The High-Risk Climate Contradictions of the Canada Pension Plan
This op-ed was written by Shift’s Senior Manager, Patrick DeRochie, and first published on TheFutureEconomy.ca on July 23, 2024. Read the original story here.
As climate change threatens to upend the lives and futures of Canadians from coast to coast to coast, there’s one national institution whose mandate unavoidably places it at the nexus of the climate crisis and our collective response to it: the Canada Pension Plan Investment Board (CPPIB).
CPPIB’s purpose has become much more complicated as the window for decisive action to avert catastrophic climate change shrinks. CPPIB has a critical role to play in safeguarding both retirement security and a stable climate for Canadians. Unfortunately, it’s not yet stepping up to do all that’s required.
The world in which CPP invests is changing fast. Accelerating climate change is driving dangerous physical impacts, curtailing global economic growth, harming investments and ruining lives and livelihoods in Canada and around the world. Financial markets are also being disrupted as energy systems begin a required and rapid transition away from reliance on coal, gas and oil.
The twin forces of a worsening climate crisis and an accelerating energy transition requires a fundamental rethink of CPPIB’s mandate and strategy. The investment decisions of CPPIB can help determine if Canadians retire into a livable future powered by renewable energy, or a hothouse earth irreversibly damaged by runaway climate change and its catastrophic impacts.
CPPIB has taken some important steps. It’s committed to net-zero greenhouse gas emissions by 2050 and made significant investments in renewable energy and other climate solutions, backed by extensive internal expertise and sophisticated measures to manage the financial risks of climate change.
However, CPPIB is also a giant global investor in the primary cause of the climate crisis – fossil fuels – with no apparent intention to stop. The fossil fuel industry’s continued dominance threatens both our retirement security and a stable climate.
CPPIB appears torn between the uncompromising imperatives of consensus climate science and a Canadian financial sector and political culture that remain deeply and dangerously entangled with the fossil fuel economy.
The Science is Clear: A Stable Climate Requires a Rapid Phase-Out of Fossil Fuels
CPPIB’s mandate sounds straightforward: to invest the assets of the Canada Pension Plan (CPP) with a view to achieving a maximum rate of return without undue risk of loss. Legislatively firewalled from political interference, CPPIB has served Canadians well over its 25-year history, growing the CPP from $12.1 million in 1999 into a global investment behemoth with over $632 billion in assets.
However, as with all of the systems and institutions upon which Canadians rely, the climate crisis poses an existential threat to the CPP.
The consensus science calling for rapid reductions in greenhouse gas emissions and urgent, transformative changes to our economies and energy systems is unyielding. To stabilize temperatures at relatively safe levels, the Intergovernmental Panel on Climate Change says global emissions must be slashed by about half by 2030 and reach global net-zero by mid-century. Achieving this target requires investors to be ahead of this curve.
The International Energy Agency recently clarified what net zero by 2050 means for our energy systems: an immediate end to expansion and an immediate decline in the production and use of oil, gas and coal. That’s why peer-reviewed studies show that to achieve net zero by 2050, nearly 60% of currently-proven oil and gas reserves and 90% of coal reserves must remain unextracted.
There are escalating costs to delay – the longer we wait to phase out fossil fuels, the worse the climate crisis gets, the harder it becomes for pension funds to generate financial returns, the unlikelier it becomes for plan members to enjoy a dignified retirement on a livable planet. Every tonne of carbon counts.
A Stable Climate is Imperative for CPPIB to Fulfill its Mandate
Recent studies show that governments and economists have drastically underestimated the macroeconomic damage caused by climate change and its worsening impacts. The United States National Bureau of Economic Research finds that the world economy will be 31% poorer by the end of the century if we stay on our current emissions trajectory– a cost equivalent to fighting a domestic war, forever. Recent studies by Carbon Tracker and the United Kingdom’s Institute and Faculty of Actuaries show that the climate scenario models used by investors are dramatically underestimating the costs of global heating. CPPIB itself finds that in a business-as-usual scenario where global decarbonization efforts are less successful, the fund’s market value could potentially drop by 15% in any given year during the next 30 years, largely driven by physical climate impacts.
CPPIB, by definition, has a long-term investment horizon, with a fiduciary duty to invest in the best interests of plan members, from the 18-year-old starting their first job to the 108-year-old retiree. With alarming evidence that climate change is happening sooner and faster than predicted, a pension fund cannot provide retirement security by making investments that accelerate the climate crisis, thereby contributing to financial instability and economic collapse.
