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The COP26 summit in Glasgow has put major institutional investors in the spotlight as financiers of both climate change and solutions to combat it.
With assets topping $2-trillion, Canada’s biggest pension funds are key to the discussion, and current and future retirees are demanding their contributions be invested in assets that won’t make the problem worse.
All of the funds have talked a big game when it comes to the sustainability of their holdings. Two of the biggest, the Caisse de dépôt et placement du Québec and Ontario Teachers’ Pension Plan Board, have set net-zero goals with strategies for getting their portfolios in line to meet that target. Others have boosted low-carbon investments in recent years and have signalled they will announce their own plans to reach net-zero.
The big pension plans have also called for Corporate Canada to standardize disclosures of climate and other sustainability metrics, and now the country’s securities commissions are moving toward mandating that imperative. This, as Montreal gets set up to host an office of the newly formed International Sustainability Standards Board (ISSB), and Canada sets up a domestic standards organization.
These are all moves in the right direction. So far, though, it’s been difficult to make comparisons among the pension funds – how much of their portfolios are actually sustainable and what remains to be accomplished to meet environmental, social and governance targets.
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A new Canadian Pensions Dashboard for Responsible Investing aims to make that easier by scoring a range of sustainability metrics. It is designed to provide the industry with benchmarks for setting environmental and social goals, as well as data that could give governments and regulators information to set incentives to help meet national targets.
The inaugural edition reports that the 12 largest funds have $160-billion of assets under management that they consider environmentally sustainable, or roughly 7 per cent of the total. Its authors estimate that, to align Canada’s pension plans with a net-zero emissions future, the plans must get to 20 per cent sustainable assets, and annual low-carbon investments of 2 per cent to 5 per cent of assets under management.
That represents a huge investment in energy transition, though the report accompanying the dashboard does not specifically prescribe divesting fossil-fuel holdings. Pension funds have differing views on whether to pull capital from the industry or use their power as shareholders to push for changes to reduce their carbon emissions.
Ed Waitzer, a lawyer and former chairman of the Ontario Securities Commission, said the pension funds already know sustainability issues affect the long-term resilience of their portfolios and the companies and assets in which they invest. Now the task is improving the data.
“We’ve got to inject a little more rigour and materiality into ESG reporting. Hopefully this will advance that, as will the [ISSB] and the Canadian counterpart,” said Mr. Waitzer, who was on the project’s advisory panel.
The dashboard was developed by the charity Natural Step Canada and Smart Prosperity Institute, the policy think tank, in partnership with the green-business media outlet Corporate Knights and the Trottier Family Foundation.
It sets out a range of categories that allow for comparison, from five-year annualized return, to percentage of assets in sustainable solutions, to carbon footprint and whether the fund has set a net-zero target. The dashboard also gives details on whether executive pay is linked to ESG targets, how much more money the chief executive officer makes relative to average employees, and if the board of directors has environmental and social competency.
In the inaugural report, there are a lot of holes in the data. All of the pension funds have work to do to bring their disclosure up to standards that allow across-the-board rankings.
In terms of assets invested in sustainable solutions, Teachers is closest to the authors’ net-zero target at 14 per cent. The next three with the highest allocations, Canada Pension Plan Investment Board, the Caisse and Healthcare of Ontario Pension Plan, reach 11 per cent, 9 per cent and 8 per cent, respectively.
However, it is still difficult to make accurate comparisons because of differing definitions of what a low-carbon asset is.
Toby Heaps, one of the report’s authors, said the federal government could use the information to help increase sustainable investments. Ottawa, could, for example, change the tax credit policies for pension funds to give incentives for green acquisitions.
Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at jeffjones@globeandmail.com.
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Jeffrey Jones