OMERS’ 2022 Annual Report Provides Climate Updates, Promises 2023 Climate Action Plan
OMERS’ 2022 Annual Report, released February 27, 2023, shows that the pension fund is making progress in its approach to climate-related financial risk, although significantly more action still needs to be taken. Expectations are high for OMERS’ forthcoming Climate Action Plan.
SUMMARY
OMERS has reduced its portfolio’s carbon emissions intensity and announced a new 2030 emissions intensity reduction commitment and $3 billion “transition sleeve”. However, OMERS has not yet set a timebound target for aligning companies in its portfolio with a net-zero pathway, has yet to set a target for investments in climate solutions, and continues to invest in the fossil fuels that are causing the climate crisis. OMERS has committed to release a Climate Action Plan in 2023; Shift hopes to see OMERS take a significant step forward by releasing a credible climate plan that addresses identified gaps.
DETAILED ANALYSIS
OMERS’ 2022 Annual Report, including its Task Force on Climate-Related Financial Disclosures (TCFD) report, provides some positive updates, including:
A reduction in the carbon intensity of the OMERS portfolio
OMERS achieved a reduction in portfolio emissions intensity of 32% below 2019 levels by the end of 2022, surpassing the fund’s 2025 goal of a 20% reduction. OMERS attributed this achievement to divestments from high-carbon assets (including fossil fuel linked assets), and emissions cuts from other large holdings (see p.68).
As OMERS beneficiaries have previously noted, in late 2021 OMERS sold its 25% stake in Scotia Gas Networks (the second-largest gas distribution network in the United Kingdom), and in 2022 it sold its 80% joint stake in GNL Quintero (Chile’s largest fossil gas import terminal) and its ownership stake in Midland Cogeneration Ventures (the largest gas-fired cogeneration plant in the United States). There is no place for oil, gas or pipelines in a climate-safe future, and OMERS appears to be sensibly shifting its Infrastructure portfolio away from owning these risky assets.
OMERS’ Annual Report implicitly draws the connection between reducing its risk exposure and the divestment of fossil fuel assets, noting that "Our Infrastructure team made significant progress in optimizing its portfolio, reducing exposure to hydrocarbons, and reducing the portfolio Weighted Average Carbon Intensity" (p. 64). These are positive moves, but OMERS has yet to explain exactly how these moves fit within a comprehensive climate strategy.
A new commitment to reduce the emissions intensity of the portfolio by 50% below 2019 levels by 2030
We commend OMERS for reducing its portfolio emissions intensity and setting a 2030 target to keep the fund on track toward its net-zero by 2050 commitment. While OMERS’ 2030 commitment is not as ambitious as some funds (the Ontario Teachers’ Pension Plan has committed to a 67% reduction in emissions intensity below 2019 levels by 2030, Caisse de dépôt et placement du Québec to a 60% intensity reduction below 2017 levels, and University Pension Plan to a 60% intensity reduction below 2021 levels), it’s a laudable step up in ambition from OMERS original 2025 commitment.
$19 billion in green assets as of December 31, 2022
For the second year in a row, OMERS calculated and disclosed its “green asset exposure” as defined by the International Capital Market Association Green Bond Principles. The amount remained unchanged as a percentage of AUM since the end of 2021, when OMERS held $18 billion in green assets. OMERS has not yet set a target for increasing the percentage of its AUM invested in climate solutions.
OMERS current investments in renewable energy include:
Ownership of Leeward Renewable Energy, a wind, solar, and energy storage company.
A 19.4% stake in Azure Power acquired in 2021. Azure Power is a renewable power producer in India which faced a crash in share price in August 2022 after the resignation of its CEO and disclosure of a whistleblower complaint.
Northvolt, a Swedish company that makes the lithium-ion batteries used to power electric vehicles. OMERS first invested in Northvolt in June 2021 and reinvested in the company in July 2022.
Navisun LLC, a solar power producer acquired by OMERS in November 2021.
A 49% stake acquired in October 2021 in FRV Australia, a solar power firm.
Joint acquisition (with Dutch pension fund APB) in May 2022 of Groendus, an energy transition platform focused on solar projects, electric vehicle charging, and energy storage.
An undisclosed investment in Group 14 Technologies, a company improving the performance of lithium ion batteries.
USD $100 million invested in August 2022 in NovaSource Power Services, which operates and maintains over 20-GW of solar power plants across 11 countries and announced its expansion into Australia in September 2022.
