Climate Analysis of HOOPP’s 2023 Annual Report and Climate Disclosure
HOOPP’s 2023 Annual Report and 2023 Climate Disclosure, released in March, recap HOOPP’s inaugural Climate Strategy, describe a number of incremental improvements to the pension fund’s internal management of climate-related risk and provide moderately increased transparency to beneficiaries. HOOPP reported no new direct private investment in thermal coal or oil exploration and production companies in 2023, getting ahead of its commitment to exclude such investments by 2025. However, the pension fund continues in its misguided belief that climate engagement can convince fossil fuel companies to align with the goals of the Paris Agreement, despite experts and many other investors concluding otherwise.
Read on for Shift’s analysis of the climate-related updates in HOOPP’s 2023 Annual Report. This information builds on previous analyses including:
2023 Canadian Pension Climate Report Card - HOOPP analysis (February 2024)
Shift’s Statement on HOOPP’s Inaugural Climate Action Plan (March 2023)
2022 Canadian Pension Climate Report Card - HOOPP analysis (January 2023)
HIGHLIGHTS
Climate-related highlights from HOOPP’s 2023 Annual Report and Climate Disclosure include:
Increased focus on climate, with climate commitments discussed in messages from the Chair and Vice-Chair of the Board and from the President and CEO.
Climate change added as a standing agenda item for each Board meeting.
Disclosure of $10 billion invested in climate solutions as of December 31, 2023, with a clear definition using Climate Bonds Initiative criteria and examples provided.
Improved carbon footprinting, including disclosure of absolute financed emissions.
A concrete example of climate engagement, although the company is not named and HOOPP’s engagement process and proxy voting disclosure still need improvement.
Disclosure that HOOPP made no new direct investments in private thermal coal or oil exploration and production companies in 2023, on track for its commitment to exclude such investments by 2025. However, HOOPP has not disclosed what percent of its portfolio is currently invested in coal, oil and gas, nor has it committed to exclude or phase out investments in publicly traded fossil fuel companies.
WHAT HOOPP STILL NEEDS TO DO
Acknowledge that HOOPP’s investment decisions and decarbonization approach can affect the trajectory of the climate crisis; recognize that the climate crisis could threaten HOOPP’s ability to achieve its mandate; and acknowledge that limiting global heating to 1.5°C requires the rapid phase-out of fossil fuels.
Continue to improve disclosure and transparency, including by disclosing the fund’s high-carbon assets and its proxy votes and continuing to improve its climate disclosures.
Strengthen ambition of HOOPP’s climate targets, including by ensuring all direct investments have credible, science-based transition plans by 2030.
Engage with companies with the expectation that companies will develop and implement credible, science-based transition plans within a set timeframe. Include the potential for divestment in a timebound, escalatory climate engagement process.
Acknowledge the limits of engagement for fossil fuel companies, and follow the example of other investors who have divested from fossil fuels after engagement failed to produce results. Instead of engaging fossil fuel companies, HOOPP should pivot to using its influence to publicly support laws, policies and regulations that require the fossil fuel sector to rapidly reduce emissions in line with Canada’s climate goals.
Develop and disclose a policy that the pension fund expects companies to obtain and maintain the free, prior and informed consent of Indigenous peoples for projects affecting them, and that the fund will support shareholder proposals calling for the same.
DETAILED ANALYSIS
Communication of Climate Urgency
Consistent with the release of HOOPP’s Climate Strategy in 2023, the Annual Report includes more discussion of the pension fund’s climate targets and progress, including in messages from the Board Chair and Vice-Chair and from the President and CEO. It is a positive development to see HOOPP begin to focus on, rather than downplay, its efforts to manage climate-related financial risk, which are an essential part of the fund’s fiduciary duty to beneficiaries.
HOOPP’s communication of climate urgency would be strengthened with:
recognition that everyone, including HOOPP’s beneficiaries and health care workers responding to the health impacts of climate change here in Ontario, is already experiencing the impacts of the accelerating climate crisis;
acknowledgment that fossil fuels must be rapidly phased out in order to achieve the goal of limiting global heating to 1.5°C;
acknowledgement that HOOPP’s investment decisions and decarbonization approach can influence the trajectory of the climate crisis;
recognition that the climate crisis poses an existential risk that could threaten the fund’s ability to achieve its mandate.
