Canadian pension funds with hundreds of billions in assets are ignoring the threat to their members’ retirement security as the global climate tips into a new and more destructive phase.
“There are some pretty ominous concerns that we’re approaching tipping points,” says Patrick DeRochie, senior manager with Shift Action for Pension Wealth and Planet Health, an educational and advocacy organization on Canadian pensions and climate.
“Pension funds need to understand that their mandate is impossible to fulfill without a stable climate. There is no retirement security unless we have a safe climate future to retire into.”
In a recent unpublished analysis of climate disclosures at Canada’s major pension funds provided exclusively to Corporate Knights, Shift Action found what DeRochie calls “cognitive dissonance” at many of the funds in their disregard for climate risks as global warming accelerates.
“This speaks to a fundamental lack of climate literacy in Canada’s financial institutions, including large pension funds, where they don’t seem to grasp the catastrophic and existential nature of this problem,” DeRochie says.
Shift Action’s findings are similar to reports released in July from Carbon Tracker, a global advocacy organization on climate and finance, and the Institute and Faculty of Actuaries (IFoA) and the University of Exeter, all based in the United Kingdom. The reports concluded that climate tipping points will soon trigger much greater economic risk than previously forecast.
Urgent net-zero actions are required by pension administrators and trustees, argues global pensions expert Keith Ambachtsheer.
“Scientific evidence strongly indicates that failing to do so would have material negative impact on our future ability to pay pensions, and hence constitute a clear breach of fiduciary duty,” Ambactsheer wrote in a recent newsletter.
Unlike asset managers such as mutual funds that don’t have long-term financial obligations, pension funds are considered asset owners, and are obligated to match their assets with their long-term liabilities, namely pension payouts to their current and future retirees. This makes their investment horizon extremely long, stretching decades into the future, to ensure they have adequate assets for their payouts and to keep contributions as low as possible for current workers.
Recognizing that climate change could pose long-term risks, many funds are now reporting under the Task Force on Climate-related Financial Disclosures (TCFD), a global voluntary framework established in 2015. Among its recommendations, TCFD advises companies and financial institutions to analyze and report their physical and transition risks under various climate scenarios such as 2°C of global warming above pre-industrial levels. (The world hit 1.5°C above those levels in July, the hottest month on record.).
'Cognitive dissonance' at AIMCo
One example of “cognitive dissonance,” DeRochie says, is at AIMCo, the $158-billion manager for Alberta public pension and endowment plans.
In its 2022 TCFD Report, AIMCo estimated that the risk to the value of its public equity and bond portfolio is higher under a 1.5°C increase in global temperatures than in 2°C and 3°C scenarios. The analysis says that 14% of its portfolio is susceptible to transition risk (arising from the shift to a low-carbon economy) under 1.5°C, compared with only 5.5% under 2°C and 0.6% at 3°C.
This can be explained by AIMCo’s overweighting in Alberta, particularly in the oil and gas and real estate sectors that would be massively disrupted in a low-carbon transition.
Potential losses from physical risks (economic damage from weather-related destruction), on the other hand, are estimated to be 14% of the portfolio under all three scenarios, even though the destruction to ecosystems, agriculture, business and infrastructure from extreme weather events is expected to be much more frequent and severe under the higher-temperature situations.
“I find that shocking because I can’t imagine how AIMCo’s beneficiaries can enjoy retirement security in a world that sees global warming of three degrees,” DeRochie says.
“There were limitations in what the model used could show in terms of physical risks,” an AIMCo spokesperson says. “We will continue to evaluate new models and tools as they evolve.”
DeRochie’s analysis found other major pension funds that downplayed the threats of climate change or avoided discussing the risks altogether.
PSP Investments, with assets of about $244 billion on behalf of federal public-sector pension plans, stated in its recently released 2023 TCFD Report that climate-related risk “increases at a relatively linear pace through the 2050s” under all projected scenarios of global warming, and that risks due to extreme weather-related events such as tropical cyclones and wildfires will be limited.
There is no retirement security unless we have a safe climate future to retire into.
- Patrick DeRochie, senior manager with Shift Action for Pension Wealth and Planet Health
This is not in keeping with projections by climate scientists, who predict that risks will hit new and dangerous tipping points and that previous “linear” risks of extreme heat and weather will accelerate perilously.
“PSP is vastly underestimating the systemic risks and existential nature of climate change,” DeRochie says.
Another fund that Shift highlighted is the Investment Management Corporation of Ontario (IMCO), with assets of $73 billion on behalf of Ontario public-sector pensions and endowments. In its 2021 ESG Report, IMCO stated that its portfolio is expected to deliver a modest positive return under a 2°C rise in temperatures, a modest negative return under other scenarios, and “is well-placed to benefit from climate opportunities and mitigate losses in higher warming scenarios,” including a 3°C temperature rise.
IMCO is demonstrating a lack of “climate literacy” by not realistically forecasting physical risks at the higher- temperature scenarios, DeRochie says.
Shift Action also found that the Healthcare of Ontario Pension Plan, the Ontario Municipal Employees Retirement System and the Ontario Teachers’ Pension Plan have conducted climate scenario analyses but have not publicly disclosed the results.
Such lack of disclosure leaves plan members in the dark about the pension risks of climate change, DeRochie says, “a catastrophic crisis that is impacting their lives every day now and is putting their retirement savings at risk.”
More dangerous climate ahead
Pension risks due to climate change are accelerating rapidly, a situation identified in the Carbon Tracker and IFoA studies released in July.
The reports note that the climate is entering a new and more dangerous phase in which factors such as glacial melt and faster-than-expected sea level rise will create much greater hardship and economic damage. They say that financial institutions must reflect these possibilities.
“Tipping points must be included if scenarios are to be realistic,” the IFoA report says. “They are no longer high-impact, low-likelihood events but are now high-impact, high-likelihood, and we need to mitigate and plan for them.”
“The vast majority of climate change economic papers are based on scientifically false assumptions,” the Carbon Tracker report says. “These assumptions drastically underestimate the damages that climate change could do to the economy.”
The reports state that no one knows for sure how much economic damage is ahead since there is no past data to draw on for guidance.
But the IFoA report offers a preliminary answer to that question by plotting curves based on temperature rise and destruction of gross domestic product (GDP). It’s important to understand that this is not a prediction; it’s a scenario based on assumed economic destruction.
But imagining the unimaginable – total destruction of the economy at 6°C temperature rise – the IFoA analysis suggests that even a 3°C temperature rise would destroy approximately 30% of the GDP, far higher than pension funds are contemplating.
DeRochie says such a distressing scenario should cause pension funds not just to provide better risk estimates of their assets, but to ramp up their efforts to decarbonize their portfolios and publicly urge government action to reach net-zero.
“You would think with such a massive threat to their portfolio and to the security of our national retirement funds, they would be making much bigger efforts to ensure that we do stay within safe climate limits,” he says. “Their mandates will become impossible to fulfill if they allow these terrifying global- warming scenarios to come to fruition.”
Eugene Ellmen is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association). He writes on sustainable business and finance.