A $3 billion “transition sleeve” for “assets playing a key role in the global transition toward a lower-carbon economy”
While this “transition sleeve” is mentioned in OMERS’ TCFD report, no further details are provided. OMERS must provide a clear definition for what it considers to be transition assets, ensuring that the fund won’t provide capital that expands or prolongs fossil fuel production (e.g. carbon capture and storage for oil and gas companies or ill-conceived hydrogen pipeline schemes). OMERS should also specify a limit to the role offsets will play in achieving its climate objectives.
In defining what constitutes “transition”, OMERS should draw on its own Sustainable Bond Framework, which explicitly excludes “investments related to the exploration, production and transportation of fossil fuels... even where such investments are intended to support the sector’s transition” (Sustainable Bond Framework, p.9).
In a move similar to that being used by the Ontario Teachers’ Pension Plan with its $5 billion “High Carbon Transition” assets allocation, OMERS will calculate the carbon footprint of this transition sleeve separately from its overall portfolio footprint. This approach is only acceptable if the fund releases rigorous and transparent plans to transition these assets to zero emissions.
Enhanced carbon footprinting disclosure
OMERS provided increased disclosure of its portfolio’s emissions, including disclosure of an absolute financed emissions metric, quantification of reported versus estimated emissions, and emissions by asset group.
A commitment to release a Climate Action Plan in 2023
Despite having made a net-zero commitment in November 2021, OMERS to date has no climate action plan to back it up. Shift’s Canadian Pension Climate Report Card identified steps OMERS must take to have a credible climate plan, and we look forward to seeing these elements included in OMERS’ forthcoming plan.
Specifically, OMERS still needs to:
pair its emissions intensity reduction commitments with absolute emissions reduction commitments.
set targets for investments in climate solutions and for the proportion of AUM covered by a credible net-zero plan.
set clear net-zero aligned expectations and success targets for timebound and escalatory climate-related engagements with owned companies.
disclose results of its climate scenario analysis and explain how the fund would perform in a 1.5°C global heating scenario. Achieving the global goal of 1.5°C is imperative for OMERS members’ retirement security.
set an expectation that owned companies tie executive compensation to the achievement of climate targets, refrain from lobbying against climate action, directly or through industry associations, and refrain from allocating capital to fossil fuel expansion.
strengthen its Proxy Voting Guidelines to indicate that OMERS will vote for shareholder resolutions requiring companies to have science-based decarbonization plans.
begin publishing its voting rationale along with its voting record.
place an exclusion on any new investments in coal, oil, gas and pipelines to reduce stranded asset risk and align with climate objectives.
commit to a timebound and managed phaseout of existing fossil fuel assets.
OMERS’ existing fossil fuel assets include:
a 50% stake in NET4GAS, a Czech gas distribution network that transports Russian gas. In January 2023, the Financial Post reported that Net4Gas had not received the latest monthly contracted payments from a major Russian shipper (Gazprom, according to Fitch Ratings). Revenues from these contracts amounted to three quarters of total 2021 revenue.
a 25% stake in Exolum, purchased in 2016 for around €700 million. Exolum owns 6,000 km of pipelines and oil storage facilities in Europe. In December 2022 it was reported that OMERS was unable to find a buyer for its stake in Exolum due to the challenges the company faces in the low-carbon transition.
a 50% stake in BridgeTex, purchased in 2018 for US$1.48 billion. BridgeTex is a Texas-based pipeline company that transports 440,000 barrels per day of crude oil.
require climate expertise on its Board of Directors.
tie executive and staff compensation to the achievement of climate targets.
develop an Indigenous rights policy following the United Nations Declaration on the Rights of Indigenous Peoples and clarify that OMERS’ investment decisions will respect the Free, Prior and Informed Consent of Indigenous Peoples for projects that affect their traditional lands and waters.
specify in its Proxy Voting Guidelines that the fund will vote in favour of proposals requiring companies to demonstrate the Free, Prior and Informed Consent of Indigenous Peoples.
BACKGROUND INFORMATION
OMERS is the investment manager for the pension fund of Ontario’s municipal workers, with 559,000 members and over 1,000 participating employers (ranging from large cities to local agencies). Members include union and non-union employees of municipalities, school boards, transit systems, electrical utilities, emergency services and children’s aid societies across Ontario. OMERS’ AUM was $124.2 billion as of December 31, 2022.