In Conversation: Canadian Pension Managers Must Divest Fossil Fuels, Catch Up with the Shift Off Carbon, Scott Says

Adam Scott is director of Shift:Action, an organization that engages with Canadian pension funds on climate accountability and risk. In this interview, he talks about the ideologies that still drive fossil fuel investment, the Canadian Pension Plan Investment Board’s adventures in Colorado, and what it takes to make pensions a fascinating topic.

The Energy Mix: Most Canadians don’t think of pensions as the fascinating issue they want to pay attention to every day. What makes it fascinating to you as a veteran climate campaigner?

Scott: Pensions are really boring when you first think about them. But when you start to look closely at the pension sector, it gets interesting really quickly. Just looking at the top 10 pensions in Canada alone, those funds have more than $1.7 trillion in assets under management. They own huge amounts of the real world we live in: infrastructure, ports and airports, commercial real estate, high rises, shopping malls, just huge chunks of companies across the planet.

From a climate perspective, it’s clear that we can’t achieve our goals and solve the climate crisis with just governments alone. We actually need the owners of these assets, of the world’s economies, to be part of that solution. We need to be rapidly shifting away from fossil fuels into climate solutions, and we can’t do it without these incredibly large and powerful investors. It’s clear they have enormous power to shape what the future looks like, and that means we have to talk to them.

The Mix: Where do you see the biggest problems with the way Canadians’ pensions funds are invested? Where do you see signs of progress?

Scott: They’re managed like many large institutional investors around the world. They’re really careful about how they invest, and one of the ways they try to protect themselves and minimize risk is to invest in everything.

It’s something you may have heard from your advisor, that you need to diversify. But pension funds have a strategy called universal ownership, which means their goal is to have a piece of every single sector of the economy. That means if there’s risk in any one part of the economy, they can protect it in another part. In the COVID-19 crisis, the airlines collapsed, but if you own shares in a hand sanitizer company, you’re going to be okay.

The problem is that they see that strategy as an excuse to own a number of very significantly dirty industries that are the root cause of the climate crisis. They own coal, gas, and oil in large amounts, and when we point out that that’s a huge risk financially, they fall back on the risk management techniques they’ve developed over many years and say they need to be diversified. That’s just unacceptable in 2020. When you understand what the climate crisis is, what’s causing it, what the solutions are, and where this crisis is tracking, owning a big chunk of every asset class, especially fossil fuels, is a very dangerous and immoral thing to do.

So there’s a huge barrier in the ideology of the sector, which is ‘let’s do things the way we’ve always done them’. That momentum is a real problem.

The Mix: We’ve been hearing a lot this week about the Canadian Pension Plan Investment Board’s involvement with Crestone Peak Resources, a fracking company in Colorado. Does that illustrate the problem?

Scott: What we hear from CPP, and from asset managers in general, is that they can’t divest from these companies because fossil fuels need to be a part of the transition. That’s their default on climate, and it was CPP’s response to the Crestone story—that fossil fuels will be around for a long time.

It’s complete nonsense. And it’s the Canadian financial sector’s default position on climate. They say the fossil fuel industry is actively transitioning away [from carbon], when all the transition plans they’ve put forward have no credibility. They’re calling for small, incremental, marginal emission reductions using technologies that don’t actually exist, or are not fully commercialized, like carbon capture and storage, blue hydrogen, and small-scale nuclear reactors. And they quietly admit that they can’t afford to invest in those things. So they’re calling for the federal government to subsidize their embrace of transition technologies that don’t even exist. End to end, it doesn’t make sense.

The Mix: There’ve been concerns about different Canadian institutions being captured by the fossil industry, and by the whole mythology that the economy as we know it depends on them. Are you seeing that here?

Scott: There’s a very significant fossil fuel entanglement in all our institutions. Canada’s finance base is small, with a relatively limited number of banks, institutional investors, large companies, and even governments. There’s a revolving door among those elite positions in the country, and everyone sees it as in their best interest to not attack or denigrate fossil fuels, for fear of the impact on their own employability. It’s actually really impolite in Canadian financial circles to say anything critical of fossil fuels. That entanglement is a real cultural problem in Canada, and it leaves our pension sector way behind when it comes to positioning themselves and their portfolios for the future response to climate change.

The Mix: There’s a constant flow of news and analysis pointing to the massive investment opportunities in the transition off carbon. Why aren’t pension funds and pension managers getting the memo?

