The accelerating transition away from fossil fuels and toward electrification and renewable energy presents both risks and opportunity to investors. For those with significant fossil fuel holdings, returns are imperilled by demand risk, as energy consumption trends toward electrification. Investors have an opportunity to take advantage of this realignment by focusing on sectors and assets that are likely to grow as the energy transition accelerates.

The global investment firm Brookfield has established some of the largest private equity funds claiming to do so with its two “Global Transition Funds” and its “Catalytic Transition Fund.” The funds claim to offer investors exposure to climate-transition opportunities by directing capital toward the decarbonization of high-emitting assets, and by investing in clean energy.

Clear guidelines and adherence to best practices would offer stakeholders confidence that their bets into the transition economy are being placed accordingly.

– Michael Sambasivam and Adam Scott

Transition funds are an important investment class, as they can help supply some of the trillions needed to achieve net-zero by 2050 or sooner, while offering savvy investors a venue through which to access transition opportunities. But transition investing also requires rigorous due diligence: not all investments labelled as such legitimately contribute to the transition, and not all assets can be transitioned.

Fuzzy criteria could mislead investors

Brookfield’s funds currently lack the transparent guidelines that are necessary for transition investments to work. Clear definitions of “green” and “transition” investments would ensure that investors – both in the funds and in Brookfield itself – are getting what they were sold. Brookfield has opted instead to rely on vague language that suggests it adheres to external guidances that define credible, science-based transition investments, but without specifying the guidances involved or how they are applied.

Brookfield is not alone in this. Last year, we filed a complaint with the Ontario Securities Commission on the basis that Canada’s banks labelled investments as “sustainable” even though they resulted in increased greenhouse gas emissions. Each of Canada’s “big six” banks were involved in sustainably labelled transactions that financed the expansion of fossil fuel infrastructure.

Related

‘ESG tourists’ are leaving, but sustainable funds are still growing in Canada

RBC’s climate retreat sparks debate over anti-greenwashing law

Carney wants a pipeline. Building one will be harder than it sounds.

As Brookfield deploys transition capital on behalf of pensions and other clients, it is paramount that it ensures that it does not similarly mislead its investors. Comments from Brookfield Infrastructure CEO calling LNG a “leading transition fuel,” paired with Brookfield’s substantial and growing gas portfolio, led us to file a shareholder proposal asking for clarity.

Our proposal asks that Brookfield disclose the criteria used to determine asset eligibility in its transition-labelled funds. Clear guidelines and adherence to best practices would offer stakeholders confidence that their bets into the transition economy are being placed accordingly.

Methane gas has no place in transition investing

The Canadian financial sector’s systemic unwillingness to properly define the terms “transition” and “sustainable” shows the need for Canada’s upcoming green and transition taxonomy to adhere to strict best practices.

A Canadian green and transition taxonomy would serve as a classification system for which activities are aligned with Canada’s climate target of achieving net-zero emissions by 2050. Where Canada’s financial sector lacks the incentives or willingness to regulate itself, investors and the general public alike would benefit from guardrails that ensure that green and transition finance are not simply buzzwords.

We know what is needed to successfully transition the economy toward net-zero and to avoid cementing further transition risk into Canada’s finances. The International Energy Agency’s and the Intergovernmental Panel on Climate Change’s net-zero pathways make clear that financing new development of fossil fuel infrastructure is misaligned with net-zero by 2050. Suggestions that methane gas be labelled as transitional are not rooted in science but rather an attempt by fossil fuel companies to displace capital allotted to transition investments.

The fossil fuel sector’s newest campaign, in which liquefied natural gas is being falsely sold as a “bridge fuel” to allow developing economies to replace one fossil fuel (coal) with another (gas), is unfounded in both economics and climate science. LNG’s high life-cycle emissions make it a marginal emissions-reduction tool at best, while new gas investments of any type would lock in carbon emissions for decades, blocking transition.

LNG is not a transition fuel, and either Brookfield’s transition funds or Canada’s taxonomy would be undermined by pretending that it is.

A science-based and climate-aligned taxonomy would not prevent Canada’s financial institutions from managing capital as they see fit. Instead, it would mandate honesty, prevent greenwashing, create trust and ensure that transition capital is deployed in alignment with its mandate.

