“Our pension funds are amongst the world’s largest and most sophisticated investors,” Carney told the World Economic Forum in Switzerland. The funds are one of Canada’s prized assets, along with the country’s educated workforce and its sizable reserves of energy and critical minerals. “We have capital, talent and a government with the immense fiscal capacity to act decisively.”

But some key questions were left unasked: If Canada’s pension funds are so powerful, why aren’t they investing more in their home country? Is it possible for these behemoths of global finance to commit more of their multitrillion-dollar assets to the Canadian economy in this time of need?

In the past, most of Canada’s major pension funds have pushed back against even a whiff of political interference. Yet recently, some pension CEOs are saying they are open to investing more in Canada, especially in strategic sectors of national interest. Deals like the recent Caisse de dépôt et placement du Québec (CDP) investment in renewable-energy company Boralex show that some of the funds are already moving in this direction.

Are these sleeping giants getting ready to pony up the capital needed to kick-start Canada’s critical industries? Here are the central issues in this debate.

The Maple 8’s global reach

Canada’s major pension funds rank among the top in the world. The eight largest, known as the Maple 8, manage more than $2.5 trillion in assets. The largest of these, the Canada Pension Plan Investment Board (CPPIB), is the seventh-largest pension fund in the world. At the end of 2025, CPPIB held $781 billion in assets for the CPP, which serves 22 million Canadian workers and retirees.

CDP, which manages funds for the Québec Pension Plan and other public funds and investors in Quebec, is number two in Canada at $517 billion. The Ontario contingent includes three large public-sector funds: the Ontario Teachers’ Pension Plan (OTPP), the Healthcare of Ontario Pension Plan (HOOPP) and the Ontario Municipal Employees Retirement System (OMERS). The Maple 8 also includes British Columbia Investment Management Corp. (BCI) and Alberta Investment Management Corp. (AIMCo), investing funds in B.C. and Alberta, and Public Sector Pension Investments (PSP), managing federal public-service pension funds.

The funds have developed a management style known as the Canadian model, marked by independence from the governments that established them, internal professional management (rather than outside managers) and global investment in stocks and bonds and alternative assets such as real estate. The formula has mostly been successful. The annual average return of Canadian pensions has outperformed all but a few countries since the financial crash of 2008, although gains have slipped in the last two years as a result of declining real estate and private equity assets.

Pensions already invest in Canadian stock markets. Could they invest more?

The global profile of these funds has sparked calls to invest more in Canada. A CBC investigation in February showed that most of the Maple 8 invest far more in the United States than in Canada. CPPIB, for example, has $366 billion invested in the United States (47% of its total) and only $98 billion in Canada (13%). OMERS’s portfolio is 55% American, and PSP is 41% invested in the United States.

The level of U.S. investment seems shocking, bordering on unpatriotic, considering the recent economic pain inflicted by the United States. Only three of the Maple 8 funds have more assets invested in Canada than in the United States – HOOPP, OTPP and AIMCo.

We have the capital available right now to make those investments. We’re just waiting for those opportunities to manifest themselves.

– Michael Wissell, CIO, HOOPP

But compared with Canada’s share of global markets, the pensions are actually over-invested in their home country. According to the MSCI World Index (a broad-based investment index holding companies across the globe), the United States represents 70% of total world investment markets. Canada’s share is tiny at only 3.6%.

The funds argue that their mandate is to invest across the world in markets, sectors and companies that will deliver the best returns at acceptable risk to ensure that they can meet their long-term pension payouts.

Paul Calluzzo, a professor at the Smith School of Business at Queen’s University and a researcher for the Institute for Sustainable Finance, points out that pension funds have a legal and ethical obligation to invest in the best interests of their beneficiaries. “If a pension fund was to invest more in Canada, or support strategic industries, or just invest in infrastructure that was strategically important, that would be a cross-subsidy where the pension holders are footing the bill for something that benefits everyone,” he says.

