Analysis of PSP’s new Sustainable Investment Policy and Proxy Voting Principles and Proxy Voting Principles
PSP approved a new Sustainable Investment Policy (SIP) and Corporate Governance and Proxy Voting Principles (PVP) in February, and also released its 2022 Green Bond Impact Report. The updated documents are further evidence that PSP is becoming more proactive in managing climate-related financial risks and encouraging portfolio companies to develop credible climate plans.
The documents are designed to align with PSP’s Climate Strategy Roadmap and claim to be grounded in the Paris Agreement and PSP’s “(subscription) to the adoption of a long-term science-based world view and the potential to use our influence to support the transition to global net-zero emissions by 2050” (SIP p.3). But overall, PSP is not yet treating “systemic climate change risk” (SIP p.2) like a global emergency that could make it impossible to meet PSP’s financial obligations and invest in the best interests of contributors and beneficiaries.
Sustainable Investment Policy
In the Sustainable Investment Policy, PSP affirms that it believes that engagement is “usually preferable to exclusion or divestment”, but clarifies that there are instances where PSP Investments “may refrain from investing or decide not to maintain investment, including where there are material reputational and/or financial risks relating to: (p.3)
material ESG factors that do not align with our investment beliefs and the meeting of our mandate;
the potential for investments to cause or contribute significantly to negative societal outcomes, for example environmental harm or human rights abuses;
material concern about a company’s long-term social license to operate;
the lack of engagement or strategy by the board of directors or management to prevent or mitigate material ESG issues;
structurally unsuccessful engagement activities (by PSP Investments or collective efforts).”
Following the logic of those guidelines in the context of a worsening climate crisis, most fossil fuel production companies already meet PSP’s thresholds for exclusion:
The business model of fossil fuel companies’ does not align with PSP meeting its mandate because these companies do not have credible, profitable pathways to transition away from the burning of oil, gas and coal– activities which threaten the stable climate and financial system upon which PSP’s returns rely and the retirement security of its members depends.
Fossil fuel companies contribute significantly to negative societal outcomes, including both environmental harm and human rights abuses. A good example is Imperial Oil, a company that spilled toxic chemicals from its oil sands operations into groundwater and waterways for months and neglected to tell downstream Indigenous communities about it. PSP owns over US$2.4 million in shares in Imperial, while a corporate director of the oil sands company sits on PSP’s Board of Directors.
Fossil fuel companies are losing their social license to operate, similar to how tobacco companies lost their social license when the extent of their product’s harmful health impacts, and the degree to which companies had obfuscated these impacts, came to light.
Unless a fossil fuel company has a credible transition plan aligned with climate science to rapidly phase out its scope 1, 2, and 3 emissions (i.e. to stop producing fossil fuels for combustion) then its board of directors or management is not preventing or mitigating material ESG issues.
And PSP has not provided a single example of engagement activities leading a fossil fuel producer to develop a credible transition plan aligned with climate science (something PSP calls for in its proxy voting principles).
These facts are supported by analysis from international experts, as well as the latest climate science released by the Intergovernmental Panel on Climate Change in its 6th synthesis report earlier this week.
Corporate Governance Policy and Proxy Voting Principles
PSP’s updated Corporate Governance and Proxy Voting Principles include a new stand-alone section called “Taking Action on Climate Change” (p.16), which states that PSP “will generally support shareholder proposals seeking enhanced climate-related disclosures” and “expect(s) companies to have a sound climate-related governance structure, accountability for oversight of climate commitments, a transition plan aligned with climate science, and enhanced disclosure of decision-useful information. PSP “may consider, in light of value and portfolio risk considerations, voting against directors to hold them accountable.” PSP’s weak climate-related proxy guidelines stand in contrast to other Canadian pension managers that have indicated they will vote against accountable corporate directors, such as the Canada Pension Plan Investment Board and Investment Management Corporation of Ontario.
Human Rights and Indigenous Rights
The proxy voting guidelines also say (PVP p.15) that PSP “encourage(s) companies to adopt appropriate standards and as a minimum to support labour standards and human rights in all their operations… Companies should strive to ensure that they maintain their long-term ‘social license to operate’ (PSP’s quotations), gaining the support of communities who may be affected by their activities. This may include, where appropriate, the free, prior, and informed consent of indigenous peoples.” PSP does not specifically indicate how it will vote on shareholder resolutions related to labour standards, human rights, or Indigenous consent, or how it may escalate its engagement with companies that don’t meet “appropriate standards”.
Lobbying against climate action
PSP says that it “discourage(s) companies from making political contributions, in order to prevent the appearance of a quid pro quo and possible scandal if politicians or governments adopt policies favourable to the company. If companies choose to make political contributions or engage in direct or indirect political activities, they should be fully transparent about their actions” (PVP p.16).
PSP’s Corporate Governance and Proxy Voting Principles are an improvement, but still leave wiggle room for PSP to allow companies to continue to violate Indigenous rights, expand fossil fuel infrastructure, and lobby against climate action (as long as companies report those political activities). Companies will generally face few consequences from PSP if they fail to align their businesses with climate safety. The Proxy Voting Principles do not specifically require companies to align with what PSP itself lays out as necessary to maintain investment according to its own Sustainable Investment Policy, which “subscribe(s) to the adoption of a long-term science-based world view and the potential to use our capital and influence to support the transition to global net-zero emissions by 2050” (SIP p.3). PSP “may consider, in light of value and portfolio risk considerations voting against directors to hold them accountable” (PVP p.16). This language, and other loopholes in the Proxy Voting Principles, essentially allows PSP to vote however it wants on climate-related shareholder resolutions. It’s a far cry from being “seized with the potential to use our capital and influence to support the transition to global net-zero emissions by 2050” (PVP p.16).
2022 Green Bond Impact Report
Finally, PSP released its 2022 Green Bond Impact Report in February, which discloses that PSP disbursed CA$1 billion in certified green bonds to finance renewable energy (across the Americas, Europe and Australia), “environmentally sustainable management of living natural resources and land use”, and green buildings. The green bonds led to the installation of 2,976 MW of total installed renewable energy capacity, contributed to the sustainable management of 575,000 hectares of natural resources and land use, including certified sustainable timber, aquaculture and agriculture production (certified by the the Sustainable Forestry Initiative or the Canadian Council for Aboriginal Business Progressive Aboriginal Relations), and improved water efficiency and energy efficiency, reduced emissions and increased renewable energy purchased in green building projects. PSP did not disclose which companies or projects were financed by the green bonds, apart from a net-zero building in London, UK.