Analysis of BCI's 2022 ESG Annual Report

Last month, BCI released its 2022 ESG Annual Report, which provides further evidence that BCI is responding to calls from pension plan members for increased disclosure of how it is handling climate-related financial risks. 

The British Columbia Investment Management Corporation (BCI) is the $211-billion investment manager for over 715,000 public sector employees, including teachers, health care workers, college and university staff, and provincial and municipal public servants. 

BCI’s reporting on its approach to climate risk is extensive compared to many of its Canadian peers. BCI appears to be taking an increasingly sophisticated, well-resourced approach to the climate crisis, undertaking extensive analysis of climate risks and prioritizing climate change and Indigenous reconciliation in its advocacy and engagement activities. In some ways, BCI is demonstrating climate leadership in the Canadian pension sector, but a close read shows that BCI’s strategy has an overreliance on false climate solutions like carbon capture, utilization and storage (CCUS) and carbon offsets, a fatally flawed approach to engaging fossil fuel companies, and a lack of a plan to disclose credible, science-based climate plans for its growing portfolio of fossil fuel assets.

This is the latest in a series from Shift on BCI’s approach to the climate crisis, including:

• May 2022: Documenting the entanglement between BCI executives and fossil fuel companies.

• August 2022: Analysis of BCI’s 2021 ESG Report

• November 2022: Statement on BCI’s disappointing 2022 Climate Action Plan.

• January 2023: Detailed analysis of BCI’s approach to climate change, as part of Shift’s 2022 Canadian Pension Climate Report Card

• March 2023: Brief analysis of BCI’s updated Proxy Voting Guidelines (p.2-3).

Still no net-zero target or interim targets

Despite “affirming (its) support for the global goal of reaching net-zero emissions by 2050” (p.1, 5), BCI has still not committed its portfolio to net-zero emissions by 2050 or sooner. This stands in contrast to nearly every other large Canadian pension manager (other than the Alberta Investment Management Corporation and PSP Investments). It also stands in contrast to the BC Municipal Pension Plan, one of BCI’s client pension plans, which set its own net-zero by 2050 goal and 2030 emissions intensity reduction target in November 2022.
Furthermore, BCI remains one of the few remaining Maple Eight pension plans not to set interim emissions intensity reduction targets for its portfolio, beyond a target to reduce the carbon intensity of its public equity portfolio 30% by 2025 (a target BCI announced over two years ago). Regarding its portfolio’s total carbon footprint, BCI says that it has an “expectation that it will decrease over time,” a passive approach that undermines accountability for achieving targets. 

Increasing internal capacity to manage ESG and climate risks

BCI is significantly increasing its focus on ESG risks, including climate change, by bolstering its internal capacity to assess climate risks, prioritizing climate-related advocacy, and stress testing its portfolio against different global heating scenarios. These are welcome steps forward, but it is not clear if they are adequate to protect the portfolio from growing climate-related financial risks.

BCI hired its first global head of ESG in 2022, as well as additional senior ESG experts, bringing its total ESG staff count to sixteen (p.5). It is not clear what percentage of BCI’s ESG-focused staff is specifically focused on climate issues. Lumping climate change in with “ESG” more broadly is itself problematic. Climate change is a systemic crisis that has the potential to make the planet uninhabitable for humans if left unchecked. Conflating climate risk with other material ESG risks (such as important issues around diversity and inclusion, labour rights and corporate governance) suggests that BCI does not yet fully grasp the urgent, existential nature of the climate emergency and its growing potential to make fulfilling BCI’s mandate impossible.    

Regarding climate advocacy, BCI responded to or participated in 11 policy consultations, roundtables, and joint statements in Canadian and global markets to advance ESG matters, stating that it ensures that its “climate-related policy advocacy supports a just transition to a low-carbon future for workers and communities, and the ambition of achieving the global goal of net-zero emissions by 2050 or sooner” (p.17). For example, BCI responded to the US Securities and Exchange Commission’s proposed climate disclosure rule, and responded to the Canadian Securities Administrators’ regulatory consultation on disclosure of climate risks (p.45). It is unclear if BCI’s advocacy is strong enough to actually influence government policy and regulations, or to counteract the incessant lobbying by the fossil fuel industry and other companies and industry associations to block, undermine and weaken climate policy.

BCI is also using its ESG Risk and Opportunity Framework to analyze climate-related physical and transition risks and stress test the portfolio using 1.5°C, 2°C, and 3°C warming scenarios, reporting that the portfolio’s climate risk decreased between 2018 and 2022. BCI’s analysis is leading it to “(plan) exits from some external managers with high exposure to climate risk” (p.13), but it’s unclear which external managers BCI is exiting from, by when, and what BCI considers “high exposure” to climate risk.