If Canada’s financial institutions earnestly stand by their green- and transition-labelled investments and investment vehicles, we should see them asking for the same.

Michael Sambasivam is a senior analyst at Investors for Paris Compliance, a shareholder advocacy organization holding Canadian companies accountable to their net-zero commitments.

Adam Scott is the executive director of Shift Action for Pension Wealth and Planet Health, a charitable project working to align Canada’s financial sector with climate goals.

The post What’s in your ‘transition fund’? Poor transparency puts investors at risk appeared first on Corporate Knights.

When Finance Minister Chrystia Freeland took the main stage to announce long-anticipated policy measures, expectations were high. New financial rules are desperately needed, as Canada is already listed by the United Nations as a “low-regulation jurisdiction” on sustainable finance while providing cover for financial institutions with the highest levels of financing for oil, gas and coal.

What we heard was a welcome, yet inadequate, attempt to draw level with global climate finance leaders.

The speech – accompanied by an official backgrounder on the new sustainable investing guidelines – included two main themes: progress on a green labelling taxonomy and movement to formalize corporate climate disclosures for major companies in federal law. These are important and positive steps, but they amount to meeting the basic standard, not climate leadership.

The first piece provides a path for finally rolling out a voluntary, made-in-Canada sustainable investment taxonomy, focused on setting detailed science-aligned climate labelling standards for electricity, transportation, buildings, agriculture, forestry, manufacturing and extractive industries, including mineral extraction and processing and natural gas.

That last category raises a major red flag for climate experts, as scientifically credible transition pathways require, by definition, the replacement of fossil fuels in our energy system, not merely marginal emission reductions. Gas cannot be transitioned.

The long, difficult process to develop taxonomy rules has been continually undermined by aggressive oil and gas industry lobbying to distort the rules to keep the finance taps open. Canada might have simply adopted EU taxonomy rules, which exclude most fossil fuel activities. This threat sparked an industry push to create a made-in-Canada approach, on the flawed premise that a pathway for science-based 1.5°C alignment could somehow be changed in consideration of “Canada’s economic makeup.”

This distortion of reality is very much in evidence in the backgrounder, albeit in coded terms. The text describes “a broad range of eligibility criteria for existing natural gas production,” so long as companies align with “limiting global temperature rise to 1.5°C above pre-industrial levels.”

The government provides an example of such an eligibility criterion: “displacing more polluting fuels internationally.” This is just an oblique and perverse reference to industry attempts to force the exporting of liquefied natural gas into the transition label against the advice of experts.

Natural gas is a major cause of the climate crisis and cannot, regardless of Canada’s current economic makeup, align with limiting temperature rise to 1.5°C on any reasonable time scale. LNG export is an expansion of fossil fuels – the literal opposite of a transition investment.

The backgrounder also contained an important acknowledgement that new oil or gas projects are inconsistent with a safe climate. Clearly, given the contradictions on display, the hard work on labelling is not over.

Ensuring that these rules earn global credibility and adhere to climate science in a politicized environment will require committed follow-through. The next step in the process is for detailed labels to be ironed out by an independent stakeholder working group over 12 months, the makeup of which has yet to be announced.

Canada needs these labelling rules, and many well-intentioned people have worked hard for years to make them a reality. The government must deliver on promises to ensure that civil-society representatives, climate experts and Indigenous rights-holders are all part of the decision-making process.

At the event, the government also promised to codify climate disclosure rules for Canada’s largest federally regulated corporations. This is an equally important, but also incomplete, policy.

Once adopted, these disclosure rules will form a foundation for future rules to require credible climate transition plans across the financial sector, but a clear policy direction for where we need to end up is still lacking. The EU is already much further ahead with such policies, like the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive.

Aligning Canada’s financial sector with a science-based climate transition pathway isn’t optional. The work to achieve this necessary calibration needs to pick up the pace. The international community wants to see Canada leading, not catching up.

Adam Scott is the executive director of Shift: Action for Pension Wealth and Planet Health, a charitable project working to align Canada’s financial sector with climate goals.

The post Canada’s new sustainable finance rules don’t go far enough appeared first on Corporate Knights.

