Learn about sustainable Canadian funds here.
By their very nature, pension funds are long-term investors. More than that, they are stewards with a license and obligation to think about the impacts of their investing strategies decades out, which means that pension plans, and CPP in particular, have an important role to play in shaping the long-term prospects for the Canadian economy.
Canada has a very large pension fund sector, totalling around US$2.8 trillion, or 5.7% of collective OECD-area pension assets, which is greater than 100% of annual GDP.[1] The Canada Pension Plan (CPP) is one of the world’s largest public pension funds globally. As of March 2020, it had over CA$400 billion in assets under management and ranked as the 9th largest, according to the 2020 Thinking Ahead Institute’s Pensions & Investments 300 ranking.[2]
Because of the investment horizon of its 20 million contributors and beneficiaries, ages 18 and upwards, the CPP has to plan its investments across generations, not years. It effectively invests on behalf of Canada - a portion of most paycheques earned in Canada goes towards entitlements that kick in at retirement.
The mandate of the CPP Investment Board, now referred to as CPP Investments, is to manage the funds of the CPP in the best interests of contributors and beneficiaries and to maximize investment returns without undue risk of loss. CPP Investments was established by an act of parliament in 1997 specifically to manage the funds contributed by the Canada Pension Plan.
Equally clear is CPP Investments’ understanding of what its mandate is not. In a recent article in the Toronto Star, Michel Leduc, senior managing director and global head of public affairs and communications for Canada Pension Plan Investment Board said, “We might be urged to abandon our own investment thesis and engagement work and simply divest from conventional energy according to a specific target linked to policies of the government, from which we must always remain independent. Such a target, by definition, is a matter of wider public policy, not an investment decision, in stark contrast to clear objectives enshrined in our enabling legislation.”
So how does this play out in CPP’s investment approach?
In executing its mandate, CPP Investments is required to “…[take] into account the factors that may affect the funding of the Canada Pension Plan and its ability to meet its financial obligations.”[3] This means that the CPP must look not to today’s economy, but the economy of Canada in 2050 and beyond. With that horizon, it is imperative that the fund clearly addresses and tackles environmental, social and governance issues, especially climate change.
As it stands today, Canada’s economy is heavily dependent on oil and gas – a clear vulnerability from a climate and financial stability standpoint. Canada is the world’s fourth-largest oil producer and 10th largest oil consumer.[4] About 5.3% of Canada’s GDP comes from the oil and gas sector.[5]
CPP seems to recognize this.
In July 2020, it published an Updated Policy on Sustainable Investing, in which it recognizes the importance of environmental, social, and governance (ESG) factors, specifically mentioning climate change, saying “…companies that integrate consideration of ESG-related business risks and opportunities are more likely to preserve and create long-term value.” The new Policy on Sustainable Investing specifically outlines CPP Investments’ support for companies aligning their reporting with the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD).
Do CPP’s Actions Match their Words?
In a report titled, ‘‘Troubling Incrementalism’, Cynthia Williams, Osler Chair in Business Law at Osgoode Hall Law School points out that the serious transition-risks to the Canadian economy from climate change puts Canadians’ retirement savings at risk and urges CPP Investments, as both a financial steward and a steward of ‘intergenerational equity’, to do more to support the transition to a low-carbon economy in Canada.
Williams documents how, in its Canadian public equity holdings, CPP Investments chose to be over-invested in oil and gas companies. “It's S&P 500/TSX 60 investment of $5.6 billion is already an investment that is as substantially exposed to oil and gas as is the Canadian market generally, 19.5% of the $3.137 billion listed, or $605 million of holdings, are in oil and gas companies,” the report notes, adding that this over-investment in oil and gas presents financial risks. The report goes on to describe six private equity investments in energy companies that further substantiate the argument that CPP appears to be “hedging on the global energy transition.”
“In a number of ways, CPP is emblematic of the wider [finance] sector in Canada, where they’re beginning to work on an understanding of climate change, but there is no evidence of actively managing climate risks across investment portfolios,” points out Adam Scott, Director at SHIFT, a Canadian initiative working with pension fund beneficiaries to align investment policies, priorities, and practices with required action on climate change.
He adds that finance is critical to the low carbon transition, yet some of CPP’s investment decisions take Canada in the opposite direction. “If you're investing in a piece of new fossil fuel infrastructure today, like say a pipeline, that infrastructure is designed to last for decades. Each time you make a decision to invest in something like that, it impedes our ability to make the transition to low carbon,” he points out, referring to CPP’s investments in energy companies.
He argues that CPP’s investment mandate is entirely consistent with having and disclosing an overarching investment strategy for tackling climate risk in the Canadian economy.
A Closer Look at CPP’s Mandate
CPP has an incredibly simple, one-line mandate. “to manage the funds of the CPP in the best interests of Canadian Pension Plan contributors and beneficiaries, and to maximize investment returns without undue risk of loss.”
“CPP invokes fiduciary responsibility as a reason not to take action on climate change, but I argue that the opposite is true. CPP’s fiduciary responsibility clearly requires them to act when it comes to climate change and to take some substantial action to protect the best long-term interests of all Canadians,” Scott says.
