarbonising their investment portfolios.
A new benchmark report which compares the climate policies of 11 Canadian pension funds found that none were yet fully aligned with global climate goals, with few setting interim targets for greenhouse gas emissions reductions, none setting absolute emissions targets and only one – Caisse de Depot et Placement du Quebec (CDPQ) – committing to and implementing an exclusion on oil producers.
The Canadian Pension Climate Report Card acknowledged that most funds had made “measurable progress” in developing climate-aware investment strategies. But its analysis scored them well below international peers, with five of the 11 Canadian funds given D ratings.
“The overall reason why some of our funds are lagging behind is the extreme entanglement that the Canadian financial sector has with our oil and gas industry,” said Adam Scott, Co-author and Executive Director of Shift Action for Pension Wealth and Planet Health, a Canadian charitable initiative focused on protecting pensioners from climate risks.
Historically, extractive industries have been a major element of the Canadian economy and continue to be substantial sources of revenue, with oil and gas in particular securing considerable influence.
A previous analysis by Shift found that 80 different pension directors, trustees, executives and senior staff working for Canada’s 20 largest pension funds currently hold or previously held 124 different roles with 76 different fossil fuel companies.
“Oil and gas has an outsized influence in Canada and it is over-represented in a lot of portfolios,” said Scott.
E for engagement
The new scorecard gave most pension funds an F grade for their fossil fuel exclusion policies, but few were rated well for their climate engagement activities, with only three given grades at the B level.
It described the overall engagement approach of Canadian pension funds as lacking transparency, rigour and the required escalatory measures to align investee firms’ business models with climate goals. But it also noted a particular problem arising from the funds’ “ongoing intention to engage with fossil fuel companies, for whom there are no credible pathways to decarbonisation other than phase-out”.
In Q4 2021, around 30 Canadian institutional investors formed Climate Engagement Canada, an initiative leveraging the practices of Climate Action 100+, but focused on enhancing investor dialogue on climate transition with Canadian firms.
The Shift report included detailed recommendations to improve engagement and other areas of investment activity, including clearly stating and setting timelines for expectations of investee companies, publicly disclosing voting records and rationale before or immediately after shareholder meetings and immediate prohibition of any new investments in fossil fuels or related infrastructure.
“Funds can’t pick and choose between the different elements of climate action. They need to adopt a comprehensive package. What we see is a lot of plans that look good on paper but on close inspection don’t have the essential elements. We’re not seeing the changes in day-to-day practices of the fund,” said Scott.
“Whole economy transition”
Canada Pension Plan Investment Board (CPP Investments), the manager of the C$529 billion AUM Canada Pension Plan (CPP), was given a C+ grade for engagement, and encouraged to engage with investee companies “using time-bound criteria and a process that escalates to divestment” with the aim of developing credible net zero pathways.
The report criticised the firm for not making clearer its expectations on net zero targets and plans to investee firms by enshrining these in policy, but welcomed its development and use of tools to direct how it engages on climate.
A spokesperson said CPP Investments would continue to invest in and exert its influence in the whole economy transition as active investors, rather than through “blanket” divestment. “We will continue investing in companies that are committed to a whole economy transition and that are advancing climate change solutions across every sector of the economy,” the spokesperson said.
“We continue to send clear messages that boards need to hold management to account to develop credible transition plans. Importantly this also means providing capital to support these companies in executing these plans when they develop them. We will finance early-stage climate solutions, we will scale green technologies as they become commercial, and we will provide transition financing to support the greening of grey sectors.”
Aligning financial flows
Last autumn, a Canadian NGO coalition including Shift published recommendations for reform of Canada’s financial system to better align finance flows with climate action. This included regulations requiring credible climate plans from financial firms, pension funds, insurance companies, federally regulated large corporations and ‘crown’ corporations.
“We expect that regulators will have to regulate that pension funds have credible climate plans, reported as part of their financial statements. They will need to disclose not just their carbon footprints and scenario analysis, but also their [emissions reduction] targets, and progress against their targets annually,” said Scott.
To help institutional and other investors evaluate the climate policies and transition plans of investee firms, Share (Shareholder Association for Research and Education) recently published new guidance on corporate climate actions.
“Businesses across Canada need ambitious net zero climate plans, and they need to see them through. Most Canadian companies don’t have fully formed, clear, ambitious, comprehensive climate action plans yet,” said Barbara Zvan, CEO of Ontario University Pension Plan.