The pension funds contend that it’s prudent to over-invest somewhat in Canada because of their “home-field advantage” through their detailed knowledge of local companies and cultures. But governments should resist the urge to think of pension funds as a national piggy bank, Calluzzo says. “There’s a temptation to say, ‘We have these huge pools of capital; let’s do something with them that helps Canada,’” he says, adding that it’s important to be mindful that pensions don’t belong to governments. “Those huge pools of capital are from the people who have been paying into their pension all those years. That’s something that should be respected.”

Pension CEOs open the door, but just a crack

Nevertheless, over the last few months, several pension fund CEOs have said they are open to investing more in Canada.

“As a nation, we have a significant opportunity to build a stronger and more resilient future, and OMERS wants to be part of that,” CEO Blake Hutcheson said in February. “We like the advantage that our relationships and on-the-ground expertise offer.” OMERS is looking for deals that support the fund’s financial objectives and Canada’s growth, he said.

“We have the capital available right now to make those investments,” Michael Wissell, chief investment officer at HOOPP, told Reuters on March 10. “We’re just waiting for those opportunities to manifest themselves.”

Last June, PSP CEO Deborah Orida said her fund is actively looking for additional Canadian investments. After years searching for global alternative investments, she told Bloomberg, “at PSP we’re asking ourselves: Have we been underleveraging our home-ice advantage.”

And in a speech last September, John Graham, CEO of CPPIB, cheered what appears to be a new spirit of cooperation by federal and provincial policymakers. “Unity and coordination will initiate the nation-building projects Canada requires. And those are exactly the projects that international and domestic investors, including us, are eager to invest in.”

Two years ago, it was a different story. The funds vigorously pushed back against a letter signed by 90 Canadian business and financial leaders, calling for rules to require pension funds to invest more domestically.

But last year’s Trump tariffs have created an elbows-up mood among Canadians, including millions of members of the plans the funds manage. The funds are also confident that Carney – former central banker and Bay Street executive – will seek ways for them to finance national projects without increasing risk or jeopardizing returns. “We can do more together, respecting that they [pension funds] are independent but at the same time looking at opportunities,” Finance Minister François-Phillippe Champagne told CBC in February.

Key sectors: Energy, critical minerals, defence and infrastructure

So what are the strategic sectors that could be targeted for additional investment?

Certainly energy – especially electrification – is one promising area. According to a list of proposals by the Major Projects Office (MPO), the federal agency is looking at a number of clean-energy proposals, including small modular reactors in Ontario, northern hydro projects and a British Columbia transmission line. The Shareholder Association for Research and Education recently released a report saying $220 billion in proposed new investment is threatened unless Canada’s power grid is urgently modernized, a need expected to be a focus of the upcoming federal electrification strategy. Support for clean energy has also been triggered by the recent spike in oil and gas prices caused by the U.S.-Israel invasion of Iran.

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Last week’s $3.8-billion acquisition of Boralex by CDP and Brookfield Asset Management is a sign of growing pension interest in clean energy. The investment “aligns with our commitment to the energy transition and our determination to help build Quebec-based champions,” said CDP executive vice president Kim Thomassin. The investment follows the fund’s $10-billion takeover last year of Innergex Renewable Energy. (CDP is unique among the Maple 8, however, operating with both financial and Quebec development mandates).

Rising oil and gas prices from the Iran war also means that liquified natural gas projects and Alberta’s proposed Western oil pipeline could also be a focus for pension funds. Oil and gas investment hinges on how long the price hikes will last and whether they will minimize the future glut in fossil fuels caused by the global renewable-energy transition. AIMCo is a large investor in Alberta’s oil and gas industry, including a major holding in the Coastal GasLink pipeline. There have been suggestions that the Alberta government may pressure AIMCo to ramp up its provincial oil and gas investments. To date, though, AIMCo has not expressed interest in the proposed oil pipeline.

Critical-mineral projects have also been identified as priorities for the MPO. The federal government adopted a national critical-minerals strategy in 2022, aimed at promoting domestic production and processing. According to the most recent strategy update, there are 140 mining projects planned for development by 2034, worth $72.4 billion in potential investment.