Williams argues that CPP should be making a substantial contribution to Canada’s future economy by supporting new technologies, new companies, and the just transition to a low-carbon economy and that CPP could use its decades-long investment horizon, and its substantial secure funding from the Canadian public to be a “platform investor” in the transition to a low-carbon economy. Part of her argument is built on a legal interpretation of CPP Investments’ fiduciary responsibilities as articulated in its founding legislation.
“I don't expect CPP to be politically active, that's not what I'm arguing. I’m arguing that the best financial management recognizes climate as an existential financial risk. I really question that if CPP continues with its current strategy, whether it'll be able to pay out pensions for people who are just starting to pay into the system. For example, if you're 18 years old and you just got a job and you're paying into CPP, I don't trust that CPP is investing responsibly such that it'll have retained value over a 30 year horizon, because a lot of the assets that it’s holding on to are directly contributing to the climate crisis and making this problem worse,” Scott notes.
Williams also adds that the CPP is not subject to short-term pressures from capital markets, and so could support newer, riskier technologies and research. It could invest its patient capital in bringing new technologies to market and supporting the necessary scaling up of existing renewable and storage technologies. It could be a leader in supporting transition strategies and innovative approaches to business. While there is evidence of its increasing support for renewables, there is also strong evidence that it has been doubling down on oil and gas, a sector to which the Canadian economy is already substantially over-exposed. “This choice presents lost opportunities at a time when a transition to a low-carbon economy is a global, and Canadian, imperative.”
Active Ownership a Powerful Tool for Effecting Change
The political will to decouple Canada’s economy from fossil fuel production reached a turning point last week as the Liberal Government tabled the Net-Zero Emissions Accountability Act. The proposed climate legislation aims to bind the government to achieving the deep economy-wide emissions cuts required to stay on track to reach net-zero by 2050.
‘Net-Zero’ has become a shorthand term for the science-based target of transforming the global economy: by 2050, at a global level, any human-caused greenhouse gas emissions need to be balanced by removing an equal amount from the atmosphere.
Given the scale of transformations required at the global level, the most effective actions are those that collectivize the efforts and weight of large investment institutions. ‘Net zero’ will not be reached without the full participation of the financial sector. CPP, Canada’s largest institutional investor, has a crucial role to play both at a national and global level.
Last Wednesday CPP joined with the CEOs of seven other large public pension plan investment managers across Canada to publicly call on investee companies to adopt standardized sustainability reporting according to SASB and the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations.[6]
Yet, while the global ‘net-zero’ movement has been gaining steam, up to now CPP remained outside of the largest global investor initiatives steering system-wide financial action on climate change - notably, the Climate Action 100+ Coalition and the Net Zero Asset Owners Alliance. The former, representing US$41 trillion in assets, focus members’ engagements on 160-odd of the most systemically significant emitters globally. The latter, a more select club of 33 of the largest pension plans and insurers, united by the long-term nature of their investment horizons, commit to advocating at corporate, industry and policy level for a low-carbon transition and to supporting the development of strategies for near-term portfolio decarbonization.
CPP’s absence from these groups contrasts with the leading role played by Caisse de dépot et placement du Québec (CDPQ) in both initiatives as well as membership by other large US and Canadian peers in the Climate Action 100+ initiative.
CPP is also absent from the list of signatories to the most recent Global Investor Statement to Governments on Climate Change convened by The Investor Agenda and addressed to world governments urging action to accelerate the net-zero transition and improve climate-related financial reporting. Canadian pension plans CDPQ, AimCo and OPTrust along with other global investors representing US$37 trillion AUM signed the appeal.
What Can Canadians Do to Hold CPP Accountable?
When asked for comment, CPP Investments pointed out that, “CPP Investments is not part of the government with quasi-regulatory powers. We are an investment organization that takes the risks and opportunities associated with climate change very seriously with rigorous processes as outlined in our disclosures.”
Scott bemoans the lack of transparency around the details of CPP’s portfolio decarbonization plan and argues that every Canadian beneficiary and contributor is entitled to this information. SHIFT has gotten Canadians to participate in CPP’s province-level consultations and has been working to help people write letters directly to CPP, articulating specific and direct questions and seeking answers, for example, ‘Can you please provide detailed information on how your engagement has led to measurable change?’
[1] http://www.oecd.org/daf/fin/private-pensions/Pension-Markets-in-Focus-2020.pdf
[2] https://www.thinkingaheadinstitute.org/news/article/pi-300-2020-press-release/
[3] https://www.cppinvestments.com/about-us/our-mandate
[4] https://www.eia.gov/tools/faqs/faq.php?id=709&t=6
[5] https://www.nrcan.gc.ca/science-data/data-analysis/energy-data-analysis/energy-facts/energy-and-economy/20062
[6] https://www.newswire.ca/news-releases/ceos-of-eight-leading-canadian-pension-plan-investment-managers-call-on-companies-and-investors-to-help-drive-sustainable-and-inclusive-economic-growth-844608554.html
