2023 UPDATES

• Committed in Climate Stewardship Plan to advocate for Paris-aligned policy and regulations, including mandatory climate and transition plans.

• The Climate Stewardship Plan additionally included:

• A statement that the intended outcome of engagement activities is alignment with the goals of the Paris Agreement;

• An engagement focus on 1) banks; 2) high-emitting Canadian companies; and 3) oil companies contributing to UPP’s carbon footprint;

• A plan to strengthen proxy voting guidelines and communicate votes to issuers.

• Set climate-related thresholds for new investments and developed criteria to assess and monitor net-zero alignment of new and existing investments (Climate Transition Investment Framework).

• Launched a real-time proxy voting database, including voting rationale.

• A snapshot of UPP’s climate-related proxy votes indicates that the fund’s voting record aligns with its published voting guidelines.

SUMMARY 

UPP’s net-zero emissions by 2040 commitment and Climate Stewardship Plan together set strong expectations for focus companies to set targets and define and implement a credible transition strategy for 1.5°C alignment. The Climate Stewardship Plan also outlines UPP’s timeline for considering revisions to strengthen climate-related proxy voting guidelines and a plan to amplify the impact of its votes through communication with companies and external managers. UPP’s Climate Transition Investment Framework will be used to screen new investments and assess and monitor climate-alignment of the portfolio.

UPP’s engagement approach differentiates between high-emitting companies generally and oil companies specifically. This is a crucial distinction as fossil fuel companies do not have a credible and profitable pathway to net-zero other than phase-out. However, UPP has not yet committed to excluding investments in fossil fuel companies or set a date by which these risky investments will be phased out of the portfolio.

UPP also engages collaboratively, for example through Climate Engagement Canada, and engages with its external managers on climate.

Notably, UPP has committed to advocate for Paris-aligned policy and regulations and set an expectation that oil companies align their policy advocacy with the goals of the Paris Agreement (Climate Stewardship Plan, pp.4, 6).

Going forward, UPP must articulate time-bound net-zero-aligned expectations of companies, with consequences if they are not met, and follow through on the considered strengthening of its proxy voting guidelines. UPP can also leverage its relatively strong guidelines and voting record to take a leadership role in filing climate-related shareholder resolutions and publicly highlighting climate resolutions or climate-related votes against directors.

DETAILS

Expectations for new investments

UPP is the only fund included in this analysis that has shared with beneficiaries a detailed outline of the climate-related thresholds it will use for new investments. (The Ontario Teachers’ Pension Plan comes close, having stated that new investments without science-based emissions reduction targets must set such targets within two years). UPP’s Climate Transition Investment Framework, released in December 2023, is intended to support UPP’s efforts to “invest only in new mandates and assets that align with the transition to a net-zero world” (p.2). The Framework sets thresholds that must be met before UPP makes new investment commitments and outlines how UPP will assess the “transition alignment and readiness” of current and new investments (p.2).

Investment thresholds differ for fund commitments versus co-investments or direct investments. Any new fund commitment must be to a fund that discloses scope 1 and 2 emissions and “where possible” scope 3 or to a fund that commits to net-zero emissions by 2050 or commits to an interim science-based target (p.4). 

Co-investments and direct investments are broken down into different categories, each of which have their own investment thresholds. Any new co-investment or direct investment must disclose scope 1 and 2 emissions and scope 3 “where possible” (p.5). Additionally, “high-impact” categories of new co-investments or direct investments must meet thresholds as follows: 

• high-impact sectors with high scope 1 and 2 (and possibly 3) emissions must commit to develop a net-zero by 2050 target or an interim science-based target, and must commit to develop a plan to achieve the targets;

• high-impact sectors with only high scope 3 emissions are required to develop a climate transition plan (p.5).

UPP’s transparency and initiative in setting climate-related investment thresholds is laudable, but UPP is drawing a false equivalency by considering oil and gas production companies in the same category as other “high-impact sectors”, such as steel and cement, that have credible, profitable pathways to transition. Investments in oil and gas carry significant, unique, system-level financial risks for investors and distinct, disproportionate harms for the climate and UPP members. UPP’s investment thresholds should be strengthened to include an exclusion screen for any investment in new fossil fuel development and an acknowledgment that the only 1.5°C-aligned pathway for fossil fuel companies is phasing out production.

