In October, the annual PRI in Person conference kicked off in Toronto with opening remarks from Luke Gould, the CEO of Mackenzie Investments, a Canadian leader in responsible investing and the lead sponsor of the event. “Sustainability is more than a buzz word. It is the most important progression in how we approach capital markets,” he told the gathered crowd. “Our commitment to sustainability is deeply rooted in the core values of responsibility, active ownership and transparency.”

Over the next three days, the conference convened discussions that highlighted the latest learnings, focus areas and key obstacles for the responsible investment community. Here are our top four takeaways from PRI’s 2024 conference, based on insights and conclusions from the world’s top responsible investors.

1. Sustainability disclosure is the new normal

Around the world, policies and regulations requiring companies to disclose their emissions and sustainability metrics have advanced at varying rates and to different stages of development, from barely nascent to quite mature. The European Union is leading the way with its sustainable finance taxonomy and Corporate Sustainability Reporting Directive. Meanwhile, Canada only recently released its plans to move forward with a green labelling taxonomy and a legal framework for corporate climate disclosures by major companies.

For investors, however, sustainability disclosure isn’t merely optional anymore; it’s essential. On a panel discussing Climate Engagement Canada – an initiative to foster dialogue between finance and industry for a just transition to a net-zero economy – TD Asset Management’s managing director, Priti Shokeen, said that her team now expects portfolio companies to make sustainability disclosures. Even if such disclosures are voluntary from a regulatory perspective, the information is critical for asset managers, especially now that they need to report their own portfolio emissions on ESG-labelled funds.

2. Engagement and divestment both have a role to play

The engagement versus divestment debate has been ongoing in the investor community. Since investors hold sway with companies as shareholders, the “engage” side of the camp argues that investors can more effectively push for change through active engagement. That is, by showing up to shareholder meetings and trying to steer portfolio companies toward decarbonization.

Pro-divestment groups argue that investors should sell shares in companies that operate in specific industries like oil and gas, for ethical reasons and to promote social change by making it harder for these companies and industries to raise capital. According to the Global Fossil Fuel Divestment Commitments Database, there are now 1,638 pension funds, philanthropic foundations and other groups worth more than US$40 trillion committed to fossil fuel divestment. Studies have shown that divesting really works, both to cause the stock prices of climate-damaging stocks to fall and to create additional financial value.

At the conference, it was clear that the responsible investment community has arrived at the conclusion that engagement and divestment should both be on the table, and that no one-size-fits-all approach works best for portfolio decarbonization.

“The idea that [the options are] either engage or divest is a bit of an antiquated, false dichotomy and doesn’t really reflect the reality that I have as an investor,” explained Joseph Bastien, trustee at the Wikwemikong Trust. “We buy and sell companies all the time for a variety of reasons, quite frankly.”

Investors can’t just divest from carbon-intensive industries and wipe their hands of their role in the net-zero transition, argued Deborah Ng, head of ESG and sustainability at GMO LLC. “If we don’t get real-world emission reductions, we’re not going to get to net-zero, and having a net-zero portfolio isn’t going to help,” she said.

3. Companies need transition plans that show capital-expenditure alignment with 1.5°C

It was clear at PRI in Person that investors are tired of waiting for governments to put regulations in place that will require companies to decarbonize. Carmen Velasquez, managing director for sustainable investing at Alberta Investment Management Corporation, said that her team provides specific feedback to companies on a case-by-case basis, from target-setting to scenario analysis – and that companies appreciate this.

But responding to this feedback with concrete metrics can be more challenging. For example, companies struggle to report how their capital expenditures align with a 1.5°C pathway. “There is no path to zero, so [we ask] how are you aligning capex over time?” Velasquez explained, describing how she helps companies think about sustainability reporting.

Company transition plans can help shine a light. “Disclosure defines the problem, action is required to address it,” said Mark Carney, the former governor of the Bank of Canada, during his plenary address at the conference. Reflecting on his work as a world leader in aligning finance with net-zero, Carney said that it took 10 years after the 2015 Paris Agreement for climate disclosure to become mainstream – and we can’t wait 10 more years for disclosures to be incorporated into plans for reducing emissions.

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“Governments should act now by adopting consistent and comparable taxonomies and mandating transition plans for large companies and financial institutions,” Carney said to a round of applause from the 2,000-person crowd. “Plan beats no plan. We are in a climate crisis. You need a plan to get out of it.”

4. Responsible investors must take a balanced and cautious approach to AI

“Can You Invest Responsibly in AI?” was the title of one of the final panels at PRI and a frequent topic of conversation among conference attendees.

There is a trifecta between AI, power demand and the need to decarbonize, said Kirsty Jenkinson, investment director at California State Teachers’ Retirement System. AI is going to present a considerable barrier to achieving net-zero goals, she explained, because of the exponential electricity demand required by the “hyperscalers” (the data centres and cloud computing companies that support modern AI).

On the other hand, AI could heighten and accelerate some of the shifts we need, such as in electricity-transmission bottlenecks. “Hyperscalers are paying massive premiums right now for carbon-free baseload power, [which] is creating opportunities for geothermal and other forms of [renewable] energy,” Jenkinson pointed out.

So how should investors evaluate companies’ use of AI from an ESG perspective? From ethics to privacy, cyber security, human rights and emissions, there are many overlapping ESG considerations that investors and companies need to consider to ensure that AI is being used responsibly.

It’s important for companies to include tech-literate people on their boards who are capable of judging whether it’s properly under control, advised Canadian AI expert Cameron Schuler, chief commercialization officer and vice president of industry innovation at the Vector Institute. Often corporate governance is the least frequently discussed pillar of the ESG framework, but the rise of AI means that responsible investors will need to take a closer look at how company executives are managing the risks it presents.