Without a stable climate, it will be impossible for CPPIB to fulfill its mandate and for Canadians to enjoy a dignified retirement.
CPPIB Has What it Takes to Become a Global Climate Leader
CPPIB has the tools, resources, influence, skills and capital to profitably accelerate the energy transition. CPPIB acknowledges that “climate change may well radically change economies and capital markets.” The pension manager insists that “the risk of foregoing short-term pain will be long-term pain— a permanent cost to business, the planet and society. No one can afford to wait.”
To that end, CPPIB committed the CPP portfolio to net zero by 2050 in 2022. The fund uses a range of processes and tools to measure and manage climate-related financial risks, capture value from climate-related financial opportunities, and stress test the portfolio against different policy and global heating scenarios. The fund also developed a “Decarbonization Investment Approach” to help portfolio companies identify economic pathways to decarbonization and claims to have partnered with over 15 portfolio companies to help them reduce operational emissions.
CPPIB is making large and growing investments in climate solutions while stating its intention to drive down emissions in the real economy. CPPIB’s investments in renewable energy grew from just $30 million in 2016 to $10.3 billion in 2022 and have likely grown even larger since. From $7.5 billion in green bonds to wind farms off the coasts of France and the United Kingdom, to solar energy in India and Brazil, to electrolyzers and green hydrogen in the UK and the Netherlands, to electricity transmission in Chile and the southwest US, to battery manufacturing in South Korea and Quebec, CPPIB is starting to pour money into profitable climate solutions that are critical to achieving global climate goals.
But achieving global climate goals – which is necessary to fulfill its mandate – will require CPPIB to go much further.
Despite Investments in Climate Solutions, CPPIB Greenwashing is Rampant
With $84 billion invested in “green and transition” assets, CPPIB is well on the way to its goal of $130 billion by 2030. However, CPPIB’s disclosure of these assets is too opaque to know what “transition” means. The pension manager appears to be categorizing at least some of its fossil fuel holdings wrongly as “transition assets” and has consistently ignored requests to disclose which assets it considers “green” and which it considers “transition.”
For example, CPPIB’s “Sustainable Energies” portfolio includes renewable energy and energy efficiency and conservation companies, but also oil and gas producers, pipeline companies, gas-fired power producers and carbon capture and storage (CCS) infrastructure for oil and gas. This lack of transparency and obfuscation makes the CPPIB’s investments in “green and transition” assets impossible to verify.
CPPIB has also refused to set interim portfolio emissions reduction targets, unlike many of its peers in the Canadian pension sector. The pension manager’s CEO said that he believes interim targets create an incentive to sell off investments in high-emitting businesses rather than spending the money it takes to reduce emissions. CPPIB says the fund’s carbon emissions are “likely to increase in the near term.”
Temporary increases in portfolio emissions may indeed be necessary and unavoidable, as CPPIB can play a crucial role in deploying capital to help high-carbon, hard-to-abate companies and industries profitably decarbonize. This could be a smart use of pension capital – but only if companies have a credible, science-based decarbonization pathway that’s aligned with the goals of the Paris climate agreement.
Achieving global climate goals requires emissions to be halved by 2030, which necessitates a rapid transition away from all fossil fuels. The only Paris-aligned pathway to decarbonization for fossil fuel companies is the managed phase-out of production and early retirement of assets. With its obfuscation of “green and transition assets,” CPPIB makes it impossible to verify that all of its assets have credible, profitable transition plans.
It appears that many do not.
CPPIB is Propping Up and Expanding Fossil Fuels
CPPIB’s significant ownership of fossil fuel assets might explain its reluctance to set interim emissions reduction targets or publicly acknowledge the scientific consensus that fossil fuels must be rapidly phased out. Shift estimates that the CPP holds between $21.72 billion and $63.35 billion in fossil fuel assets as of December 31, 2023. CPPIB has repeatedly refused to verify these estimates or disclose an inventory of its fossil fuel holdings.
In addition to billions of dollars in shares of publicly traded oil and gas producers, CPPIB owns or co-owns several private fossil fuel companies. This includes a 13.4% stake in Calpine, the largest generator of gas-fired power in the US; a 43.5% stake in Nephin Energy, which owns the Corrib gas field off the coast of Ireland; a 49.9% stake in Transportadora de Gas del Perú SA, which operates a pipeline transporting fracked gas from the Amazon rainforest to the Peruvian coast; and a 35% stake in Williams Ohio Valley Midstream JV, which operates more than 30,000 miles of pipelines and handles approximately 30% of US fossil gas. It also includes 99% ownership of Wolf Midstream, which owns and operates the Alberta Carbon Trunk Line that transports captured carbon from a refinery and fertilizer facility near Edmonton to enhanced oil recovery projects in Alberta’s oil sands. Senior CPPIB staff sit on the boards of these companies, overseeing and approving their business plans, capital expenditures and sustainability strategies.
