Dr. Marcus Taylor is head of the department of global development studies at Queen’s University in Kingston. He is an adviser to the OECD’s climate adaptation governance task team.
As world leaders gather in Glasgow for the COP26 climate talks, there is growing recognition that the landscape of financial investment has shifted. Headed by former Bank of Canada governor Mark Carney, a highly visible campaign has sought to push global asset managers toward robust net-zero commitments suited to the scale of the climate crisis.
The Canadian university sector has embraced this task. Two weeks ago, University of Toronto president Meric Gertler compellingly argued the sector has a moral obligation to promote emissions-reducing behaviour across the wider economy. This rhetoric was matched by a commitment to decarbonize its $4-billion endowment and shed all direct investments in fossil fuel companies within a year.
Mr. Gertler’s announcement was rightly praised. Yet the university’s decision was made easier as it had just passed control of its sizable pension holdings to the University Pension Plan, a new investment fund that now manages the combined pensions of Queen’s, Guelph, Toronto and – from 2022 – Trent. The challenge of decarbonizing this $10.5-billion portfolio falls to the UPP. Will it follow the U of T’s bold approach and help set a new Canadian standard?
So far, the UPP has been highly cautious, pledging only to begin evaluating climate scenarios and their potential impact on investments. It indicates a willingness to set science-aligned targets to reduce emissions, but no commitments, mechanisms or timelines have been announced.
The stakes are high. Research shows a Paris-aligned transition plan is not just ethical, it is also vital to upholding fiduciary duty. A recent report by investment house Fidelity International highlights most funds significantly underestimate the impact of climate change on growth, inflation and asset prices. With governments applying a growing array of policy levers to reduce emissions, funds that hold investments in carbon-intensive sectors are increasingly vulnerable to asset volatility and decline. A new paper in the scientific journal Nature estimates that – should leaders at COP26 get serious about net-zero – half of the world’s fossil fuel assets could become worthless by 2036.
If funds such as the UPP are to prosper over the next decade, they cannot remain stuck on the operating principles of the past. What is required is a transformational approach. Fortunately, there are models of good practice now available that have been charted and tested by forward-thinking financial actors globally. If the Canadian university sector is to meet its moral obligations and fiduciary duty, funds must deliver on three key objectives.
First, they need to set immediate commitments to comprehensive, Paris-aligned transition plans that achieve net-zero status by 2050 at the latest. This overarching goal must be accompanied by clear interim targets for 2030 and 2040 including year-over-year objectives to meet them. If workable models are required, the European Union Paris-aligned benchmark would be a good place to start.
Second, any sustainable finance strategy must follow the universities of Toronto, Guelph, Laval, Concordia, McMaster, Simon Fraser, Lakehead, UQAM, British Columbia, Victoria and Waterloo in putting an immediate screen on fossil fuel investments and rapidly transferring investments out of the sector. As the president of Harvard unequivocally stated in September, fossil fuel investments contradict the need to decarbonize the economy and violate the university’s social mission.
Happily, we now have robust evidence from leading financial firms that divestment serves to advance a portfolio’s value. Lest anyone claim that such a step would be difficult, consider the example of Dutch pension fund PME that shed €1.2-billion ($1.73-billion) of fossil fuel investment in just six weeks. Waiting on the other side, the global renewable energy market is projected to reach $2.15-trillion by 2025, providing an opportune field for strategic reinvestment.
Finally, sustainable finance only works if there is full transparency. Funds such as the UPP should follow the Swedish model by disclosing publicly an annual list of their holdings alongside a breakdown of emissions from investments. Pension-plan trustees cannot develop an honest and productive dialogue with members without this strong commitment to transparency. An ethical pension fund must be an open pension fund.
Change can happen fast, even in a recalcitrant pension sector. Funds such as the UPP now need to step up. Our collective future – not just the health of our pensions – depends on it.
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