The Carney government’s Defence Industrial Strategy could also create investment possibilities. No defence-related proposals have yet been identified by the MPO. However, the government’s “buy Canadian” approach aligning defence purchases to the battery and critical-minerals sectors, as well as its upcoming electrification strategy, has potential to generate additional defence-sector investment, said New Economy Canada, a coalition of 60 business, Indigenous and labour organizations.

Infrastructure including transport projects, data centres, waste and water facilities, and agriculture also hold future investment potential. CPPIB has already identified data centres as a key area, pointing to its $225-million data-centre investment in Cambridge, Ontario. Transportation, such as the Alto high-speed rail project, also holds potential. CDP is already taking a lead role in this proposal, joining the consortium developing the project.

Reaching out for help from Australia

With such a long list of potential projects, the funds have called on some of their colleagues in Australia to lend a hand.

Representatives of the Maple 8 funds (plus the Investment Management Corporation of Ontario, manager of Ontario government pensions) signed an agreement with a group of large Australian pension funds to foster joint investments. They pointed to “a shared heritage, open and resource-rich economies, strong credit worthiness” and legal institutions as solid terrain on which to build.

Like Canada, Australia has a group of fast-growing pension funds with a relatively small domestic investment market, prompting it to look for partners around the world, particularly for infrastructure investments. IFM Investors, one of the Australian signatories, already invests in two Canadian infrastructure companies, Global Container Terminals in Vancouver and Enwave Energy in Toronto. IFM said it intends to invest up to $10 billion in Canada over the next decade “with the right policy settings in place.”

With this agreement, the funds are exploring possibilities for a larger pool of infrastructure investors, a strategy that would reduce risk for any individual fund.

It’s all about the projects

In the federal budget in November, the government set a target of enabling $1 trillion in total new investments over the next five years in Canada. The government’s charm offensive is aimed at persuading pension funds and other investors to open their wallets to help meet this ambitious target.

Ultimately, it will come down to whether the right projects can be put on the table. Proposals will need to meet three requirements: they’ll need to be in the national interest, demonstrate a high probability of returns that meet or exceed fund benchmarks, and represent an acceptable level of risk. Governments, project proponents and pension funds are looking for investments that check all three of these boxes.

Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now the Responsible Investment Association).

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The Office of the Chief Actuary (OCA) is failing to consider worst-case scenarios or the true extent of the potential impacts of global warming on the sustainability of Canada’s public finances, say Tanya Jemec and Karine Peloffy of Ecojustice, Canada’s largest environmental law charity, writing on behalf of the pension watchdog Shift Action for Pension Wealth and Planet Health (Shift). “While it is a fundamental duty of all actuaries to act in the public interest, the OCA’s obligation is particularly acute as its reports are used to inform policy direction and highlight risks for government and other decision-makers on matters that affect millions of people,” they write. For Canada’s public pension plans, “mismanaged climate change risks could harm the financial security of beneficiaries, reduce benefits and increase costs or require government bodies to cover shortfalls.”

The OCA has already published reporting that forecasts how climate change could affect Canada’s gross domestic product under three transition scenarios. But what the OCA fails to include in its reports and assessments, Shift and Ecojustice claim, is the systemic risks of climate change, such as crossing critical thresholds that would lead to irreversible changes to Earth systems. “The collapse of ice sheets, the halting of major ocean currents and permafrost melt are all examples of tipping points that are increasingly likely to be triggered if the global average temperature rises more than 1.5°C above pre-industrial levels,” they write.

In 2023, the Institute and Faculty of Actuaries (IFOA) in the United Kingdom published a report stating that tipping points must be included if scenarios are to be realistic. Such events are now considered “high impact, high likelihood, and we need to mitigate and plan for them. Ignoring them in scenarios and modelling significantly understates risk,” the authors write.

The chief actuary needs to do its job by ensuring its statutory actuarial valuations of federal plans and programs actually reflect the reality of these risks, so that they can be managed before it’s too late.