Progress Toward Interim Targets
Climate solutions
HOOPP for the first time reported a climate solutions investment figure, with $10 billion invested in climate solutions (defined using the Climate Bonds Initiative taxonomy) as of December 31, 2023. HOOPP has committed to $23 billion invested in climate solutions by 2030.
Emissions reductions
HOOPP’s previously announced emissions reduction targets are not as ambitious as those of some of the fund’s peers, but the pension fund is reporting progress. HOOPP’s financed emissions (scope 1 and 2) have gone down in both absolute and intensity terms since the fund’s baseline year of 2021, with absolute emissions dropping by 11% by 2023. HOOPP attributes the reduction to “changes in the sector weights within our largest public equity indices from market movements and new investments in low-carbon sectors in HOOPP’s private portfolios, such as renewable power generation and telecommunication” (Climate Disclosures webpage).
Credible transition plans
HOOPP has not yet reported progress towards its commitment that 50% of its infrastructure and private equity portfolio AUM will be covered by credible transition plans by 2030. As Shift has previously noted, this target could leave half of these assets without credible transition plans as late as 2030, a year by which we must have achieved significant reductions in absolute emissions.
Climate Integration
HOOPP continues to make progress in developing the systems and expertise that it will need in order to manage climate-related financial risks.
Board
The Board has secured an external climate change advisor to support Board oversight of the fund’s climate approach (Annual Report, p.29) and separated climate from ESG at the board level “because climate change poses unique issues” (p.21), while three Board committees play a role in HOOPP’s climate change governance and climate change is a standing agenda item at quarterly Board meetings (p.50).
Management and staff climate expertise
HOOPP has established a Climate Change Standing Committee which is chaired by the CEO and includes the Chief Investment Officer, Chief Risk Officer, Chief Operating Officer, Chief Financial Officer and General Counsel (Climate Disclosures webpage). At the investment team level “multiple education sessions” have been conducted to build knowledge and expertise for investing in climate solutions (Annual Report, pp.12, 51).
Transparency and disclosure
Disclosure of high-carbon assets
HOOPP still has not disclosed the composition of its portfolio by sector, and it is impossible to determine the percent of the portfolio currently invested in high-carbon assets. Without disclosure, beneficiaries cannot assess if HOOPP’s assets could have profitable, credible pathways to transition to net-zero emissions by 2050 in line with HOOPP’s climate target.
Portfolio carbon footprint
The pension fund has continued to make slow but steady progress in improving its portfolio carbon footprint metrics, and this year disclosed its absolute financed emissions for 2021, 2022 and 2023. HOOPP’s 2023 reported emissions included the same asset classes as last year (public equities, real estate, private equity, and infrastructure) and HOOPP disclosed that to date its footprint accounts for 66% of in-scope assets. In 2023 the fund improved the percent of reported emissions data in its infrastructure and private equity classes, reported a data quality score, and “initiated” scope 3 data collection in a “portion” of the portfolio (Climate Disclosures webpage).
Climate Engagement
HOOPP is beginning to disclose some information about how it is engaging companies on climate. According to the 2023 Annual Report, HOOPP is co-leading engagements with three Climate Engagement Canada (CEC) focus companies “at varying stages of progress” (p.13) and engages with these companies “to encourage companies to adopt and execute plans to reduce GHG emissions consistent with the goals of the Paris Agreement” (p.53).
HOOPP also reports that it engaged with 81 companies “to communicate our expectations on climate change and/or other ESG topics” (p.52). Unfortunately, it is not clear what climate expectations HOOPP is communicating to these companies or how many of these engagements were focused on climate versus “other ESG topics”.
HOOPP’s Proxy Voting Guidelines (effective January 1, 2024) communicate minimal expectations that companies have “reasonable policies, practices and disclosure related to material environmental and social issues” (p.12). Unlike the voting record of all other Maple Eight pension managers, HOOPP’s proxy voting record is not publicly available, leaving its members in the dark as to how HOOPP is voting on individual climate-related proposals. HOOPP’s disclosure that it supported 43% of climate-related shareholder proposals in 2023 (p.52) is incomplete, as one cannot evaluate what the proposals were and whether or not they should have earned HOOPP’s support. Nor can one evaluate how HOOPP is voting in situations where it “consider[s] withdrawing support for the relevant board director” (Climate Disclosures webpage).
