In previous decades, gas utilities were considered stable, low-risk, inflation-proof assets for institutional investors.
This is no longer the case.
Canadian pension funds have risked billions of dollars in workers’ retirement savings on gas companies that make the climate crisis worse and that face terminal decline as the energy transition accelerates. While gas companies insist they can decarbonize their operations and protect their business model by repurposing their infrastructure to transport and use hydrogen, these flimsy claims don’t stand up to due diligence.
As climate change provokes stronger emission-reduction policies and as cheaper zero-carbon technologies proliferate, gas companies are soon entering an era of shrinking demand and lost customers. This could result in billions of dollars in stranded gas assets and significant losses for Canadian pension funds.
New research published by Shift reveals the extent of these climate-related financial risks. Nine of Canada’s public pension managers are co-owners of 22 private gas distribution, transmission, power generation, processing and storage companies, collectively operating nearly 350,000 kilometres in pipelines globally.
As long-term investors with a fiduciary duty to invest in members’ best interests, pension funds are obligated to manage climate-related risks. Owning thousands of kilometres of gas pipelines has become incompatible with this duty.
– Patrick DeRochie, Senior Manager, Shift Action for Pension Wealth and Planet Health
Demand for low-cost electrification technologies, like heat pumps, renewable energy and battery storage, is skyrocketing. Gas companies face the prospect of lower demand for gas transmission and distribution – leading toward a “gas utility death spiral.” Gas utility customers are increasingly choosing to leave the gas system (for example by swapping their gas furnace for a heat pump). As more customers ditch gas, utilities must spread their fixed infrastructure costs over a shrinking pool of customers, driving up prices for those remaining. That in turn pushes even more gas customers to leave.
There’s no safety for pensions in betting that the energy transition will occur slowly. The longer these pipelines operate – perpetuating the production, transportation and combustion of methane – the worse the climate crisis gets. This, in turn, multiplies risks for pension portfolios across the wider financial system.
Banking on hydrogen puts pension managers in a bind
Gas companies downplay their exposure to this growing transition risk by touting plans to repurpose their infrastructure to transport and use hydrogen. Hydrogen may well play a niche role in the energy transition in hard-to-decarbonize industrial processes. But expert analysis has poured cold water on the potential for hydrogen’s use in existing gas infrastructure, concluding that hydrogen is “expensive to produce, difficult to transport, and a second- or third-best clean energy solution in almost all proposed markets.”
A peer-reviewed 2024 study found that “hydrogen is not an effective decarbonization tool for use in homes and buildings” and that “attempts to repurpose gas systems for use with hydrogen face major safety, technical, political, regulatory and economic hurdles.” A meta-review of 54 studies on hydrogen for home heating concluded that none supported heating with hydrogen at scale.
This should set off alarm bells for Canadian pension managers.
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The Ontario Teachers’ Pension Plan recently bought large stakes in gas distribution and transmission companies in the United Kingdom and Italy. Similarly, the British Columbia Investment Management Corporation co-owns gas pipeline networks in Brazil, Czechia, Germany and the United Kingdom. Both pension managers claimed that their gas investments were about “net-zero transition” and “decarbonization” but have neglected to disclose credible plans for how these high-carbon assets could profitably transition.
The Canadian pension sector’s significant exposure to gas companies puts these investment managers – and the pension plan members they invest on behalf of – in a bind.
As long-term investors with a fiduciary duty to invest in members’ best interests, pension funds are obligated to manage climate-related risks. Owning thousands of kilometres of gas pipelines has become incompatible with this duty.
In the long run, there are no winners when investors bet against the energy transition.
Pension managers should act quickly to ensure the climate integrity of their risky gas investments – helping to protect both financial returns and a healthy planet on which to enjoy them. This means increasing transparency and disclosure of gas company holdings and how they are aligned with pension fund net-zero commitments, halting investments in unjustifiable gas and hydrogen infrastructure, and acknowledging the need for gas companies to transform their business model and plan for the decommissioning of gas infrastructure over time.
It’s time for pension funds to stop pretending that gas is a “transition fuel” or that hydrogen will rescue their soon-to-be-stranded gas assets. If gas companies refuse to align their business with credible decarbonization plans, they don’t belong in pension portfolios.
Patrick DeRochie is the senior manager for Shift Action for Pension Wealth and Planet Health, a charitable project that tracks the fossil fuel investments and climate policies of Canadian pension funds and mobilizes beneficiaries to engage their pension managers on the climate crisis.
