2024 UPDATES

• Provided more detailed case studies of climate engagement with owned companies.

• Signed open letter calling on the federal government to urgently implement a Sustainable Investment Taxonomy. 

• Submitted joint comments to the Canadian Sustainability Standards Board (CSSB), calling for alignment with International Sustainability Standards Board (ISSB) disclosure standards, including scope 3 emission disclosure.

• Signed on to the 2024 Global Investor Statement to Governments on the Climate Crisis.

OVERVIEW

The investment manager has set out strong climate expectations for owned companies. In 2024, IMCO’s score increased on this indicator based on increased disclosure of climate engagement of portfolio companies. IMCO can build on its already strong approach by setting out timebound milestones for companies to meet, being willing to escalate publicly when companies are not responsive to engagement, and setting out stronger commitments to align external managers on climate.

DETAILS

IMCO has science-aligned climate expectations for its owned companies and states similar expectations for public companies through its Proxy Voting Guideline. The fund manager prioritizes investing with external managers with net-zero commitments. IMCO collaborates on climate with other investors through Climate Action 100+ and Climate Engagement Canada (CEC). 

IMCO’s proxy voting record indicates it is voting in line with its climate guidelines and is willing to vote against directors. Its Stewardship Guideline and Climate Action Plan indicate that the investment manager will consider escalation steps up to and including divestment.

As IMCO’s engagement strategy matures it needs to be strengthened with:

• a time-bound and escalatory engagement process, with continued demonstration that IMCO is using escalatory tools such as voting against directors and bringing forward shareholder resolutions;

• targets and commitments for ensuring external managers align with net-zero;

• a distinction between engagement with fossil fuel companies, which do not have a credible and profitable pathway to net-zero other than phase-out, and other high-carbon assets, such as cement or steel, which do have a credible and profitable net-zero pathway; and

• public advocacy to help ensure that governments in Canada and around the world are developing and implementing stringent and durable laws, policies and regulations that provide greater investment certainty and accelerate emissions reductions in line with the Paris Agreement.

Expectations and escalation

IMCO’s 2021 Annual Report articulated IMCO’s expectations that companies would commit to net-zero by 2050 or sooner and set science-based emissions reduction targets.

IMCO’s 2022 Annual Report says that the investment manager engages with portfolio companies “to establish Paris-aligned plans, report on and reduce emissions.”

In 2024, IMCO’s 2023 Sustainability Report reiterated that “We need to know what actions our external managers and investee companies are taking – or plan to take – to be aligned with net zero. [...]  achieving our commitment of a net zero emissions portfolio by 2050 requires an understanding of how each investment aligns with this objective.”

IMCO has demonstrated some willingness to escalate climate engagements, whether itself or through its managers. Escalation steps may include votes against directors, co-filing of shareholder resolutions, collaborative engagement and, “as a measure of last resort,” divestment.

Portfolio companies

IMCO’s detailed case studies of climate engagement with portfolio companies contributed to the investment manager’s increase on its Climate Engagement score.

IMCO’s 2023 Sustainability Report noted that the investment manager had “shared best practices on net zero transition planning with several directly held portfolio companies” and was “developing more robust models to assess investee companies’ net zero alignment and to model the impact of investment decisions on our climate commitments.“

IMCO provided a case study of working with portfolio company DataBank to get a credible net-zero plan and aligned budget in place at the data centre. IMCO engaged with the company to ensure costs were understood, if the target was embedded throughout the organization, and if it had executive level support. IMCO engaged with other shareholders on DataBanks’ climate policy and reviewed the near-term budget for the net zero plan.

The plan ultimately included a commitment to mitigate 100% of scope 1 and scope 2 emissions by 2030, board-level accountability, and the incorporation of environmental metrics into management compensation.

IMCO also provided an example of engaging with refined oil products transporter and storage operator Exolum to “diversify its business interest and focus on sustainability”. While Exolum has made a net-zero by 2040 commitment, its vague plans for achieving this through future use of hydrogen, carbon capture, and biofuels lacks technical or economic credibility. It is unclear how further engagement could address growing stranded asset risks, as the majority of its operating profits and valuation are dependent on fossil fuel transportation terminals. IMCO must draw a distinction between companies that have a pathway to transition and those that do not. Climate engagement efforts should not be wasted on companies that cannot or will not align on climate; instead IMCO should reduce its exposure to assets that face potential devaluation due to the transition challenges they face.

External managers

IMCO, along with the University Pension Plan (Ontario), stands out for its statements on aligning on climate with external managers. In IMCO’s 2021 ESG Report, the investment manager provided above-average detail on the process it used to conduct due diligence and screening of external managers, including questions related to net-zero commitment, portfolio alignment with net-zero, climate risk and opportunities, carbon footprinting including scope 3 “if appropriate,” and climate-related targets and metrics. IMCO’s ESG expectations are included in contractual agreements with external managers; in 2024 IMCO reported that 90% of newly onboarded managers signed side letters with ESG language” in 2023.