Jessica Carradine is project lead on Corporate Knights’ Climate Dollars initiative.

The post Four key lessons from the world’s top responsible investors appeared first on Corporate Knights.

CEC is a finance-led initiative, launched in 2021 and inspired by Climate Action 100+, the investor initiative that guided the Church of England’s attempts to engage Shell. CEC “drives dialogue” to help Canadian companies transition to net-zero. The project includes major long-term investors such as the Healthcare of Ontario Pension Plan (HOOPP), the Investment Management Corporation of Ontario, OMERS and the University Pension Plan. CEC’s initial list of engagement targets consists of 39 companies listed on the Toronto Stock Exchange. Its recently launched Net Zero Benchmark lays out a robust set of indicators to guide these engagements.  

Engagement can often be an important tool for investors. However, when it comes to the 10 oil, gas and pipeline companies targeted by CEC, an active ownership approach is a dead end.  

That’s the conclusion reached in June by the Church of England Pensions Board, which had tried to engage the oil and gas sector for over a decade, including leading a “very intensive” investor engagement with Shell, the world’s second– largest investor-owned oil and gas company. 

Canadian investors have long taken the engagement route with oil companies, with little to show for it. Engagement is worthwhile only if it’s viable for a company to do what you’re asking. And for institutional investors like pension funds, engagement must come with a strong degree of likelihood that the company can generate long-term value while meeting your demands.  

But it’s neither viable nor profitable for fossil fuel companies to decarbonize or to meet CEC’s expectation that they “develop and implement a comprehensive strategy to reduce GHG emissions … consistent with the goals of the Paris Agreement.”.  

To do so, they would need to go beyond investing billions in unproven, uneconomical and unscalable carbon capture and storage technologies to eliminate their upstream operational emissions. They also have to phase –down the production and sale of fossil fuels in order to address the larger problem: life–cycle emissions, which are largely the result of the end– use combustion of their products.  

Aligning fossil fuel companies with climate goals requires a rapid production decline this decade, with a complete wind– down of all production destined for combustion by 2050 at the latest. It is not prudent to assume the industry can generate strong financial returns for investors at the same time that it voluntarily phases itself out, while also addressing its massive and growing liabilities. These are not financial risks our pensions should be exposed to, especially when fossil fuel investments have already underperformed relative to the wider market over the last decade. 

If fossil fuel companies can’t profitably be engaged to phase out production, should investors be trying to engage them at all? 

One might argue that engagement could lead to short-term emissions reductions. For example, reducing methane emissions would yield fast and significant emission cuts in the oil and gas sector. However, methane regulations are moving forward from the government, and compliance ultimately rests with the regulator, not the investors. 

One might also argue that engagement is better than selling shares to investors who don’t care about environmental performance. But there’s little evidence that pension funds’ ownership of oil and gas companies has led to meaningful emissions reductions. It’s hard to see this dynamic improving when the company’s business model is irreconcilable with achieving climate goals. 

The fossil fuel industry itself provides a compelling reason to give up on engagement: fossil fuel companies are busy walking back their climate commitments. 

After telling investors that it would cut production each year for the rest of the decade, Shell now says it will invest $40 billion more in oil and gas production in the next 12 years, with production remaining stable until 2030. This was the last straw for the Church of England Pensions Board, whose chief executive officer finally realized that the oil and gas sector doesn’t have “sufficient ambition to decarbonize in line with the aims of the Paris Agreement.” The respected investor is now divesting from all fossil fuels by the end of 2023 and will no longer try to engage with oil and gas. 

The fossil fuel industry itself provides a compelling reason to give up on engagement: fossil fuel companies are busy walking back their climate commitments. 

We’ve seen this before. BP claimed it would reinvent itself as a renewables company, setting early and ambitious targets. Yet despite 10 of its top institutional investors being members of Climate Action 100+, BP has also walked back its 2030 climate targets. It’s no wonder that a June report from Net Zero Tracker concluded that fossil fuel companies’ net-zero plans were “largely meaningless.” 

Certainly, some CEC participants are already mapping out routes to net-zero and discovering that fossil fuel companies don’t have a profitable way to get there.  

HOOPP, for example, recently announced that as of 2025 it would end new private investments in coal and oil. It is, however, baffling that HOOPP recognizes fossil fuels’ financial risks and incompatibility with climate safety in its private portfolio, yet –– like other CEC participants –– the fund continues to hold shares in publicly –traded fossil fuel companies, as if these companies somehow have a different prognosis. For pension funds, holding such shares will become a drag on delivering the pension promise. 

Investors can better protect their beneficiaries’ savings by eliminating their fossil fuel exposure and pushing governments to use all available tools to responsibly oversee a managed decline of oil and gas production and demand while ensuring a just transition for the sector’s workers.  

One of the world’s most experienced engagement leads, the Church of England Pensions Board, has walked away from oil and gas. Canada’s climate– conscious investors could look naive, and risk losing money, if they continue to act as if these companies have a future worth investing in.  

Laura McGrath is pension engagement manager at Shift: Action for Pension Wealth and Planet Health.

The post The time for engaging with fossil fuel companies is over appeared first on Corporate Knights.

That was one of the conclusions from a new Corporate Knights report that revealed that a Colorado pension fund missed out on an additional US$2.7 billion in returns over the last 10 years by not divesting from fossil fuels.  

