As the dust settles on a slew of annual results from Canada’s largest pension funds, there are positive signs that some public pension managers are slowly getting their act together on climate, spurred along by pressure from their members.
Three Ontario pension funds in particular stand out for improving their climate strategies in 2023: the Healthcare of Ontario Pension Plan (HOOPP) and the Ontario Municipal Employees Retirement System (OMERS) both released climate plans. And the Investment Management Corporation of Ontario (IMCO), the pension manager for the Ontario Public Service Pension Plan and other funds, continued to improve its management of climate-related financial risks.
Pension funds are invested (figuratively and literally) in our collective ability to meet global climate targets. They’re trying to make sense of the physical, transition, legal, regulatory and reputational risks that their assets will face in the coming years as the climate crisis intensifies and the policy response to it strengthens. At the same time, they’ve started asking themselves how they can profitably invest in climate solutions and decarbonization so that their investments are making the future better, not worse, for their members.
These pension funds are making progress, although the growing severity of potential climate impacts demands that they pick up the pace.
In March, HOOPP reported that it has invested $10 billion in climate solutions, with a commitment to reach $23 billion by 2030. In comparison, IMCO is starting from behind with $1 billion currently invested in the energy transition, but that means its commitment to reach 20% of assets under management invested in climate solutions by 2030 represents almost entirely new allocations, an exciting commitment to financing a clean, renewable future.
OMERS, IMCO and HOOPP have all placed some limits on new investments in fossil fuels, a signal that they’re getting serious about the risks such investments pose to their portfolios and the climate.
OMERS is shifting its portfolio allocation as it seems to realize the fossil fuel industry faces terminal decline: energy (oil and gas) dropped to 2% of OMERS’s assets under management as of December 31, 2023, down from 3% in 2022 and 4% in 2021. OMERS’s moves to reduce its fossil fuel exposure should help protect the long-term funded status of the pension.
While IMCO, HOOPP and OMERS are not yet climate leaders among Canadian pension funds, they moved further in the last year than their peers, many of whom made only incremental progress between 2022 and 2023. These three funds demonstrated that their internal capacity to measure and analyze climate-related risks and decarbonization pathways is increasing: IMCO began to report its financed Scope 3 emissions, the greenhouse gases emitted up and down its value chain and a key indicator of transition risk, in its 2022 ESG Report. OMERS developed an internal Climate Metrics Manual in 2023 and is now reporting greenhouse gas emissions for 95% of its in-scope portfolio. Last year, HOOPP secured an external climate change advisor to support its board and reported this year that its investment teams participated in multiple education sessions to understand and identify opportunities for investing in climate solutions.
There’s a lot of progress here for pension members to appreciate. The portfolio managers charged with investing for their futures are beginning to understand that there’s no retirement security on a dead planet.
But let’s not discount the work that’s still ahead. IMCO, HOOPP and OMERS, like most major Canadian pension funds, publicly state that they want to achieve real-world emission reductions and not just divest their way to their emission-reduction targets. Their goal is laudable and essential: climate safety depends on real-world decarbonization. So let’s take a look at what pension managers will need to do, beyond prohibiting new fossil fuel finance, to make good on this goal.
There’s a lot of progress here for pension members to appreciate.
First, they’ll need to make commitments to reduce their absolute financed emissions. HOOPP has made a small start with an absolute emission-reduction target in its real estate portfolio but has yet to set absolute targets across the entire portfolio.
Second, they’ll need to account for which emission reductions are a result of shifts in portfolio allocation and which are a result of decarbonization. OMERS has taken a step in this direction with its $3-billion commitment to a “transition sleeve,” which will see separate greenhouse gas reporting for investments geared at transitioning high-carbon investments.
Third, they’ll need to require all of their assets to develop and implement credible decarbonization plans. OMERS and HOOPP have both made commitments to have such plans for a portion of their portfolios by 2030, but these incomplete targets are inadequate. The 2030 targets would squander six crucial decarbonization years and would mean that even at the outset of the next decade, big portions of OMERS’s and HOOPP’s portfolios will still be without transition plans.
As investment managers start to undertake the hard work of decarbonization, they’re going to realize that real-world decarbonization means that almost everything in their portfolio will stop using fossil fuels. That should raise alarm bells about the financial prognosis for the private fossil fuel assets they currently own and the publicly traded oil and gas companies in which they hold shares.
Real-world emission reduction requires that investment managers stop directing new capital to fossil fuel expansion. Pension funds will want to avoid directly owning unsellable fossil fuel assets loaded with liability and threatened with lawsuits. If they are stuck with these increasingly risky assets, they must have a plan for the wind-down of oil and gas production or early retirement of assets that is aligned with safe emissions pathways. With public companies, they must redirect their climate engagement efforts from the companies that can’t or won’t decarbonize – such as oil and gas producers – to companies that can accelerate the energy transition – such as banks, insurance companies and utilities.
And to ensure real-world emissions reduction across the economy, pension funds must vocally and publicly throw their support behind ambitious government policies that curtail fossil fuel expansion, rapidly reduce emissions and accelerate the development of the renewable energy that will power all of their assets in the future.
Ontario pension managers are making progress in understanding and managing the complex interactions between their investments and climate stability. If they pick up the pace and build their capacity to drive real-world decarbonization, they’ll be taking the necessary actions that can help ensure a livable future for their members.
Laura McGrath is pension engagement manager at Shift: Action for Pension Wealth and Planet Health.