In its 2022 Annual Report, IMCO stated it would “prioritize partnerships with external managers that have made, or plan to make, net zero commitments and increase investment in companies with net zero commitments.” Its 2023 Sustainability Report added, “We engage with external managers to encourage reporting on emissions and progress toward net zero alignment of portfolios, prioritizing heaviest emitting sectors.”

IMCO reported in 2024 that it has developed a dashboard to track external managers on indicators including climate risk and greenhouse gas emissions.

IMCO reports to stakeholders the percentage of externally managed assets that have set net-zero targets.

IMCO’s requirements of external managers would be strengthened with a time-bound commitment to reach 100% of externally managed assets overseen by a net-zero aligned manager.

Proxy Voting Guidelines

IMCO has above-average climate expectations for owned companies and has set these out in each iteration of its Proxy Voting Guideline since Shift began reviewing the guidance.

The current Guideline, effective February 1, 2023, reiterates IMCO’s expectations and specifies additional expectations and escalation for “the world’s largest corporate greenhouse gas emitters” (which, in 2023, meant companies on the CA100+ focus list).

For all companies, IMCO sets out requirements that management proposals on climate change commit to climate disclosure, to reporting on progress to shareholders, to a net-zero target by 2050 or earlier, and to science-based reduction targets for the short, medium and long-term. IMCO states it will vote against or abstain from voting on management proposals if IMCO’s expectations are not met.

IMCO will generally vote for shareholder proposals calling for climate risk disclosure, the setting of emissions reduction targets, the development and disclosure of climate scenario analysis, and disclosure of lobbying activities.

In addition to the above, IMCO has set out additional detail for CA100+ focus list companies, requiring TCFD-aligned disclosure or disclosure of scope 1, 2 and 3 emissions along with short or medium term emission reduction targets and an accompanying plan. For CA100+ focus list companies, IMCO states it will vote against the board chair “in cases where we determine that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change.”

IMCO’s voting record is available on its website and includes rationale for shareholder votes or votes against directors. A February 2024 analysis by Investors for Paris Compliance of select climate-related shareholder votes indicates that IMCO for the most part is voting in line with its guidelines. IMCo itself reports that in 2023 it supported 64% of climate-related shareholder proposals, and 100% of proposals calling for lobbying disclosure, including proposals related to increased transparency on climate-related lobbying.

IMCO should build on its already strong Proxy Voting Guideline by expressing expectations that companies tie compensation to the achievement of climate targets, not lobby against climate policy, and not direct capital expenditure to fossil fuel expansion. Additionally, IMCO should follow through on the escalation steps outlined in its Stewardship Guideline by bringing forward climate-related shareholder resolutions.

Collaborative engagement

IMCO is a member of Climate Engagement Canada (CEC) and an investor participant of CA100+.

In 2023, IMCO participated in CEC engagements with companies including Capital Power, Enbridge, Fortis, Tourmaline Oil and Waste Connections.

The business models of three of these five companies, Enbridge, Fortis, and Tourmaline, depend on the continued growth of fossil fuel combustion. It is unclear why IMCO believes that these companies can be engaged to set and achieve credible Paris-aligned outcomes. Credible analysis would reveal that the only Paris-aligned route these companies could take is a carefully managed wind-down of core oil and gas production and transportation businesses. 

Perhaps in recognition of this fact, IMCO appears to be escalating its engagement with Enbridge. The investment manager reported that in 2022 it had “encouraged” disclosure of how Enbridge’s capital expenditure and lobbying align with the goals of the Paris Agreement. In 2024, Shift noted that IMCO voted for a shareholder resolution calling on Enbridge to disclose its scope 3 emissions and voted against Enbridge’s board chair for failure to manage “material environmental, social and governance risks.” Neither effort was successful, and Enbridge continues to lobby against climate policies while lacking credible or profitable pathways to align its business model with a safe climate.   

With this track record, IMCO must conclude that Enbridge meets IMCO’s threshold for divestment: “When prior extensive engagement has not proved successful and there is a clear risk to shareholder value, divestment may be carefully considered by the investment teams as a measure of last resort.”

Policy engagement

IMCO encouragingly put its name behind two calls for clearer and improved disclosure standards by signing a joint statement in support of aligning Canadian Sustainability Standards Board (CSSB) standards with International Sustainability Standards Board (ISSB) standards and adding its name to an open letter calling for Canada to rapidly implement a sustainable finance taxonomy. IMCO also joined more than 600 other institutional investors in signing on to the 2024 Global Investor Statement to Governments on the Climate Crisis, a call for climate policy implementation and a whole-of-government climate approach from all levels of government.

IMCO should continue to use its voice to call for more rigorous climate policy and climate-aligned financial regulation. Without such policy and regulation, climate impacts will continue to worsen, and IMCO will find it increasingly difficult to fulfill its obligations to beneficiaries.