The report found that the Colorado Public Employees’ Retirement Association (Colorado PERA) could have earned an additional 21.8%, or $4,161, for each of its members from 2012 to 2022 if it had divested all its fossil fuel stocks in favour of the rest of the portfolio.  

“While it’s true that oil and gas stocks had a banner year over the past 12 months thanks to the Russia–Ukraine conflict, even taking this highwater mark for their stocks into account, over the past 10 years oil and gas was the worst-performing sector from a total returns perspective,” says Corporate Knights CEO Toby Heaps. “The gathering trends, namely the rapid electrification of transportation coupled with ever-cheaper renewable electricity, will materially disrupt demand for oil and gas – pointing toward another lost decade for remaining fossil fuel investors.”  

The report, which was commissioned by Boulder County, laid out three different scenarios in which the pension divested from stocks that earned 10% of revenue from thermal coal, oil and gas; divested from stocks that earned 50% of revenue from those sources; and divested from all fossil-fuel-related stocks. Researchers found that in each scenario, the pension fund missed out on similar returns.  

And a breakdown of the Colorado pension fund’s total returns by sector shows that oil and gas stocks had the lowest returns during this period (even with high returns from 2021 to 2022 due to skyrocketing energy prices caused by the invasion of Ukraine). Information technology had the highest.  

The revelation came as Colorado state lawmakers consider a bill that would direct the Colorado PERA board to adopt proxy voting procedures that “ensure that the board’s voting decisions align with, and are supportive of, the statewide greenhouse gas emission reduction goals.” If passed, the bill would also adopt new GHG targets for the state that would slash emissions by 65% (of 2005 levels) by 2035 and 100% by 2050. 

At a committee hearing on the bill this week, supporters urged lawmakers to approve the legislation, citing the Corporate Knights research.  

“Moral arguments aside, this should be a major red flag for anyone interested in the long-term financial stability of PERA’s investments,” said Giselle Herzfeld, a defunding climate disaster coordinator with 350 Colorado. “Portfolio managers have a fiduciary duty to identify risks in their portfolio and strategize to avoid and eliminate these risks.” 

The Colorado pension fund is far from alone when it comes to financial institutions continuing to invest in fossil fuels despite the obvious risks of doing so. Some of Canada’s largest pension funds, such as the Canada Pension Plan Investment Board and the Public Sector Pension Investment Board, continue to finance oil and gas expansion. And according to a report by Reclaim Finance, banks and financial institutions that signed on to the Glasgow Financial Alliance for Net Zero (a group with assets worth more than US$130 trillion) have continued to pour hundreds of billions of dollars into fossil fuels.   

Nor is Colorado PERA alone in its proven missed opportunities. In 2016, Corporate Knights analysis showed that the New York State Common Retirement Fund lost at least US$5.3 billion from its investments in coal, oil and gas. And Corporate Knights research revealed in 2015 that the University of Toronto lost more than $550 million by not divesting.  

But a growing number of pension funds are now adopting sustainable investing strategies. In 2021, Corporate Knights found that 12 of Canada’s biggest pension funds had quietly unloaded fossil fuel stocks over the previous 10 years. And in 2018, Ireland became the first country to divest its national investment fund completely from fossil fuel companies. (This decision followed Corporate Knights research that showed the fund had investments in at least 152 fossil fuel companies.)  

It’s time for Colorado PERA and others to get on board to prevent the retirement savings of their members from being squandered on the pathway to catastrophic climate change.  

The post Colorado pension fund loses US$2.7 billion by not divesting from fossil fuels 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.

As the burning of fossil fuels presents us with yet another summer of catastrophic impacts, the pressure is growing for institutional investors to either phase out their oil, gas and coal and pipeline assets or explain how they’re aligned with a safe retirement future for pension members like us. Are pension funds starting to hear beneficiary concerns and beginning to reduce their high-carbon exposure? 

For our pension fund, Canada’s seventh largest, the answer appears to be yes. Ontario’s $121-billion pension fund for half a million municipal employees, OMERS, announced in July that it’s selling its stake in the largest gas-fired cogeneration plant in the United States. The sale marks the third time in the last year that OMERS has divested a major fossil fuel asset. 

Since late 2021, OMERS has announced it would sell its 25% stake in Scotia Gas Networks (SGN), the second-largest gas distribution network in the United Kingdom, as well as its 80% joint stake in GNL Quintero, Chile’s largest fossil gas import terminal. Meanwhile, regulatory filings show that OMERS has reduced its holdings in publicly traded fossil fuel companies by 3 million shares, or about 17%, since June 30, 2021. 

As pension plan members, we’ve been asking OMERS to either demonstrate how its fossil fuel assets have credible decarbonization pathways or divest them. And OMERS might finally be listening. 

The climate crisis is already costing lives and wreaking havoc around the world. Oil and gas companies and infrastructure don’t have a profitable financial future or a credible, science-based decarbonization pathway in a world that must rapidly phase out fossil fuels. Continuing such investments increases the risk of asset stranding, locks in carbon pollution and heightens the risk of catastrophic global heating outcomes.  

The long-term investment calculus for fossil fuel assets has changed as the cost of renewables plummets, governments and companies commit to net-zero emissions and countries become increasingly aware that a reliance on fossil fuels is a threat to energy security. At least four Canadian pension funds own stakes in assets that transport gas from Russia, and all must be nervously eyeing the changing risk and return calculation as the war in Ukraine continues. In OMERS’s case, portfolio company NET4GAS was downgraded by Fitch based on the threat (now realized) of Russia restricting its flow of gas, along with Europe’s determination to reduce its reliance on said gas. 