– Adam Scott, executive director, Shift Action

The OCA is also underestimating the consequences of climate change for GDP, according to the standard of “the most recent, authoritative climate science and risk modelling,” Ecojustice and Shift say. While the OCA estimates no impact on baseline GDP by 2030 under a failed transition scenario and only an 8% decrease by 2050 and a 30% decrease by 2100, by contrast, the IFOA predicts a negative GDP impact of 65% to 73% by 2100 under the same scenario. “Climate change is undoubtedly an existential threat of the highest order, a fact the OCA should recognize,” the authors of the letter argue.

Responding to a request for comment, media relations for Billig’s office said they were still considering the contents of the letter from Ecojustice and Shift. This article will be updated when further response is provided.

Risk exposure for Canadian pensioners

As fossil fuels are the primary cause of climate change, and the Canada Pension Plan Investment Board (CPPIB) holds significant investments in the sector, Canada’s public finances are exacerbating the problem – and the risks to beneficiaries. “By directly contributing to the accumulation of greenhouse gases in the atmosphere, CPPIB’s fossil fuel investments facilitate rising physical risks across the portfolio,” Ecojustice and Shift argue. These investments are vulnerable to such transition risks as asset stranding, devaluation and sudden repricing as a result of policy changes, technological advances or market changes.

In a white paper published last September, the risk management firm Ortec Finance analyzed the climate risk exposure of five large pension systems worldwide, including the United States and Canada. The report found that North American pension funds could see their investment returns decline by 50% or worse by 2040 under a business-as-usual scenario where global warming reaches 3.7°C.

Left unaddressed, climate change will affect the U.S. pension system the most out of the five included in the report, but Canada also faces severe consequences. “A large majority of Canadian pension funds are highly exposed to physical risks,” according to Ortec. “The country’s exposure to severe climate events such as wildfires and droughts exacerbates these risks.”

The factors harming asset performance include rising temperatures, extreme weather and declining agricultural productivity.

“Many of Canada’s largest pensions are sleepwalking into a climate crisis with existential consequences for their members,” Adam Scott, executive director of Shift, said in a statement. “The chief actuary needs to do its job by ensuring its statutory actuarial valuations of federal plans and programs actually reflect the reality of these risks, so that they can be managed before it’s too late.”

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Shift and Ecojustice have made five recommendations to the chief actuary’s office: 1) include realistic climate tipping points and cascading impacts in risk assessments; 2) reassess economic models to avoid underestimating worst-case climate scenarios; 3) provide clearer qualitative descriptions of climate uncertainties and risks; 4) give greater consideration to risks from fossil fuel investments; and 5) integrate climate impacts into baseline financial projections.

“As a multifaceted crisis with severe impacts on the planet and its inhabitants, climate change impacts pension plan liabilities and assets, as well as beneficiaries and contributors,” the letter concludes. “The risks cannot be ignored until 2030 or 2050: They must be addressed now.”

Mark Mann is the associate editor at Corporate Knights. He is based in Montreal. 

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Canada’s national pension plan is getting poor marks for failing to pursue its commitments on climate change, even as some of the country’s top plans are taking concrete steps to meet their ambitious goals, says the watchdog group Shift Action for Pension Wealth and Planet Health in a new report.

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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.

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Among the 11 funds surveyed, the Canada Pension Plan Investment Board (CPPIB), which manages retirement savings for more than 22 million Canadians, “stands out as the biggest investor in and defender of fossil fuel investment in the Canadian pension sector,” Shift Action for Pension Wealth and Planet Health concludes in its second annual Canadian Pension Climate Report Card. “CPPIB appears to have an ideological commitment to fossil fuel investment.”

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The government has started to take action, but more is needed. Last week, in the fall economic statement, the federal government promised action on sustainable finance. It committed to a green and transition taxonomy (a classification system for investments) and mandatory climate-related disclosure from large private companies. It also proposed to tackle greenwashing by strengthening competition law. If done well and implemented quickly, these policy promises would make the financial sector more sustainable and help Canada reach its 2030 emission-reduction commitments.

Canada can succeed on its global climate commitments only if financial institutions move in the same direction and allocate money to climate solutions instead of climate pollution. Yet many Canadian banks, pension funds, insurers and large companies still underinvest in clean energy and disproportionately invest in oil, gas and coal. Earlier this year, Canada was recognized as a “low-regulation jurisdiction” on sustainable finance by a UN sustainable investment group.