Last month, the Canada Pension Plan Investment Board (CPPIB) released its 2022 Report on Sustainable Investing, highlighting its commitment to be net-zero by 2050 and its engagement strategy to pressure companies to manage climate risks. Our $523-billion national pension manager is making big promises to decarbonize its portfolio by making large investments in climate solutions, pledging to report its absolute emissions, and using its influence and capital to help transition high-carbon industries. 

It’s potentially a smart approach, but it stands in stark contrast to public commitments CPPIB officials have made to continue investing in fossil fuels.  

At the end of September, Richard Manley, the head of sustainable investing at CPPIB, told The Globe and Mail that we could see “Big Oil become Big Energy, but also no-carbon oil over time.”  

This comment should be a red flag for Canadians concerned about the security of their pensions and the stability of our climate.  

It’s part of a broader argument that financial institutions should continue to flow capital into the oil and gas industry indefinitely, in spite of pension funds’ fiduciary duty to invest in members’ best long-term interest and climate commitments to reach net-zero emissions by 2050. For example, CPPIB said earlier this month that it will “support conventional energy companies that are committed to reducing their emissions and are well positioned for the energy evolution.”  

Many emissions-intensive industries – like cement, agriculture, buildings, transport and utilities – have credible, profitable pathways through the energy transition, but the oil and gas sector does not. 

Manley also said that “we’re already seeing Big Oil become Big Energy,” but this belief is mistaken. Five of the global supermajors are spending around US$750 million annually on greenwashing while allocating just 12% of capital expenditures to “low-carbon” activities, according to think tank InfluenceMap. Canada’s six largest oil and gas producers are making record profits but failing to invest significantly in emissions reductions while lobbying to undermine ambitious government climate policies.   

The notion of “no-carbon oil” is absurd – a marketing attempt to obscure reality. Crude oil is composed of long chains of carbon strung together. It’s consumed primarily via combustion to extract energy, releasing that carbon into the atmosphere in the process. Global production and the use of 100 million barrels of oil per day is a leading cause of the climate crisis. 

The underlying argument that institutional investors like CPPIB should continue to flow capital into oil and gas companies to finance carbon-cutting innovations sounds reasonable – until you consider reality. The technologies available to reduce oil and gas emissions have to date proven ineffective, unreliable, expensive and unavailable at the required scale.  

The leading proposed solution, carbon capture utilization and storage (CCUS), has not measured up to hype, with oil companies unwilling to invest profits into this expensive technology that increases production costs. CCUS may eventually prove important for hard-to-abate sectors like cement or fertilizer, but better, cheaper, zero-carbon substitutes for oil and gas already exist. 

Even if CCUS somehow became inexpensive, scalable and effective, it cannot address oil and gas life-cycle emissions. There’s no taking the carbon out of the barrel. The overwhelming majority of emissions are the result of using oil and gas products as designed – for combustion. Depending on the blend, between 70 and 80% of the carbon pollution from a barrel of crude comes from the tailpipe.  

Disruptive technologies and new policies are already destroying oil demand, with an estimated six million electric vehicles expected to be sold in China alone this year. There is little reason to believe that a market for non-combustion uses of crude might arrive at scale in time to stop the industry’s decline. Optimistic marketing around “bitumen beyond combustion” that could drive future demand growth for oil-sands production lacks credibility, considering that only 7% of crude oil consumed in the United States is for non-combustion use. 

CPPIB reported this summer that it has $21.72 billion invested in fossil fuel producers. It is deeply entangled with the fossil fuel industry through its board and staff. A long-time member of CPPIB’s global leadership team is now CEO of the Canadian Association of Petroleum Producers. 

As the Intergovernmental Panel on Climate Change and the International Energy Agency have made clear, limiting global heating to 1.5℃ requires an immediate end to fossil fuel expansion and a rapid phase-out of production. The Glasgow Financial Alliance for Net Zero and the Investor Leadership Network already provide investor guidance for the responsible phase-out of high-emitting assets. 

CPPIB’s mandate, to invest the CPP funds to achieve a maximum rate of return without undue risk of loss, does not involve assuming extraordinary climate-related financial risks to prop up an industry facing structural decline. Fossil fuel companies are desperate to preserve their business model and prolong the use of oil and gas, but our pension capital cannot be their lifeboat. 