Are pension funds starting to hear beneficiary concerns and beginning to reduce their high-carbon exposure? 

Fossil fuel assets are at increasing risk of becoming stranded in a world getting serious about climate action. To limit global heating to 1.5°C, 40% of developed reserves of fossil fuels must stay in the ground, and some fossil fuel assets need to be retired early. A company with unextractable oil and gas reserves, or the infrastructure built to transport them, can’t generate the long-term returns on which a pension fund relies, and it may need to be sold at a loss when markets realize that their products are incompatible with a stable climate. 

Financial regulators in Canada and elsewhere warn that the fossil-fueled climate crisis threatens the stability of the global economy and financial system. There is no safe place for our pensions to invest our savings if the climate crisis spirals out of control. 

OMERS is no doubt aware of the growing calls for fossil fuel phase-out from its members and employers. Beneficiaries and labour stakeholders have written to the fund requesting that it account for its fossil fuel investments. Municipalities including Toronto, Kingston and Brampton have passed motions urging the fund to phase out fossil fuels. 

We’ve felt some optimism about OMERS’s significant investments in energy storage, battery efficiency and renewable energy platforms. We welcomed OMERS’s commitment to net-zero emissions across its portfolio by 2050, but that is just a first step. Without OMERS committing to align its portfolio with a safe climate, we’re left wondering about what kind of future we’ll face in retirement. OMERS needs to strengthen its short- and mid-term climate commitments, restrict any new investment in fossil fuels and set a deadline by which it will phase out investments without a credible decarbonization pathway. 

Putting our pension savings and our planet on the road to climate safety requires immediate action to halve greenhouse gas emissions this decade. We don’t see how oil, gas and pipelines fit into a plan to do that… and we’re glad OMERS is starting to see that, too. 

The post Is one of Canada’s largest pension funds quietly divesting from fossil fuels? appeared first on Corporate Knights.

Just before the launch of COP26, the UN climate conference in November, the DivestInvest network calculated that endowments, portfolios and pension funds worth nearly US$40 trillion have now committed to divesting their fossil fuel holdings. That tally, they noted, is bigger than the combined GDP of the U.S. and China. From the US$16-billion Ford Foundation (the ultimate fossil fuel fortune) to Quebec’s giant pension fund, the Caisse de dépôt et placement du Québec, 1,485 institutions have now committed to some form of fossil fuel divestment.

And this fall, research out of the University of Augsburg in Germany has concluded that divestment isn’t just chipping away at the fossil fuel sector’s social capital. “Divestment can lead to more sustainability in the real economy,” said Martin Rohleder, the university’s chair of finance and banking, calling it “the first empirical evidence on the impact of divestment.”

The researchers found that divestment by equity funds can “exert sufficient selling pressure to cause the stock prices of climate-damaging stocks to fall in the long run,” said Rohleder.

Over a four-year period, the divested firms reduced their carbon emissions, while emissions from non-divested firms grew by 10%. Their conclusion: “Overall, our findings support the divestment movement’s hope that a critical mass of investors is able to reduce carbon emissions.”

The findings should no doubt add fuel to the movement’s fire. While the divestment movement was largely born on campuses decades ago, some big names have finally joined the divestment deluge in the latter half of 2021 – including California State University, Loyola University in Chicago, Harvard and the University of Toronto. U of T’s multifaceted divestment plan, announced in October by president Meric Gertler, offers a vision of what’s possible. Gertler said U of T will divest from all direct investments in fossil fuel firms within 12 months, and divest from pooled investments by 2030.

The university will allocate 10% of its $4-billion endowment to sustainable investments by 2025 (the “invest” side of DivestInvest). U of T is also the first university to join the U.N.’s Net-Zero Asset Owner Alliance, a global group committed to setting increasingly stringent emission targets on the road to net-zero.

Of course, revolutions can get messy.

In July, a new organization called University Pension Plan (UPP) assumed management of $10.5-billion worth of pension plans from three Ontario universities: Toronto, Guelph and Queen’s. UPP’s CEO, Barbara Zvan, helped develop sustainable investing protocols at Ontario Teachers’ Pension Plan, one of Canada’s largest pension funds. She calls responsible investing “a non-negotiable … It’s now simply good governance, and a condition for long-term value.”

But Zvan is under fire from 100 faculty and staff demanding that UPP divest from fossil investments, reallocate those funds to climate solutions and adopt “robust climate-related engagement criteria” for all investee companies. The activists claim many universities are discouraged from divesting by funders and alumni who work in the fossil fuel sector – and that UPP’s fresh start gives it a chance to “redefine best practices” in the sector by fiercely embracing divestment.

Zvan says it’s too soon for such specific action. Recently, she praised institutional investors’ potential to “engage” with fossil-fuel companies to drive change – a step the divestment movement dismisses as fantasy, as well as a common stalling tactic.

The struggle continues.

The post Divesting works: Study finds ditching fossil stocks lowers corporate footprints appeared first on Corporate Knights.

Divestment from fossil fuels is accelerating around the world. But as forward-thinking investors move their money and fossil companies sell off their most polluting and criticized resources, companies looking to generate short-term gains are snapping them up. While this may shuffle assets off one company’s books, the world’s carbon emissions keep climbing, risking our safety, security and economic well-being.

As pressure to clean up corporate environmental performance mounts and companies increasingly look to shed dirty assets, how do we ensure we’re not just rearranging deck chairs on the Titanic? We need an equitable wind-down of fossil fuels and the funding that supports it.