Investment in Climate Solutions

BCI increasingly recognizes the opportunity of investing in climate solutions that generate strong returns for BC pension plan members while helping to decarbonize the global economy. BCI highlights its acquisition of Reden Solar in 2022 (p.31), a solar power developer based in France with a one-gigawatt (GW) operating portfolio and plans to develop another 15 GW of solar energy in southern Europe and Latin America. BCI also announced an investment in energy storage company Eku Energy in January 2023 (p.32) and reports that it has “initiated a climate opportunity sector scan to complement, enrich, and validate our in-house and third-party research” (p.41). These are welcome investments in climate solutions needed for the global transition away from fossil fuels. Much more is needed.

BCI also participated in 26 “sustainable bond” issuances worth over $1.45 billion in 2022, increasing total participation to more than $4 billion, well on its way to its commitment to invest $5 billion in sustainable bonds by 2025 (p.1). BCI’s sustainable bonds are helping to finance Honda’s zero-emissions vehicles in Asia, clean transportation and green buildings in Quebec, and battery-electric locomotives for Union Pacific trains in the United States (p.35).  

Use of proceeds of BCI’s Sustainable Bond issuances. BCI 2022 ESG Report, p.35.

Investments in False Climate Solutions

Despite BCI’s growing investments in companies and technologies that need to be deployed and scaled up now to ensure a safe climate, the pension manager’s 2022 ESG Report puts an alarming emphasis on false climate solutions– namely CCUS andcarbon offsets. These investments could have the impact of delaying the energy transition, prolonging the use of fossil fuels, and greenwashing corporate net-zero claims while allowing high-carbon companies to continue to pollute. CCUS technology is also financially risky, as it has not been deployed effectively at commercial scale, does not typically generate additional revenue for companies, and is highly reliant on public subsidies. Parts of the global carbon offset markets have been shown to be fraudulent or lacking adequate standards or verification, creating considerable uncertainty and market risk going forward.

BCI makes five separate references to CCUS in its ESG report:

• Referring to CCUS as a “climate opportunity example” “arising from the global transition to a low-carbon economy”, with BCI’s Infrastructure & Renewable Resources team conducting a deep dive research on CCUS in 2022 (p.41);

• Investing in the Macquarie GIG Energy Transition Solutions fund, which “pursues investment opportunities in infrastructure and real assets capable of accelerating the global green energy transition”, including hydrogen and CCUS (p.31); 

• Highlighting a CCUS pilot project at a Teck Resources zinc and lead smelting and refining complex in Trail, BC that claims it will reduce the complex’ emissions intensity by just 33% by 2030 (p.18);

• Featuring a potential carbon capture and storage project that could see a timberland owner in Texas (Caddo Sustainable Timberlands) that’s privately owned by BCI supposedly storing carbon dioxide in subsurface geological formations “advantageously located near an industrial emissions hub, as well as existing and planned carbon dioxide transportation and injection infrastructure” (p.24);

• Highlighting the plans of another of BCI’s privately-owned timberland companies, Mosaic Forest Management, to sell carbon credits generated from the conservation of old-growth forests in lieu of harvesting timber (p.25). A recent study found that the “Verified Carbon Standard Program” (Verra) used to certify Mosaic’s carbon credits do not actually represent real emissions reductions, with at least 90% of Verra’s forest carbon offsets deemed to be worthless and making global heating worse.

• BCI also highlights the role of its ESG team in convincing BMS Group, a specialty insurance and re-insurance broker in BCI’s private equity portfolio, to “reduce its carbon footprint” by offsetting operational greenhouse gas emissions with “a credible third party” via ecosystem conservation and renewable energy projects in other countries (p.24).

• Less than a month after the release of its 2022 ESG Annual Report, BCI told a parliamentary committee that it had paused direct investments in China due to geopolitical risks and had already reduced its exposure in China and Hong Kong by 15% over the last ten years.

Shift strongly recommends that BCI portfolio managers familiarize themselves with the obvious shortcomings and credibility issues associated with CCUS and carbon offsets as Paris-aligned climate solutions. BCI should also disclose what percentage of its emissions reduction plans, and the climate plans of its portfolio companies, it plans to achieve through buying and selling offsets, and which “credible third party” would certify these offsets. 

Continuing to invest in and rely on these or other false climate solutions will only lead to accusations of greenwashing and increase climate-related transition, regulatory, litigative, and reputational risks while doing little to actually reduce emissions or shift the global economy away from fossil fuels.

