Climate analysis of Ontario Teachers’ 2023 Annual Report

Earlier this month the Ontario Teachers’ Pension Plan (OTPP) released its 2023 Annual Report, which included an update to its climate strategy. Here are the report’s key highlights when it comes to climate risk and the energy transition.

Progress toward net-zero commitment

OTPP is making good progress toward its net-zero by 2050 commitment and interim emissions reduction targets, reducing its portfolio emissions intensity by 39% compared to a 2019 baseline-- on track to achieve its target of a 45% reduction by 2025. OTPP says the decrease in emissions intensity was “primarily driven by an increase in market value and decrease in absolute emissions of (its) portfolio carbon footprint.” OTPP also notes that the emissions intensity of its credit assets is particularly high due to that portfolio’s passive index investments that are exposed to all sectors of the economy.

OTPP has also decreased the absolute emissions of its portfolio by 7% since 2019. OTPP attributes a significant part of this decrease to its portfolio of private assets, which saw absolute emissions decrease by 6% in 2023, “primarily as a result of a normal course sale of certain higher-emission assets as well as successful decarbonization initiatives at select utility assets.” OTPP specifically cites Puget Sound Energy, an electric and gas utility in Washington state that is 15.8% owned by OTPP.  

Growing investments in climate solutions

OTPP continues to make large investments in climate solutions, including $3.9 billion in green bonds in recent years. OTPP increased its green investments by about $600 million in 2023, and now has $34 billion invested in “companies that generate clean energy, reduce demand for fossil fuels and help build a sustainable economy.”

A focus on real world decarbonization

OTPP acknowledges in its 2023 annual report that it has a “natural and vested interest in the overall well-being of the environment in which (it) invest(s).” OTPP calls climate change “one of the most pressing global issues, with far-reaching impacts”, calling the “road to net zero… an urgent but long one.” The pension manager says that it’s focused on reducing its portfolio emissions, helping to accelerate the decarbonization of the global economy, and mitigating the impacts of climate change and the loss of natural capital.

Still no exclusion on investments in fossil fuels

Despite its position on decarbonization and climate stability, OTPP fails to acknowledge the scientific consensus that limiting global temperature increase to relatively safe levels requires the rapid phase-out of fossil fuels. OTPP also fails to commit to place an exclusion on investments in coal, oil, gas and related infrastructure, or commit to a time-bound phase-out of its existing fossil fuel assets.

Ongoing lack of transparency regarding OTPP’s fossil fuel assets

OTPP continued an ongoing transparency problem regarding its significant fossil fuels in 2023. OTPP provides virtually no information on the fossil fuel assets it owns, including gas pipeline networks in the United Kingdom and Italy, oil and gas producers in Western Canada and Texas, and oil and gas royalty companies with assets throughout North America. The only credible pathway that these companies have to Paris-aligned  decarbonization is the managed phase-out of oil and gas production and the early retirement of gas pipeline assets-- for which no fossil fuel companies have announced credible plans to pursue globally so far.

OTPP also obscures its exposure to the fossil fuel industry in its asset class reporting. For example, OTPP reports that 8% of its $58.5 billion private equity portfolio is invested in “sustainability and energy transition”, making it impossible to determine how exposed the fund is to fossil fuels, or how it classifies its fossil fuel assets. Similarly, OTPP reports that 46% of its $39.2 billion infrastructure portfolio is invested in “energy infrastructure”, conflating the plan’s electricity transmission and renewable energy assets with its gas pipelines. Beneficiaries should consider again requesting transparency on the details of these holdings from OTPP.  

Decarbonization-focused engagement of portfolio companies

In 2023, OTPP reported initiating engagement with 24 private companies in its portfolio in which it has a minority or controlling stake, pushing eight of them to establish Paris-aligned targets and begin to decarbonize their operations. OTPP also brought together its portfolio companies in 2023, including a “sustainability forum” for its portfolio of five airports, and a meeting of sustainability executives from its power transmission and distribution businesses to discuss climate targets and adaptation. OTPP does not disclose which of these portfolio companies are Paris-aligned, and which are not.

OTPP’s 2023 annual report also does not include an update on the $5 billion in “High-Carbon Transition Assets” that it plans to purchase, a commitment the pension fund first made in September 2022. 

New Impact Investing Strategy

OTPP reports that it is pursuing a new Impact Investing Strategy that will “advance environmental action”, “level the playing field” and “generate positive social and/or environmental outcomes that are incremental in nature”. The pension fund says it spent 2023 trialing various impact investment measurement approaches and stress testing its impact investing framework.

Compensation and climate goals

It remains unclear how exactly OTPP’s climate goals are tied to compensation for most of its staff and executives. The 2023 annual report states that the CEO’s compensation is directly tied to portfolio emissions intensity reductions and advancing the impact investing strategy, which is an encouraging step. But it is not clear if these climate metrics also factor into compensation for other OTPP staff.

Climate risk expertise at the board level

OTPP’s annual report once again includes a board skills matrix that states that all but two of its directors have expertise in risk oversight related to “corporate responsibility / climate / ESG”, without differentiating between these distinct concepts or explaining how directors have this expertise. Included in this conflated climate risk skills matrix is Deborah Stein, who sits on the boards of four different fossil fuel companies that are not aligned with the net-zero transition. This offers little confidence that OTPP directors actually have the required climate expertise that the report claims. 

Indigenous Rights

Unlike other Canadian pension funds, OTPP disappointingly has not adopted a transparent policy or proxy voting guidelines to respect the rights of Indigenous Peoples and their right to Free, Prior and Informed Consent for activities that may affect them and their territories.