The post Memo to CPPIB: There’s no such thing as ‘no-carbon oil’ appeared first on Corporate Knights.

By their very nature, taxonomies are supposed to provide clarity and certainty. But a taxonomy being developed to help Canada’s financial sector transition to a more sustainable future is in danger of doing the opposite.

Transition finance is an emerging subset of the rapidly growing sustainable finance movement. The idea stems from a concern that restricting financing to companies that are already sustainable will slow the required transition for high-carbon industries. In theory, companies that aren’t yet sustainable will also need financing to become so in the future. It’s a good idea, but it creates a significant danger of greenwashing if we get it wrong.

The Canadian Standards Association (the CSA Group), a non-profit industry body, is developing a taxonomy for transition finance, which in theory should prevent greenwashing. However, the project could instead keep the door open for fossil fuels at a time when we need to transition away from them. 

In fairly stark contrast, the European Union (EU) has developed a comprehensive “EU taxonomy for sustainable activities” to create a consensus on financial standards backed by the legitimacy of financial regulators. This draft taxonomy is in the process of being adopted by the European Parliament. 

The EU taxonomy isn’t perfect, but it creates a specific definition of transition finance, dealing squarely with the danger that it can lead to carbon lock-in if defined as simply making incremental changes to practices that ultimately need to be replaced. The EU taxonomy defines transitional activities as ones for which no low-carbon alternatives are available and that have emissions profiles considered best in sector; those that don’t hamper the development and deployment of low-carbon alternatives; and activities that do not lead to lock-in of carbon-intensive assets.

Under those logical safeguards, an oil company could receive transition financing to install electric vehicle chargers in its gas stations or invest in renewable energy, but not for upgrades to a refinery, even if those upgrades marginally reduce emissions. The whole point of transition finance, then, is to support the wholesale transition away from fossil fuels to clean energy that’s required to reach zero emissions by mid-century. 

So what about Canada? A growing list of Canadian financial institutions have recently committed to align their strategy with what is required to address the climate crisis. Some actors in the country’s finance sector have rejected the EU taxonomy approach, however, in an apparent effort to preserve the deep entanglement between governments, financial institutions and the oil and gas industry. In 2019, Canada’s Expert Panel on Sustainable Finance released its final report, firmly renouncing the clear EU transition finance definition because it would largely shut out Canadian oil and gas producers. It’s not a mystery why. Canada is home to the oil sands, producing some of the highest-cost and highest-carbon oil in the world. This is an industry long facilitated by Canada’s political and financial establishments. Bending the rules to protect this industry is a hard habit to quit.

At the urging of fossil fuel companies and some of the Canadian financial institutions backing them, the expert panel argued that Canada should go it alone or work with countries “with similar resource endowments” and develop a taxonomy that would accept activities that others won’t. This attempt at creating a “made in Canada” green taxonomy amounted to a cynical effort to insert loopholes into sustainable-finance definitions to allow Canadian banks and institutional investors to continue financing oil and gas. If adopted, the CSA’s definition of transition finance could throw efforts to avoid carbon lock-in out the window, taking the “transition” out of “transition finance.”

The proposed taxonomy would grant the “transition” label to investments that increase access and use of natural gas to replace coal. That’s not decarbonization; it’s merely switching dependency from one fossil fuel to another. The proposed rules would also allow for the exploration and development of new oil and gas reserves, but no amount of creative accounting or qualification can credibly align financing for new fossil fuel expansion with climate science.

Any credible transition taxonomy should exclude the exploration and development of new oil and gas reserves, full stop.

The committee that the CSA Group struck to tackle the issue is composed only of financial actors, natural resource companies, governments, and industry stakeholders, while excluding climate experts, civil society and Indigenous groups. Why anyone would think this process to date won’t result in controversy and deeper uncertainty is hard to imagine. Canada is pursuing a pathway that lowers the bar and allows high-carbon activities to be labelled “sustainable” at a time when the International Energy Agency and United Nations are telling us to move rapidly away from fossil fuels. Canada is developing this behind closed doors with actors from the financial sector and the oil and gas industry, with the hope that the public, international financial institutions and our trading partners will somehow accept both the substance and the process.