There are now 1,500 organizations with assets totalling more than US$39.8 trillion that have already sold or are in the process of selling off fossil fuel holdings. Besides dozens of universities (including Harvard and the University of Toronto), the divestment list now includes France’s Banque Postale, the State of New York, and Europe’s largest pension, ABP. It’s hard for an oil giant to ignore: in 2021, Shell labelled fossil fuel divestment campaigns a “material risk.” Meanwhile, Bloomberg Intelligence reported that “oil companies are finding it increasingly difficult to raise financing amid rising environmental, social and governance (ESG) concerns, while banks are under pressure from their own investors to reduce or eliminate fossil-fuel financing.”

According to two recent reports from Goldman Sachs, the cost of developing fossil fuels has surpassed the cost of renewable energy projects. “That’s an extraordinary divergence, which is leading to an unprecedented shift in capital allocation. This year will mark the first time in history that renewable power will be the largest area of energy investment,” Goldman Sachs analyst Michele Della Vigna told Bloomberg.

These developments are critical. But even in the face of these tectonic shifts, national governments still plan to produce twice the fossil fuels than what is in keeping with limiting average warming to 1.5°C above pre-industrial levels, according to the United Nations Environment Programme (UNEP).

Not only are we failing to wind down fossil fuel production and use; we are adding to the problem. The markets alone cannot ensure this happens in a fast and equitable way. We need an actual government-regulated phase-out, and removing financing of the problem is key.

In the necessary transition to renewable energy, half the world’s fossil fuel assets could soon be financially worthless. In fact, new research published in Nature Energy shows that this could happen as early as 2036. Energy conglomerates have various reasons to peer into their crystal balls and determine which of their assets are at risk and worth shedding. There’s also incentive for the banks and other institutions financing these fossil fuel companies to sell off assets as well. Yet fossil-fuel-dependent communities, as well as workers and their retirement funds, ultimately will bear the costs – not bank executives.

Private equity and vulture firms are buying up coal-fired power plants, operating them at a lower cost for up to 15 years, and then shuttering them earlier than their original lifespan, to much fanfare. They claim this is doable because the lower operating costs lead to a quicker payoff, and in turn an earlier closure of facilities.

The world’s largest asset manager, BlackRock, is getting in on the action, along with banks such as Citigroup, HSBC and the Asian Development Bank (ADB). They’re framing the dirty asset takeovers as beneficial to the planet, but ultimately, they’re running distressed coal plants into the ground or extending their operational lives to grab the last cash possible before assets are stranded. Either way, these schemes should be viewed with a huge grain of salt. None of these financial institutions have good track records of actually meeting climate commitments, including reducing the emissions footprints of the projects they finance or getting out of financing fossil fuel infrastructure altogether.

What’s needed are just and equitable buyouts that permanently retire those assets without propping up fossil fuel companies or pushing the cost of environmental liabilities onto taxpayers. Retiring coal power plants early will, in 2025, cost an estimated US$164 billion, according to research from American non-profit RMI – a small price to pay when climate disaster damages topped US$210 billion worldwide in 2020 alone. The costs to retire facilities are dropping as more coal power plants become uncompetitive.

Retiring coal plants early will cost US$164 billion – a small price to pay when climate disaster damages cost US$210 billion in 2020 alone.

The shuffling of fossil fuel assets and the fact that oil and gas companies are subsidized to the tune of US$11 million per minute make it clear that the necessary wind-down of fossil fuel production and funding won’t take place without an agreement and framework in place. It certainly won’t happen in a way that will protect workers and communities most dependent on oil, gas and coal and that lack the resources to move away from them.

That’s why a growing network of parliamentarians; local governments including Los Angeles, Vancouver, Sydney and Barcelona; Indigenous leaders; youth; more than 1,000 civil society organizations; and more than 100 Nobel Prize laureates have endorsed the principles of a Fossil Fuel Non-Proliferation Treaty. This first-of-its-kind global initiative aims to increase transparency and accountability to phase out fossil fuels in the ground and accelerate a just transition. It would advance action along three pillars.

First, end the expansion of fossil fuels. In May 2021, the formerly fossil-fuel-friendly International Energy Agency issued a report stating there was no longer any “need for investment in new fossil fuel supply in our net zero pathway. Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our pathway, and no new coal mines or mine extensions are required.”

Second, wind down production of existing fossil fuel stockpiles at the needed 5% annually, as per UNEP. Third, create agreements for wealthy fossil-fuel-producing countries to lead the transition and support countries more dependent and less financially resourced to move to clean energy and diversify their economies.

The markets, on their own, will not deliver the right signals and incentives as long as they are skewed by fossil fuel subsidies and policies that reward short-term profits despite the long-term risk to us all. International co-operation among governments is essential to wind down the source of the problem.
While some may grumble, the costs of a fossil fuel phase-out are affordable – and they are no doubt cheaper than the costs of climate inaction on our economies and our collective health.

Tzeporah Berman is the international program director at Stand.earth and chair of the Fossil Fuel Non-Proliferation Treaty.

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But some analysts say it isn’t much of a victory from a climate perspective. 

In the transaction, BHP’s oil and gas assets will merge with Woodside Petroleum, an Australian gas producer, in exchange for shares, which will be distributed among BHP’s shareholders. So these oil and gas assets will still be in operation; they’ll just be owned by another company, and one that has only “an aspiration” of achieving a net-zero target by 2050. 

“Woodside is far from being the poster child of the net-zero movement,” says Axel Dalman, an oil, gas and mining analyst at think tank Carbon Tracker. “I think the way that they phrase their net-zero target … is the weakest wording I’ve heard in this context. That really shows that it’s not really a fundamental part of their plan. Is it a climate win? I wouldn’t say so.”