Expectations for owned companies

UPP’s Climate Stewardship Plan outlines that the fund’s climate engagement activities aim to achieve one goal: a company’s alignment with limiting global heating to 1.5°C. Specifically, UPP outlines how it will engage on Paris-alignment with 27 companies (not named) across three categories: banks, “as allocators of capital that shape climate transition;" high-emitting Canadian companies; and oil companies with an outsized impact on UPP’s carbon footprint (p.3). UPP can improve transparency and accountability to its members by naming these 27 companies and regularly reporting on progress.

UPP will engage banks to disclose 1.5°C-aligned interim and long-term targets for financed and facilitated emissions, disclose exposure to high-emitting sectors, and set targets to scale up finance to climate solutions and 1.5°C-aligned assets (p.3).

UPP will engage high-emitting Canadian companies and oil companies in its portfolio to disclose 1.5°C-aligned interim and long-term targets (including material scope 3 emissions) and a decarbonization strategy to achieve the targets (p.4). 

UPP is also asking oil companies to commit to aligning their policy advocacy with the goals of the Paris Agreement and to support this alignment with disclosure (p.4). Oil companies have a track record of lobbying against climate policy individually and through trade associations.

UPP notably distinguishes “oil companies with an outsized impact on UPP’s carbon footprint” from other “high-emitting Canadian companies” in its Climate Stewardship Plan (p.3). But while UPP plans to assess whether or not oil companies are aligned with net-zero benchmarks, it is difficult to imagine why the fund believes its assessment will demonstrate anything other than the fact that a managed decline of production is required for oil companies to align with 1.5°C. Without a credible pathway for net-zero alignment, these oil investments must be phased out of UPP’s portfolio rather than shortlisted for a futile engagement process that should result in divestment when UPP’s assessment inevitably finds that oil companies have no credible plans to align with climate safety. 

UPP’s Investment Exclusion Policy (January 1, 2023) states that “Selling or excluding investments is appropriate when engagement, or other activity, has not, or is unlikely to, provide remedies.” Rather than a misguided focus on engagement, UPP should manage the unique risks of this sector by divesting its oil assets and redirecting its efforts toward strongly and publicly supporting laws, regulations and policies that require the phase-out of fossil fuels. 

While the Climate Stewardship Plan provides excellent clarity on UPP’s goals and strategy for engagement for 2023-2025, it is unclear by when UPP expects companies to align with its expectations, or what will happen if they don’t. See below in the Proxy voting section for indications of how UPP might escalate its climate expectations with public companies.

Direction given to external managers

UPP appears to be giving its external managers more education and expectations on their management of climate-related risks than other funds. The direction UPP gives to external managers on climate is crucial, with UPP’s 2021 and 2022 Annual Reports noting that the majority of the fund’s assets are externally managed.

According to UPP’s 2022 Annual Report, the fund hosted a webinar to introduce UPP’s Climate Action Plan to external managers and to “discuss the critical role of our external managers and other investment partners in achieving our climate goals” (p.38). The fund said it will prioritize partnerships with entities that have made, or plan to make, net-zero emissions commitments.

The Climate Action Plan states UPP will engage external managers “in a dialogue” to “encourage” these managers’ engagement on behalf of their clients, and to “encourage” external managers to set emissions reduction targets for their portfolios (p.13). UPP’s Climate Stewardship Plan included commitments to share updated proxy voting guidelines with external managers in 2024, and “systematically highlight our climate-related vote guidelines to external managers” in 2025 (p.5). In order to gauge the success of its Climate Stewardship Plan, UPP will examine outcomes including that “UPP’s external managers exercise proxy voting, company engagement, or advocacy in support of climate transition, following our dialogue with them” (p.2). UPP’s Fund Assessment Criteria (Climate Transition Investment Framework, p.8) will be used to assess the climate-alignment of externally managed funds.

While UPP has sent strong signals to its external managers, the fund must now demonstrate it is following through and ensuring external managers are supporting the fund in achieving its net-zero commitment and engaging companies on decarbonization. UPP could also improve transparency and accountability to members by reporting the progress externally managed funds are making toward Paris alignment.

Proxy voting

In 2023, UPP began to provide a real-time database of its proxy voting record on its website, along with voting rationale, increasing transparency for its members. Snapshots of UPP’s climate-related proxy voting record indicate that the fund has generally been voting in line with its own guidelines. 

UPP’s Proxy Voting Policy (January 1, 2023) states UPP will “support proposals calling for initiatives and/or targets aligned with the goals of the Paris Agreement, including trying to hold the increase in global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels” (p.9).