Adopting a weakened taxonomy could stem financial flows into Canada, as major European investors will lack confidence in Canada’s compliance with international standards. It could also create headaches for internationally invested Canadian financial institutions like pensions. 

A better approach would be for Canada to hit reset and move to adopting standards aligned with the EU, ensuring that Canada’s valuable progress on sustainable finance isn’t undermined. 

Canada is well positioned to thrive as sustainable finance gains momentum. We can still get this right. Keeping the “transition” in “transition finance” is our best hope for a safer and more prosperous future.

Adam Scott is the director of Shift Action for Pension Wealth and Planet Health, a charitable project that works to protect pensions and the climate by bringing together beneficiaries and their pension funds on the climate crisis.

The post Is Canada’s transition finance blueprint a recipe for greenwash? appeared first on Corporate Knights.

In 2015, the Alberta government announced a phase-out of coal, eliminating coal-powered electricity generation by 2029. This means a lot of energy generation coming off in the next decade, which needs to be rapidly replaced. Over the last few years, surprisingly, utilities have outpaced the regulations in announcing the early retirements of old coal plants and the conversion of many newer plants to natural gas. Recognizing the risk of utilities engaging in a “dash to gas,” Rachel Notley’s NDP government instituted a 30% renewable energy requirement by 2030.

Why worry about a shift to natural gas? The concerns are twofold. First, even though its combustion produces about 50% fewer greenhouse gases (GHGs) than coal, it still produces GHGs. The push for net-zero emissions is happening at all levels of the economy. The Government of Canada has announced that Canada’s entire economy will be net-zero by 2050. In the U.S., Joe Biden’s platform has called for a net-zero electricity sector by 2035 – a mere 15 years away. The projected lifespan of a gas plant is at least 35 years, putting the forecasted closure of the Cascade project in 2058 – incompatible with a climate-transitioning world.

But CO2 is not the only GHG that results from building a gas plant. Natural gas has one main ingredient: methane, which also happens to be a potent GHG. And methane leaks: from the wellhead, from pipelines, from storage facilities. Everywhere. So if the leakage rate is more than 3% of the total methane produced, a gas plant is just as bad for the climate as a coal plant. Alberta has a major methane leakage problem, and recent studies suggest it is grossly underestimated. 

Second, as major GHG emitters, gas plants are subject to a carbon price. At the moment, this expense is zero, since the price is offset by the exact amount of GHGs produced by an efficient gas plant (a full carbon-price exemption for natural gas plants, in effect). Federally, over the next 10 years, this offset drops to zero, so the Cascade plant will likely be exposed to the full impact of a very high carbon price. This makes such an investment risky, at best.

Investors, and in particular pension funds, around the world are increasingly wary of this type of investment. This isn’t just a bad bet for the future; it’s been a horrific bet in the past. A recent study compared returns on fossil fuels versus renewables over the last five years. And surprise! Renewable energy paid back handsomely compared to fossil fuels, and was less volatile. As investors wake to the reality of the carbon transition, this difference will be only more apparent. Mark Carney, former head of the Bank of Canada and the Bank of England, has stated that pension funds that ignore these investment realities risk ending up with portfolios full of worthless assets. And he’s pretty smart.

So not investing in fossil fuels is not only the moral thing to do, it is also the financially wise thing to do.

The people at OPTrust have begun to recognize this. They’ve created multiple reports, with pretty graphs and rosy statements about supporting the Paris Agreement. But this statement rings out: “Emission reduction targets are not today’s objective.” Like many other organizations, they are unwilling to walk the talk.

Ontarian pensioners deserve better, and they should demand it. They deserve investments they can be proud of, that support their growing grandchildren, and that support a survivable planet.

Joe Vipond is an emergency physician in Calgary and the president of the Canadian Association of Physicians for the Environment.

Adam Scott is director of Shift Action for Pension Wealth and Planet Health – an initiative working to protect pensions and the climate by bringing together beneficiaries and their pension funds to engage on the climate crisis. 

The post Why are Ontario pensioners investing in future Alberta stranded assets? appeared first on Corporate Knights.