Dalman says Woodside has committed to emitting less through their own processes – the extraction and production of the commodities that they sell – but not so much from the end-use emissions of their products. According to Carbon Tracker, 85% of the emissions from a barrel of oil occur when it’s burned to power transportation. 

The structure of the merger also means that the transaction isn’t necessarily a clean break for BHP shareholders from these assets, as they will still own 48% of the new venture. 

On the same day, BHP also announced plans to spend US$5.7 billion on building what is expected to be one of the world’s largest potash mines in Saskatchewan, betting on what the company hopes will be increased agricultural use of the fertilizer in years to come. 

Of the big three ingredients in fertilizer, potash, or potassium (the others are nitrogen and phosphorus), is easily the least emissions-intensive. Jeff Schoenau, a soil scientist and professor at the University of Saskatchewan, says that potassium serves as an important plant nutrient that is a zero-emissions fertilizer, as it doesn’t volatilize. “Potassium actually could be considered to have a positive impact on the greenhouse gas balance by helping to increase photosynthesis in plants and also to increase carbon stores in the soil,” he says.

When it comes to the production of potash, the mining process does emit greenhouse gases. Nonetheless, nitrogen is a much less sustainable fertilizer, as it emits nitrous oxide – a greenhouse gas with 300 times the warming effect of carbon dioxide. Synthetic nitrogen fertilizers are also produced from natural gas. In 2017, agricultural soil management accounted for 74% of total nitrous oxide emissions in the United States, according to the U.S. Environmental Protection Agency. 

Globally, potash mines have stoked opposition from Indigenous and environmental groups with concerns about deforestation, disruptions to local communities, and potential impacts on waterways. But little public opposition has materialized against BHP’s massive Saskatchewan project. 

BHP’s moves to shed its oil and gas assets and its turn towards potash could put the company in a good position to benefit from the energy transition. But Dalman is less confident in Woodside’s position, as decarbonization will require a winding down of both oil and gas. Woodside may be willing to take on the risks of BHP’s oil assets, but Dalman believes the optimism around gas that likely fuelled this deal will evaporate in the next few years. 

“People are getting around to the fact that oil is probably losing its shine, but they’re still saying gas is a transition fuel,” he says. “I think that will start to break over the next few years as the economics get worse and as the reality of the pathway we need to take becomes clearer.”

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“It has taken eight years of student action to get to this point,” says Emily Lowan, lead organizer of Divest UVic. “I wish the speed of action was quicker, but still it is a major victory that should be celebrated.”

The campaign is not over. Activists are now focused on UVic’s $445-million endowment foundation. Over the past four years, the endowment has cut fossil fuel investments to below 2% of its portfolio, but it has not as yet promised full divestment. “We are still only halfway there,” Lowan says.

The developments at UVic capture the state of divestment campaigns on many Canadian campuses: some high-profile wins but with miles to go for climate-change activists determined to remove the fossil fuel industry’s social licence to operate.

Despite only a few full divestment successes to date (see sidebar), momentum is with the campus activists, researchers say.

“It’s definitely picking up steam,” says Jaylene Murray, a research associate with the University of Saskatchewan’s Sustainability and Education Policy Network, which identified 38 campaigns at Canadian universities in a 2019 study on divestment activism. “We are seeing increases globally in terms of environmental stewardship and activism … and not just in terms of divestment, but social justice movements as well.”

University of Ottawa professor Darlene Himick, who received a Social Sciences and Humanities Research Council grant to examine the impact of fossil fuel divestment campaigns globally, points to the success of previous student drives to end apartheid and tobacco smoking. “The history is there,” she says. “Students know they can make change.”

Long-time divestment advocate Cam Fenton, Canada lead for 350.org, says campaigns once rooted in moral and environmental concerns have added financial considerations to the case against fossil fuel investments.

“To some degree, the financial argument has caught up with the moral argument,” he says, noting among other factors the poor performance of energy investments over the past decade.

Earlier this year, the non-profit Institute for Energy Economics and Financial Analysis reported that the oil and gas sector “placed at the bottom of the S&P [Standard and Poor] 500 in five of the last seven years and second-to-last in a sixth.”

In 2019, after years of resistance to divestment, the University of California cited financial risk factors in deciding to make its US$13.4-billion endowment and $70-billion pension fund fossil-free. “Our job is to make money for the University of California, and we’re betting we can do that without fossil fuel investments,” UC chief investment officer Jagdeep Singh Bachher co-wrote in an op-ed for the Los Angeles Times explaining the decision. “We believe hanging on to fossil fuel assets is a financial risk.” Bachher’s position caused a stir in the investment community, considering he had previously been deputy chief investment officer at Alberta Investment Management Corp., the provincial Crown corporation that manages pension, endowment and government funds in the oil-rich province.

In Canada, relentless pressure from students, faculty and staff has prompted some universities to reconsider past opposition to fossil fuel divestment.

In 2019, the University of British Columbia reversed its previous position and promised to divest its $2-billion endowment from fossil fuels “as soon as possible,” and also declared a climate emergency.

“That was a huge victory,” says Michelle Marcus, divestment lead with Climate Justice UBC, emphasizing the significance of the declaration. “They are making a political statement that we need to get away from fossil fuel for reasons of the climate crisis,” she says.

But many universities reject calls for outright divestment.

“This is a complicated area, and divestment is such a simple solution to a very, very complicated problem,” says University of Toronto president Meric Gertler. “We don’t think we would be doing everything we could if all we had done was divest.”