BCI’s Escalating Climate Engagement with Fossil Fuel Companies

BCI has responded to criticism from pension plan members about the effectiveness of engaging fossil fuel companies by providing enhanced reporting on its engagement efforts, claiming that the “positive momentum (it has) observed from engagement, such as an increase in companies adopting science-based targets and meaningful transition plans, confirms (its) belief that engagement is a more effective strategy for driving real-world outcomes than divestment” (p.10). 

BCI 2022 ESG Annual Report, p. 10.

Shift welcomes BCI’s newfound commitment to escalatory engagement and shareholder action, including its filing of a climate-related shareholder resolution with Imperial Oil, public communication of the resolution and BCI’s votes, and willingness to vote against Imperial Oil directors that have failed to manage climate-related and reputational risks. No other Canadian pension fund is applying such direct and public pressure on one of Canada’s biggest climate polluters. And Shift recognizes BCI’s focused engagement on Teck Resources (p.13), although BCI should concentrate its efforts on a plan for phase-out of Teck’s metallurgical coal production in the Elk Valley and a just transition for communities and Indigenous communities that will be most impacted by such a phase-out.     

Shift also supports BCI and other pension funds having robust, escalatory engagement programs and allocating capital to hard-to-abate sectors to encourage them to decarbonize. However, BCI’s approach to engaging fossil fuel companies in particular is fatally flawed. That’s because phasing out production and retiring assets early while fundamentally transforming their business model is the only possible route for fossil fuel companies to achieve urgent, science-based, Paris-aligned emissions reduction targets, despite the industry’s misleading stories of deploying false solutions like CCUS and offsets. This differentiates fossil fuel companies from other hard-to-abate sectors, such as steel, cement, mining and utilities when it comes to engagement. And it underscores why BCI’s belief in the potential for CCUS and offsets to be a climate solution for the fossil fuel industry is flawed.

BCI appears to be beginning to recognize the limits of engagement with fossil fuel companies. It says that its Climate Action 100+ collaborative engagement with ExxonMobil and Imperial Oil since 2017 “delivered some results”, but then admits that “large gaps in climate disclosure remain a concern” (p.22). BCI reports that (p.22):

At ExxonMobil’s 2022 Annual General Meeting (AGM), BCI supported a shareholder proposal calling for an audited report assessing how the International Energy Agency’s net zero by 2050 pathway assumptions affect the underlying inputs of the company’s financial statements. While the proposal passed, ExxonMobil has not provided sufficient information for shareholders to assess the financial impact of the energy transition. As a result, BCI co-filed a proposal in 2023 with two lead investors, calling on the company to report the impact of climate assumptions and net-zero scenario analysis on its financial accounting for asset retirement obligations. We filed the same proposal at Imperial Oil, ExxonMobil’s Canadian subsidiary. Shareholders will vote on our proposals at the 2023 AGMs.

By publicly calling on ExxonMobil and Imperial Oil to provide such information and reporting that ExxonMobil has not provided such information after six years of engagement, BCI is in effect warning other investors that Imperial Oil and ExxonMobil's business plans do not demonstrate climate alignment. It’s not clear why BCI clings to the belief that filing non-binding shareholder proposals asking for better climate risk disclosure will somehow lead to oil and gas companies transforming their business model and phasing out production. Imperial Oil is majority-owned by parent company ExxonMobil, which already showed two years ago that it would vote down climate-related shareholder proposals even when they have the backing of 86% of institutional investors. These companies are either unwilling or unable to respond to engagement pressure, as they continue to explore for more oil and gas, allocate capital to increase oil and gas production, lobby against ambitious climate action, and greenwash their supposed commitments to net-zero. The same goes for the other fossil fuel companies on which BCI engages directly or through Climate Action 100+, including ConocoPhillips Canadian Natural Resources Limited, Chevron Corporation and Marathon Petroleum (p.13). The month after BCI reported its direct engagement with ConocoPhillips (p.48), it was reported that the oil and gas company would buy a $4+ billion stake in the Surmont oil sands project in Alberta, while announcing plans to spend up to US$11.3 billion in 2023 to increase production. 

How long will BCI continue with failed engagement? If ExxonMobil and Imperial Oil have failed to achieve “technological breakthrough and business model adaptation” (p.10) after six years of Climate Action 100+ engagement, then when does BCI expect these companies will respond? The climate crisis gets worse every year as these companies continue to ramp up production, pump carbon into the atmosphere, and keep our economies hooked on fossil fuels. At what point does BCI determine that a “company is either not responsive or has offered insufficient solutions to address material business risks”? Waiting until 2030, when oil and gas emissions must decrease by over 40% in Canada, is not an option for BC pension plan members planning to collect their pension in a safe climate future.