More positively, HOOPP did provide a concrete example of engaging with a company on climate year-over-year. In the Annual Report, HOOPP describes voting against a committee chair in 2022 due to a lack of climate disclosures, engaging with the company following the vote, and seeing the company publish a climate report and 2030 emissions reduction targets in 2023 (p.14). Engagements such as this would be strengthened if HOOPP set out clear expectations that companies have credible, science-aligned transition plans and if HOOPP had an escalatory, time-bound engagement process to ensure companies come into alignment.
Falsely implying that engagement and divestment are mutually exclusive
In two places in the 2023 Annual Report, including the message from the Board Chair and Vice-Chair, HOOPP takes pains to point out that it is focusing on engagement rather than divestment in order to “help steer companies toward credible net-zero plans” and states that it believes this approach will better result in actual or real-world impact (pp.13,21).
It is an error to imply that engagement and divestment are mutually exclusive; both are important tools in the investor toolkit. HOOPP knows this, having itself divested from tobacco companies a number of years ago. When it comes to climate engagement, why would HOOPP take one of its most powerful tools for engaging companies and managing financial risks— the potential for divestment- off the table? HOOPP absolutely should use its investor influence to steer companies toward credible net-zero plans. But if companies are unwilling or unable to align with a credible net-zero plan within a set timeline, HOOPP should sensibly limit its exposure to those companies by divesting them. Sticking with fossil fuel companies as they decline in the coming years would be a breach of HOOPP’s fiduciary responsibility.
Further, if HOOPP’s engagement goal is to “help steer companies toward credible net-zero plans”, the fund must acknowledge that some companies do not have credible pathways to net-zero, and in those cases engagement is futile. Investor engagement has not, for example, resulted in coal, oil and gas companies phasing out production and directing capital expenditure toward climate targets. If HOOPP’s pension managers and trustees need to verify first-hand the reality of oil and gas companies’ lack of transition plans, they could ask one of their own: HOOPP trustee Nick Zelenczuk also sits on the board of Teine Energy, a Canadian company that drilled the third most oil wells in Canada in the first nine months of 2023. Teine also uses the fossil fuel industry’s holy grail of carbon capture, which might incrementally reduce operational emissions, to create even more greenhouse gas emissions by pumping more oil out of the ground in a process referred to as “enhanced oil recovery”.
The oil and gas industry has proven itself either unable or unwilling to chart a pathway to net-zero emissions, as concluded by other investors who have attempted engagement before ultimately divesting:
Church of England Pensions Board:
“The Church of England Pensions Board is today announcing its intention to disinvest from Shell plc and other oil and gas companies which are failing to show sufficient ambition to decarbonise in line with the aims of the Paris Agreement.”
“We have to realize that the top management in the oil and gas sector simply refuse to [change course] in a manner consistent with the goals of the Paris agreement.”
ABP:
“We part with our investments in fossil fuel producers because we see insufficient opportunity for us as a shareholder to push for the necessary, significant acceleration of the energy transition at these companies."
PFZW:
“Joanne Kellerman, PFZW board chair, said in the statement that most fossil fuel companies “are not prepared to adapt their business models” to the Paris climate goals – as the fund’s fossil fuel engagement programme had shown.”
Fossil Fuel Exclusions
HOOPP has already announced that it will exclude new direct investments in private thermal coal and oil exploration and production companies as of 2025, and made no such investments in 2023 (2023 Annual Report, p.12). An obvious next step would be for HOOPP to divest of, and exclude new investment in, publicly traded fossil fuel companies that fail to meet objective climate criteria, such as companies on the Global Oil and Gas Exit List and Coal Exit List.
If HOOPP can acknowledge the limits of engagement with fossil fuel companies and reduce its exposure to this declining industry, then the pension fund would be well on its way to protecting its portfolio from stranded asset risk.