Instead, his institution relies on environmental, social and governance (ESG) factors in investment decision-making; engagement with carbon emitters; and disclosure and reporting policies to curb the carbon footprint of its University of Toronto Asset Management (UTAM) Corp., which manages more than $11 billion in endowment and pension assets. U of T has pledged to reduce the “carbon intensity” (carbon emissions per dollar of investment) of its pension and endowment portfolios by 40% by 2030, compared to 2017, a target exceeding the federal government’s 30% goal.

Fossil-fuel-sector investments represent 2% of UTAM’s pension and endowment portfolios, down from 5 to 6% five years ago, says its president and chief investment officer, Daren Smith. “If you focus on oil and gas companies in the portfolio, it represents a declining share of the portfolio, and we would expect that to continue to decrease in the future.”

In December 2019, compared to 2017, UTAM reported a 12.9% reduction in absolute greenhouse gas emissions. Eliminating all equity investments in fossil fuel companies based on the 2019 carbon footprint analysis (and reinvesting the proceeds) would have reduced carbon emissions by 13%, according to the university. “[The difference is] so small because so much of the carbon footprint in any portfolio is associated with those activities that are downstream users of fossil fuels, not the firms associated with the production and distribution of fossil fuels,” Gertler says.

Campus activists are unpersuaded

Carbon-intensity measures represent a ratio, not an absolute reduction, argues Evelyn Austin, a member of multiple climate-change advocacy groups, including Divestment and Beyond at U of T. Moreover, she warns of loopholes in the university’s carbon-cutting commitments.

“This idea of shareholder engagement and ESG is the biggest hurdle that divestment is facing,” she says. The real power of divestment is as a “public statement,” she argues. “It is about removing the social licence that we grant to fossil fuel companies when we invest in them.”

University administrators say they share advocates’ sense of urgency.

In March, McMaster University president David Farrar asked his board of governors for an exit strategy from fossil fuels “as soon as possible.” The strategy would likely accelerate the university’s pledge made last October to achieve a 45% carbon reduction in public equities in its $1.3-billion portfolio by 2030 and carbon-neutral investments in publicly traded shares by 2050.

Since 2018, McMaster had cut exposure to Carbon Underground 200 companies to 2.1% from 4.5% of investments, with holdings expected to have ESG/sustainability plans and be aligned to the 2015 Paris Agreement.

“The only way the transition [to a low-carbon future] is going to happen is that everyone who needs the energy has to change, as well as everyone who makes energy,” says Deidre Henne, assistant vice-president of administration and chief financial officer at McMaster University. “So, everyone is part of the problem and the solution.”

But divestment advocates question the rationale for engagement with oil companies, given their poor returns and a global shift away from fossil fuels.

“We are going from high carbon to low carbon, and it is going to happen in a matter of years,” says Mark Campanale, founder and executive chairman of Carbon Tracker Initiative, a London-based think tank that analyzes the impact of the transition from fossil fuels on capital markets.

“In Canada, with many but not all [investment managers], I get a sense that they don’t believe what they are seeing in front of their eyes about the energy transition.”

With fossil fuel dependence waning, Campanale argues that net-zero targets that use carbon offsets to achieve a desired emission goal become less relevant measures of responsible investing. “Say we reduced our emissions,” he says. “That is not the same thing as saying you are protecting the capital of your pension fund from the downside threats of the [energy] transition.” In effect, he urges investment managers to focus on the big picture: the global move toward a lower-carbon economy.

As some Canadian universities continue to weigh their options, several institutions have chosen to incorporate divestment in a wider strategy tied to improving the economic and social well-being of society.

In 2019, Montreal’s Concordia University committed to divest its endowment from coal-, oil- and gas-sector investments by 2025, with the goal of a 100% sustainable portfolio by the same date. The university also pledged to double to 10% (from 5%) the share of investments in enterprises with social and environment impact (such as a Montreal company that recycles out-of-date food for new uses).

Divestment, alone, “just won’t solve the [climate] problem,” says Marc Gauthier, university treasurer and chief investment officer at Concordia, who prefers a sustainability-focused portfolio with social impact. The pandemic, he says, has only reinforced the strategy.

Before COVID-19, “the talk was always about climate risk,” he says. Now, “the pandemic has raised social issues that are connected to climate risk.”

Concordia’s divestment-plus approach also plays out at UVic. In its divestment announcement, the university earmarked $10 million for a renewable-power impact fund linked to the UN’s Sustainable Development Goals. A year ago, UVic pledged to invest 25% of its portfolio assets in sustainable investments.

Through a blend of divestment and responsible investing, says UVic treasurer Andrew Coward, “we are still able to achieve our financial returns and adhere to our fiduciary duty and at the same time meet our carbon reduction [targets].”

Divestment of the working capital fund, he adds, accelerates UVic’s promise to reduce carbon emissions by 45% by 2030.

Despite gains, activists vow to remain vigilant.

Radiologist Eric Halgren, a faculty leader of University of California at San Diego’s divestment movement, says advocates continue to press the university to release implementation details of its fossil-free commitment. Still, given growing attention to the financial case for divestment, he says, “it is encouraging to see that the smarter people are deciding to get out of fossil fuels, and it will become an avalanche.”

At UVic, divestment campaigner Lowan is similarly encouraged, but watchful.

“It feels like the administration is finally listening in terms of climate action and social justice,” she says, of UVic’s divestment move. “We are really excited about the direction things are going, and we are hoping to make more progress in the future.”

How do Canadian universities fare on divestment?

