Canadian pension funds are starting to embrace the green transition

The clean energy transition has been powered by activists and innovators – but it can be achieved only when business leaders recognize that both prosperity and survival hinge on shifting their investment to low-carbon systems.

With the costs of renewable energy now falling below the price of most fossil fuels, this day of reckoning is coming closer. But it’s not here yet – which is why Corporate Knights is publishing its second annual dashboard measuring the transition-readiness of Canada’s largest investors: its giant pension funds. Our new report, produced in collaboration with the Ottawa-based Smart Prosperity Institute and funded by the Trottier Family Foundation, finds that pension managers’ support for the green transition is growing but still nowhere near the pace required to meet global net-zero-carbon targets.

The good news in the second Canadian Pensions Dashboard for Responsible Investing, released March 22 and based on 2021 data, is that our pension funds are starting to embrace sustainability. The new report analyzes 14 funds, which represent more than 50% of Canada’s total pension fund assets. This year, the number of large Canadian funds that have committed to achieving net-zero emissions by 2050 rose from just two funds to nine – representing $1.8 trillion, or 81% of the total pension assets under evaluation. The amount of these pension funds’ actual investments labelled as “sustainable” rose to $276 billion in 2021, up from just $163 billion a year earlier.

The dashboard shows that sustainable investments composed nearly 13% of the pension funds’ total assets of $2.2 trillion, versus just 7% of $2.1 trillion at the end of 2020. This jump brings the Canadian industry within shooting distance of the 20%-of-assets threshold – which analysts believe marks the point at which a country’s pension funds play a significant role in its energy transition.

But it’s early in the transition, and these numbers are still soft, notes Matt Malinsky, research manager for Corporate Knights and lead author of the report. Since there is still no Canadian standard for determining the true sustainability of any investment, companies can make all the claims they like. A group of finance experts tasked with developing a definitive taxonomy of sustainability for Canadian investors has just filed a preliminary roadmap, but they likely won’t publish a detailed taxonomy until 2025.

The goal of the Canadian Pensions Dashboard for Responsible Investing isn’t just to rate the pension industry’s progress – but to spur progress, says Malinsky. “These professionals control a vast amount of capital. They have a big role to play in facilitating the transition to a low-carbon economy.” If Canada’s pension fund managers don’t take sustainability seriously, he adds, “they could get caught with stranded assets, which will cost their pensioners a lot.”

Malinsky says that since Canadian pension funds haven’t been as climate-focused as their counterparts in Europe, “we didn’t go into this expecting them to be leaders.” The overall results, he says, “reinforced our preconceived notions that they weren’t hitting a number of the best-practice indicators yet – but I think we’re starting to see the pressure grow.”

Read the full report.

The new dashboard provides glimpses of progress. For instance, in 2021, Ontario Teachers’ Pension Plan managed to reduce the carbon intensity of its investment portfolio by a hefty 32%. Other top performers were OMERS (the Ontario Municipal Employees Retirement System), which decreased its portfolio’s carbon intensity by 26%, and AIMCo (Alberta Investment Management Corp.), down 18%.

Another good sign: sustainability values are increasingly being “baked into” the pension industry. Ten large funds (up from four the previous year) now tie their executives’ compensation to the achievement of sustainability targets – although the details, including the percentage of executive pay tied to these targets, have not been disclosed.

The report also reveals a marked increase in the environmental and social (E&S) competencies found among pension-fund board directors. Qualitative research into fund directors’ backgrounds, publications and LinkedIn profiles revealed that the percentage of E&S-competent board members more than doubled over the previous report, reaching an average of 34%. Leading the pack are five boards – including the Canada Pension Plan Investment Board – that now include 50% or more directors truly qualified to understand what’s at stake.

But pension funds showed scant progress on diversity measures. In its assessment of both gender and racial diversity for the funds’ top management and their boards of directors, the new report rates the average fund’s diversity quotient at 26% – virtually the same score as the previous year.

The report includes a number of recommendations, written with the Smart Prosperity Institute, to help governments and pension funds continue to make progress. Given the fragmented regulatory structure governing pension funds, the report urges the federal and provincial governments to take “a coordinated approach” to developing policies that will prod the industry to do better.

The report also calls on pension funds to provide more transparency on how they define “green” investments, to track international sustainability standards, and to keep pressuring the businesses in which they invest to improve their own disclosures. The report suggests that pension funds develop portfolios of sustainable investments that represent at least 20% of their total assets under management – to ensure they’re doing their part to build a better planet.