Engagement has fundamental limitations when it comes to fossil fuel companies. It’s time that BCI acknowledges this and uses other tools in its toolkit– negative screening, exclusions and divestment.    

BCI doesn’t believe in screens, exclusions, and divestment– except in all the cases that it does

BCI repeatedly states that it prefers engagement over divestment, but the pension manager contradicts itself by noting in several instances its use of divestment:

• “BCI excludes securities of a company when its products are prohibited by legislation applicable to Canada or through international agreements, such as those relating to anti-personnel mines and cluster munitions” (p.6);

• “BCI or clients may consider excluding the securities of certain companies, industries, or sectors from its portfolio on an exceptional basis provided both BCI and clients take into account their respective fiduciary duties” (p.6); 

• In March 2022, at the outset of Russia’s war in Ukraine, BCI stated that “BCI recognizes that holding Russian securities in our portfolio is not aligned with our values as an organization nor that of our clients” and actively worked to sell Russian securities. This action seems in direct contradiction to BCI’s claim that “In BCI’s case, its fiduciary duty does not permit the selection or exclusion of investments predominately on values-based considerations” (BCI ESG Governance Policy, p.5); 

• “BCI may selectively divest if our evaluation of a company, inclusive of our ESG assessment, reveals that the risk-return characteristics are no longer appropriate for our clients. This could include cases where we have identified critical ESG issues that we believe impair the long-term value proposition of a company, and the company is either not responsive or has offered insufficient solutions to address material business risks” (p.10);

• “In 2022, we completed ESG assessments on 245 investment opportunities in public markets and 15 in private equity and infrastructure & renewable resources. Alongside other tools and company disclosures, we use the Sustainability Accounting Standards Board (SASB) industry-level materiality framework to assess company policies and performance. We provide our portfolio managers a comprehensive assessment of the impact of ESG factors on long-term value creation to support more informed decisions. The results of our reviews can lead to rejection of an investment opportunity, re-pricing, or tailored recommendations” (p.12, emphasis added);

• BCI also uses exclusions as part of its participation in the Sustainable Development Asset Owner Platform, which uses artificial intelligence to set a global standard for the classification of sustainable development investments (p.36). The platform states that “Companies that derive more than 10 per cent of revenues from negative products or services cannot qualify as a sustainable development investment” (p.37).  

It is abundantly clear that, based on its own public reporting, BCI uses negative screening, exclusions and divestment to limit or prohibit investment in high-risk companies and industries. Yet BCI goes to great lengths to discredit fossil fuel divestment, even as a growing number of beneficiaries of its client pension plans call for it.  

No Reporting on BCI’s Fossil Fuel Infrastructure Assets

While taking care to highlight its investments in renewable energy, sustainable bonds and other “climate solutions”, it is noteworthy that BCI’s 2022 ESG Report contains no information on the significant fossil fuel infrastructure in BCI’s Infrastructure & Renewable Resources (IRR) portfolio. BCI’s 2021 ESG Report claimed that it is developing a plan to decarbonize the IRR portfolio. But there is no update to this decarbonization plan in the 2022 report, beyond a brief mention that the IRR team “increased its scrutiny of climate targets (and) transition plans” (p.12) and will “continue advancing (its) decarbonization plans to mitigate risk and create value for (its) clients” (p.43). BCI’s IRR portfolio includes BCI’s ownership stakes in fossil gas pipeline networks in Germany, the United Kingdom, the Czech Republic and Washington state, as well as Australia’s largest transporter of coal-by-rail and a coal- and gas-fired electric utility in Louisiana and Texas.  

Indigenous Reconciliation

It appears that BCI is increasingly recognizing the importance of Indigenous rights and reconciliation, providing education and learning opportunities to staff, clients and board members, building its understanding of its role in advancing Call to Action 92 of the Truth and Reconciliation Commission’s Final Report and the United Nations Declaration on the Rights of Indigenous Peoples (p.39), and generally voting in support of shareholder proposals related to Indigenous rights, reconciliation and inclusion, highlighting votes at Onex Corporation, Toromont Industries, Citigroup and Wells Fargo (p.29).

BCI also provides the examples of portfolio company Endeavour Energy, an Australian electric utility that completed implementation of its first Reconciliation Action Plan, developed in partnership with Reconciliation Australia and local Indigenous groups. And BCI highlights portfolio company Mosaic Forest Management’s participation in the Indigenous Protected and Conserved Areas Program, which will assist local First Nations in designing and implementing research on these lands and other areas of BC’s coast (p.25).

It is encouraging that BCI is beginning to prioritize Indigenous rights and reconciliation. We look forward to BCI taking the logical next step and developing a comprehensive Indigenous rights policy for its investments and portfolio companies.