UPP will not support director re-elections “if there appears to be inadequate oversight of climate change,” (p.6) and will “not support the election of the chair of the committee responsible for overseeing disclosures if the company does not report on its climate-related governance and risks and opportunities and does not have a plan to do so in a reasonable timeframe” (p.9). This policy is stronger than that of most funds, which, if they mention voting against directors at all, usually mention it in a “may consider” capacity rather than “will not support.” UPP reported in its Climate Stewardship Plan that its 2023 voting focus included voting against “all incumbent directors where there appears to be little to no board oversight of climate-related issues” (p.5). In a website post at the end of 2023, UPP reported that it had voted against directors at 30 companies in 2023 for an absence of board climate oversight.

The Climate Stewardship Plan states that UPP will consider revisions to its voting guidelines for 2024 and 2025, with items under consideration including voting against directors based on insufficient climate action, and instituting climate-related expectations related to auditor appointment, advisory votes on compensation and corporate transactions. The Climate Stewardship Plan also articulated how UPP intends to amplify its votes by communicating in writing with companies when UPP votes against management for climate-related reasons, and by pre-declaring votes for at least one climate-related ballot item in 2025 (p.5). 

UPP’s Proxy Voting Policy section on lobbying calls only for disclosure of political contributions and lobbying activities (p.10). While this section still needs to be strengthened to ensure that companies do not lobby against Paris-aligned climate policy, UPP articulated in its Climate Stewardship Plan that it expects oil companies to align their lobbying activities with the goals of the Paris Agreement (p.5). UPP must also express an expectation in engagements and in its voting guidelines that companies tie compensation to the achievement of climate targets and do not direct capital expenditure to fossil fuel expansion.

In August 2023, the fund added its voice to a call for proxy service provider ISS to call for improved resources on climate-related votes and better integration of climate into the ISS Benchmark Policy.

UPP has an opportunity to leverage its relatively strong guidelines and voting record to take a leadership role in filing climate-related shareholder resolutions and publicly highlighting climate resolutions or climate-related votes against directors, for example through news releases and public letters to companies.

Collaborative engagement

UPP is a founding member of Climate Engagement Canada (CEC). In its 2022 Annual Report, UPP reported that it had begun CEC engagement with three companies and provided an example of its engagement with fuel retailer and roadside convenience company Couche-Tard: “We outlined our goals for the company to disclose emissions in line with [the Task Force on Climate-Related Financial Disclosures] TCFD and adopt comprehensive strategies to achieve net-zero greenhouse gas emissions by 2050, including measurable sector-relevant targets” (p.38). UPP can strengthen its engagement by laying out time-bound milestones that Couche-Tard must meet and escalatory actions UPP will take if these milestones are not met.

UPP is an investor supporter of Climate Action 100+, meaning it is a signatory to the initiative and supports the initiatives’ goals, but does not participate directly in engagements with focus companies.

UPP is also a supporter of CDP’s 2023-2024 Science-Based Targets Campaign, which in 2023 sent letters on behalf of its supporters (financial institutions and multinational corporations) to “over 2,100 high-impact companies asking them to commit to and set 1.5°C-aligned Science-Based Targets."  

Policy engagement

UPP took a leading position on policy advocacy in its Climate Stewardship Plan, stating that it aims to “[c]ontribute to establishment of mandatory standardized, economy-wide disclosure of scope 1, 2 and material scope 3 emissions, and transition plans from all medium and large enterprises,” and to “[s]upport policy advancing the alignment of activity in the real economy with a 1.5 degrees scenario” (p.6). While other funds analyzed in this report have indicated they support standardized climate risk disclosure regulations, UPP goes further by committing to advocate for regulation that requires transition plans from all medium and large enterprises. 

Importantly, UPP considers its policy advocacy to be part of fulfilling its duty to UPP members, stating, “We believe that UPP has a duty to advocate for effective rules and regulations on behalf of our members for the good of the fund and for the good of the economic, social, and environmental systems on which long-term fund performance relies” (p.6). 

UPP, along with other financial institutions, including pension manager British Columbia Investment Management Corporation, demonstrated its advocacy efforts with a joint submission to a Government of Canada consultation on capping oil and gas emissions. The submission encouraged the government “to adopt the most practical and effective regulatory changes, in order to incentivize emission reduction innovation and implementation to further limit climate change and to reduce systemic risk in our portfolios.”