Scott: There’s a real desire now to get into the opportunities around climate solutions, and I’m happy to see it. But they can’t seem to do it quickly enough, because they just don’t have the depth of expertise in those sectors.

They have whole teams of oil and gas or coal experts who know how to find value in that space, who go out every month and bring in a new project to their next meeting. They don’t have the same expertise in clean transportation or energy efficiency, and they don’t yet know how to bring in deals on the scale they’re looking for on climate solutions.

But pension funds constantly collect contributions from Canadians, and they need to find new investment vehicles all the time to put that capital into so they can grow. There’s this constant, steady demand to find things to invest in, and the funds frequently tell me they don’t have enough clean energy investments to put money into, which is another way of saying they don’t know how to.

So that’s the real gap. There are lots of companies that are expert at building renewable energy projects profitably, but there’s a disconnect with institutional investors. So we’re asking the pension funds to get good at this, to invest in the internal expertise. They need cutting-edge experts in climate solutions to take advantage of these opportunities.

The Mix: Who are the best messengers to bring the pensions industry onboard, and what will it take for those messengers to get mobilized?

Scott: The best messengers to talk to pension funds are pension savers themselves. All Canadians are members of at least one pension fund: if you’re an adult, you’re a member of the Canada Pension Plan, or if you’re in Quebec, the Quebec Pension Plan. Millions of Canadians are also part of more specific pension funds, either private or public.

If you’re a pension beneficiary, you carry real power. They’re investing your hard-earned retirement savings. You worked your whole career to save that money, it’s there for your retirement, and they have a fiduciary duty—which is a legal obligation—to invest that money in your long-term best interest. So it’s really important that they listen to what you have to say about your pension, and we advise that it’s best to ask smart questions, then follow up on the responses you get. That engagement leads the funds to understand what beneficiaries expect, and what their best interests actually are.

The Mix: Does the pension funds’ fiduciary duty eventually expose them to legal action by classes of beneficiaries who feel their best interests are not being protected?

Scott: Yes. If the pension funds continue to find themselves offside their fiduciary duty, they leave themselves exposed to possible legal challenges. They have to be transparent with their beneficiaries, actually give them enough information about what’s going on and where their money is being invested, and justify their strategies.

And they need to be very clear and up front about how they’re going to address unprecedented challenges to their investments, like climate change. If we don’t resolve the climate crisis, it will be very difficult for Canadian pension plans to pay out their pension obligations in 30 years, because we expect to see cascading, society-wide impacts that will place a headwind on global GDP growth—which pension funds rely on to pay out their beneficiaries.

So they have an obligation to be a part of the solution to climate change, as well as investing defensively to make sure they aren’t exposed to climate risk. But they have a long way to go. At the moment, most pension funds aren’t adequately disclosing the risks they face. They’re not up front about a clear and coherent strategy to ensure their pensions will be invested responsibly in the face of the climate crisis. And pension funds, by and large, have not committed to aligning their investment strategies with the goals of the Paris Agreement that Canada has legally ratified. So they’re not living up to their fiduciary duty in a number of ways, and that’s a big problem for pension funds.

The Mix: We’ve had readers ask what they can do about the way their own pensions are invested. You must get that question several times a day. How do you answer?

Scott: One of the best ways to have an impact in this crisis is to make sure the funds that are invested on your behalf are invested in solutions to climate change, not in the problem. There’s a tool on our website that makes it easy for all Canadians to send a note to their pension funds asking what they’re doing on climate risk and how they’re investing. You can also put some of those questions to your financial advisor and your bank. It’s really important to ask: am I invested in fossil fuels? And am I invested in the opportunity in climate solutions? That’s a simple step every Canadian can and should take.

The Mix: Is there anything you’d like to add?

Scott: Canada’s financial sector is far behind. We’re seeing a growing wave of large asset managers and pension funds committing to address this crisis. They’re setting up screens on new fossil fuel investments, refusing to increase their holdings, and committing to drastically increase the proportion of their investments in climate solutions by measurable amounts, on clear, measurable timelines.

This is something Canadian pension funds will do eventually. It’s not optional. So the real question is whether they’ll get on top of it now, while it’s still possible to be ahead of the curve, or whether they’ll be left behind holding assets that lose their value dramatically, and left struggling in five years as the world keeps changing. The energy transition is happening today, and I’m really concerned that Canadian pension managers aren’t acting quickly enough to protect our retirement savings and our planet.

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