Recent polling by conducted by Pollara Strategic Insights shows that more than two-thirds of Canadians want new rules from the government to ensure that financial institutions invest sustainably. In general, respondents to the poll said they want the long-term good of society to be prioritized over short-term profits.

In other words, Canadians have connected the dots: a safe planet means a better quality of life with less volatility and more affordability. Regulating climate finance, as esoteric as it may seem, would make investments work in people’s best interests.

Some policy-makers have stepped up to the plate.

Last year, independent Senator Rosa Galvez introduced the Climate-Aligned Finance Act (CAFA), a comprehensive legislative proposal that would align the financial system with climate action. The proposal moves beyond traditional frameworks, which consider only how the financial sector is affected by climate risk, to also tackle how investments in polluting industries can make climate change worse.

The bill is finally being debated in the Standing Senate Committee on Banking, Commerce and the Economy. Last week was the first hearing of what is expected to be a many-session study of CAFA. Independent climate experts are expected to be called to discuss why this bill is important for Canada to meet its climate commitments.

If passed, CAFA would ensure that financial institutions reduce the emission footprints of their investments and invest in climate resilience. This would bring transparent reporting and clarify which institutions are taking real climate action versus which are counterfeiting their green credentials. The bill would create a duty for leaders of financial institutions to consider – and take – climate action.

Climate finance policies like CAFA have support. More than 120 organizations, climate experts and academics endorse the bill, even writing to other senators to encourage them to support it too.

Some banks have taken issue with parts of climate-aligned financial policy, in particular with the elements that would be most effective at stymieing fossil fuel investments. But others have endorsed the bill. In support of the bill, Vancity notes that “it is imperative to transform our economy into one that protects the earth and guarantees equity for all,” and Desjardins Caisse d’économie solidaire applauds the bill for its ability to “upgrade our federal financial system in the face of climate change.”

Climate-aligned financial policy is key to spurring new green activity across the economy, meeting the best interests of Canadians and enabling Canada to succeed on its climate commitments. The key policy: credible climate transition plans should be required across the economy, in which financial institutions and large companies publish plans to reduce their investments’ emissions in line with a safe climate. To have a scientifically credible climate plan, an institution would have to show how it would reduce its investments’ emissions by half by 2030 and achieve net-zero by 2050 or sooner.

People in Canada want regulation for a more sustainable financial system that aligns with climate action. What is needed now? Quick progress on the Climate-Aligned Finance Act and for the federal government to turn its policy promises into policies.

Julie Segal is senior manager of climate finance at Environmental Defence Canada.

Melanie Snow is the federal legislative affairs specialist at Ecojustice.

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“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. 

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United States District Judge Matthew Kacsmaryk confirmed that he will hear a challenge to a federal rule approved last year enshrining the right of pension administrators to consider ESG issues. Twenty-five Republican states; an oil drilling company; and the Western Energy Alliance, an oil and gas association in the western U.S., are challenging the rule in Kacsmaryk’s jurisdiction, where he is the only district court judge.

Even though President Joe Biden recently vetoed Republican-led legislation banning the consideration of ESG factors by pension administrators, the court challenge is likely to succeed given Kacsmaryk’s conservative legal background.

“It’s no coincidence that Judge Kacsmaryk has on his docket a higher concentration of hot-button divisive social policy cases than any other judge in the country – people are seeking him out,” said Stephen Vladeck, a professor of constitutional law at the University of Texas at Austin, in an interview with The Guardian.

The case is expected to be heard in Kacsmaryk’s court in coming months. If he rules in favour of the challenge, it will go to the Fifth Circuit Court of Appeals, a conservative-oriented court in which 12 of the 16 active judges were appointed by Republicans. If the appeals court rules in favour of the challenge, it will move to the Supreme Court, which is also dominated by Republican appointees.