After more than a decade of divestment campaigns, more than half of Britain’s public universities, including Cambridge University, have pledged to divest. In the United States, 55 universities and colleges have committed to full or partial divestment, according to 350.org. In Canada, so far, eight universities have pledged to full or partial divestment. Here’s a range of Canadian university responses to date:

• Université du Québec à Montréal is the first Canadian university to fully divest of fossil fuels, doing so in 2017. Others set their own timetables: Lakehead University, 2023; University of Guelph, 2025; University of British Columbia, “as soon as possible”; and Concordia University, 2025.
• Laval University announced divestment plans in 2017 but two years later switched to a “responsible investment” strategy, promising a 30% cut in the carbon footprint of its foundation by 2025 and 50% by 2030. “We decided to expand the scope of our commitment to greenhouse gas emissions of all sectors instead of a limited focus on the fossil fuel industry,” a Laval spokesman stated in an email.
• University of Toronto and McGill University both reject divestment, instead pursuing a multipronged approach to reduce the carbon footprint of holdings. Last June, with 13 other Canadian universities, the two institutions announced a “responsible investment” charter that commits them to consider environmental, social and governance (ESG) factors in investment decisions; measure and reduce carbon over time; and engage with carbon-emitting companies to curb climate-related risks.
• In February, a coalition of 10 Canadian university endowments and pension plans announced they would work with SHARE, a non-profit investor advocacy organization, to engage with corporations (in which they have holdings) on climate change risks.

Jennifer Lewington is an intrepid reporter and writes regularly on many topics, including business school news.

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Complete divestment from carbon-intensive industries has become a popular strategy internationally, and institutional funds—including, most recently, Concordia University in Montreal—have excluded oil and gas producers from their portfolios. Across the border, Harvard and Yale are facing pressure from their students as well as faculty to divest immediately – earlier this week Harvard’s Faculty of Arts and Sciences voted overwhelmingly in favour of divesting the university’s endowments.

In December, McGill’s Board of Governors opted not to divest its endowment fund outright but instead announced a major plan to decarbonize it. The decision prompted much debate – one tackled at the McGill International Portfolio Challenge, the world’s largest buy-side finance competition where 87 student teams from around the world tackled the divestment conundrum in November.

This year’s challenge centered on a hypothetical $15 billion pension fund based in Newfoundland and Labrador, a province highly invested in the local oil and gas industry. In the scenario, the board of directors are under pressure to divest but deeply conflicted on how to proceed.

Teams examined the pros and cons of the divestment strategy. On the one hand, divestment sends a clear message that the fund is serious about ending its dependency on fossil fuels. It also reduces the fund’s exposure to the risk that the fossil fuel industry will become stranded once greener technologies take over.

On the other hand, the divestment strategy raises a number of questions and concerns. Will the fund maintain its political power and ability to advocate for pro-environmental corporate decisions if it gives up ownership stake in the local oil producers? Is it advisable to divest from the entire oil and gas sector when no other technology can presently replace it as an equivalent energy source? Is a divestment strategy solely focused on oil and gas producers consistent with the broader objective of reducing carbon emissions? Last but not least, is a divestment strategy consistent with the fund’s fiduciary duty to generate returns to its pensioners?

The top solutions, vigorously vetted by professors, pension experts and asset managers, addressed concerns of all stakeholders and found win-wins that aligned environmental sustainability with long-term financial profitability.

The conclusion: the first pillar of a successful solution is to establish a planned transition toward responsible investments. The fund should progressively and partially divest from its holdings in oil and gas over the next 5 to 7 years in order to reduce its exposure to this sector. It should also push the province to sign a moratorium on future offshore oil exploration to re-channel future investments toward greener sectors and diversify the economy.

The transition should be communicated upfront and include feasible milestones to establish credibility. It should be moderate and progressive to ensure that no stakeholder is disproportionately affected. By retaining some ownership of the oil producers, the fund will continue to have a say on their business operations and environmental, social and governance (ESG) practices.

It was decided that the money from the sales of oil and gas holdings should be re-invested in a diversified set of sustainable ventures where the province has a need (infrastructure, real estate) and a comparative advantage (ocean technologies, aquaculture, low-cost electricity from its large hydro project). These investments will encourage entrepreneurship in sustainable ventures and decrease the fund’s reliance on oil and gas. As well, the fund should partner up with private equity firms to achieve economies of scale and acquire expertise in these sectors.

The second pillar of a successful strategy is to leverage the fund’s large size to establish a long-term and active stake in local ventures that have positive social and environmental impact. Doing so will incite the fund to implement good governance practices, work with local communities and make sure every stakeholder gains from the projects. This in turn will lead to improved risk management and profitability over the long-run.

The third pillar of a successful strategy is to globally diversify a large share of the portfolio in order to increase returns and decrease risk. By investing in a variety of ESG-focused funds that focus on clear metrics, such as CO2 emissions and ESG scores, the fund will be able to control its carbon footprint and ESG engagement while investing in a large number of firms.

In many respects, the McGill Board of Governors’ plan to decarbonize its endowment fund echoes the winning proposals’ recommendations to partially and progressively divest from stocks of fossil fuel industries, become a more active shareholder, and make new investments in green ventures. In addition, the fund’s mandate will be revised to prioritize ESG considerations for future investments.

I expect campuses across the continent to continue deliberating over divestment tactics over the coming months. In the end, win-win solutions will need to be comprehensive, pragmatic, cognizant of the needs of all stakeholders, and align environmental sustainability with long-term financial profitability. After much debate, what is clear is that environmentally sound investment strategies should go beyond a pure yes/no response to divestment.

Sebastien Betermier is Associate Professor of Finance, Desautels Faculty of Management at McGill University.

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