Recently, CPPIB has directly financed oil and gas expansion and even grown its portfolio of fossil fuel assets – which is inconsistent with the scientific consensus on what is required to achieve net zero by 2050. CPPIB marked Earth Day 2024 with a US$300 million investment in fracking expansion in Ohio by Encino Energy, an oil and gas company 98% owned by the pension manager. A 2022 CPPIB investment of US$100 million in private equity fund Kimmeridge Fund VI was used to purchase fracked gas assets in Texas and finance a proposed LNG terminal on the Louisiana coast. In May 2024, CPPIB announced its plan to acquire a 40% stake in US electric utility conglomerate Allete, which includes a fleet of coal- and gas-fired power plants and a lignite coal mine. This summer, CPPIB supported an additional $1 billion investment for Wolf Midstream to significantly increase fossil fuel production capacity.
Is CPPIB Captured by Canada’s Petro-Culture?
CPPIB has also demonstrated an ongoing pattern of making public statements that signal it will continue to prop up the fossil fuel industry, paint oil and gas as a critical part of the energy transition, and amplify and repeat industry propaganda that is demonstrably false. In November 2023, on the opening day of the COP28 Climate Summit in Dubai, CPPIB’s CEO appeared on stage with fossil fuel company executives at the Calgary Chamber of Commerce and gave a speech that celebrated its investments in the Alberta oil and gas industry, made unbacked claims about the environmental record of the industry, and advocated for increased exports of Canadian fracked gas.
CPPIB’s deep entanglement with the fossil fuel industry is also prevalent in its governance, with three of 12 Directors concurrently board members or executives of fossil fuel companies. This creates a potential conflict between these Directors’ fiduciary duty to plan members and their legal obligations to fossil fuel companies to generate profit for shareholders by extracting, transporting and selling oil and gas.
Finally, despite efforts to insulate CPPIB from political interference, the national pension manager is facing a politically charged threat from the Alberta government, which has proposed withdrawing the province’s share of CPP assets and starting an Alberta Pension Plan. CPPIB has taken notable action to avoid this scenario and reassure Albertans that their retirement savings are better off under CPPIB management. Up against an Alberta government that is zealously supportive of the province’s oil and gas industry and hostile to climate action, CPPIB finds itself in a difficult position where acknowledging the scientific imperative to phase out fossil fuels presents a political challenge.
CPPIB’s dangerous exposure to and support for fossil fuels stands in stark contrast to the Caisse de dépôt et placement du Québec (CDPQ), the manager of the Quebec Pension Plan. CDPQ excludes investments in coal and oil and says “we no longer want to contribute to the supply of these two types of energy.”
Ambitious Climate Policies and a Phase-Out of Fossil Fuels are Necessary for CPPIB to Fulfill its Mandate
Despite CPPIB’s seemingly sophisticated approach to climate change and significant investments in climate solutions, our national pension manager and some of its portfolio companies are clearly not aligned with the scientific consensus on what’s necessary to avert catastrophic climate change.
Canada’s national pension manager must publicly acknowledge physical reality.
Limiting global temperature increase to 1.5°C requires an immediate end to expansion and a rapid phase-out of fossil fuels. It requires developing and financing credible, science-based, and profitable climate plans for CPPIB’s portfolio companies – and acknowledging that the only way this is possible for fossil fuel producers is by winding down production and returning cash to shareholders. And it means becoming a vocal public advocate for stringent, ambitious, Paris-aligned climate policies and regulations that will provide certainty for companies and investors, enable Canada to achieve its climate commitments and help limit the global temperature increase to 1.5°C. The alternative is for Canada and the world to fail to achieve the goals of the Paris Agreement, leading to ecological, economic, and financial consequences that could make it impossible for CPPIB to fulfill its mandate.
Time is running out for CPPIB to act.
If it’s serious about fulfilling its mandate, CPPIB must rise above Canada’s retrograde petro-politics and act decisively to align its portfolio with credible net zero emissions pathways. If CPPIB doesn’t get more serious about its fiduciary duty to protect Canadians’ retirement savings from climate risk, it may soon be forced to by increasingly stringent financial regulations or climate-related litigation to protect the long-term interests of CPP members.