“Part of what makes Kacsmaryk especially attractive to conservative litigants is not just his actions as a trial judge, but also that his cases will end up in the Fifth Circuit, which is by far the most conservative in the country,” Vladeck said.

In the U.S., pension administrators are responsible for managing US$12 trillion in retirement savings for more than 150 million workers under private and public employer-based retirement plans. Over the years, they have come to understand that their duty as fiduciaries requires them to incorporate all risk-and-return drivers, including ESG factors, in making decisions on the investment of these assets.

A Trump-era rule changed this traditional understanding, drawing a distinction between “pecuniary” and “non-pecuniary” issues, and prohibited managers from considering “non-pecuniary” issues. The new Biden administration rule scrapped the pecuniary/non-pecuniary distinction. It specifically allows – but does not require – fiduciaries to consider “the economic effects of climate change” and other ESG factors when making investment decisions, so long as the considerations are rooted in a risk-return analysis.

Pensions could face “legal quagmire”

It’s not clear whether the Biden administration would be able to continue with its permissive ESG regulation if the courts rule against it. But just as Kacsmaryk’s ruling last week on the abortion drug has caused confusion about the legality of a drug that has been on the market for more than two decades, a decision against the ESG rule could also sow confusion among pension trustees and managers about their right to consider ESG factors.

Losing the right to include ESG factors in their assessments of risk and return would put trustees and managers in a “legal quagmire,” say a group of scholars writing for the Harvard Law School Forum on Corporate Governance. In an example of how traditionally non-pecuniary issues can come to be seen as financially material, the authors point to executive compensation, once seen as a moral issue of management overpayment but now fundamentally linked to company financial performance and corporate governance.

In the last year, ESG has come under attack by many Republicans who have accused the industry of practising “woke capitalism.” There is no evidence for this claim, which has been widely debunked by the investment industry.

“The Republicans would like us to believe that some bizarre viral epidemic of wokeism has spread into America’s great financial companies, into the investment advisors, into the banks, into all kinds of fiduciaries, and that needs to be somehow excised,” said Senator Sheldon Whitehouse, Democrat of Rhode Island, during a legislative session. “That is not what has happened.”

It’s no coincidence that Judge Kacsmaryk has on his docket a higher concentration of hot-button divisive social policy cases than any other judge in the country.

-Stephen Vladeck, a professor at the University of Texas at Austin

Nevertheless, the financial industry is alarmed by the Republican attacks against it. Responding to new state rules, the US$173-billion Texas Teacher Retirement System confirmed it no longer does business with any money managers identified by the state for supposedly “boycotting” the oil and gas industry. As well, 11 major banks and money managers told Bloomberg recently that they are quietly avoiding use of the term “ESG” in their communications and marketing materials in red states for fear of antagonizing Republican lawmakers.

This chilling effect comes at an important time, when pension fiduciaries are needed to assess investment risks and opportunities posed by a rapidly growing fossil fuel industry. Fossil fuel assets hold a strong risk of becoming stranded as renewable energy becomes more competitive against oil and gas, and climate policy changes like carbon pricing, vehicle emission standards and industrial CO2 and methane caps require a fossil fuel phaseout.

These risks are increasing. The New York Times recently reported that the fossil fuel industry is surging, driven by higher oil and gas prices caused by the Ukraine war. Oil and gas projects approved or about to be approved in 2023 will bring the equivalent of tens of billions of barrels of oil to the market. This includes the US$8 billion Willow oil project on Alaska’s North Slope, which was approved last month, as well as major projects in Qatar, Saudi Arabia, Russia and smaller producing countries like Canada.

The Net Zero Asset Owner Alliance (NZAOA), part of the United Nations Glasgow Financial Alliance for Net Zero, recently published guidance for its insurance and pension fund signatories, saying there should be no new investments in oil and gas fields, infrastructure or unabated gas-fired power stations. NZAOA said such projects are not consistent with its members’ climate change target, which is to limit global warming to no more than 1.5°C.

Eugene Ellmen is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association). He writes on sustainable business and finance.

The post How U.S. pension funds could lose their right to consider ESG in upcoming court battle appeared first on Corporate Knights.

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.

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