2024 Canadian Pension Climate Report Card
OVERALL SCORE
C
Public Sector Pension Investment Board (PSP or PSP Investments)
Climate Urgency
B
Climate Engagement
C+
Climate Integration
B-
Fossil Fuel Exclusions
F
Interim Targets
B-
Paris-Aligned Target
F
The 2024 Canadian Pension Climate Report Card analyses, assesses and ranks the progress made by eleven of Canada’s largest pension managers and two international pension managers in their approach to climate risk and investment decisions as they relate to the climate crisis. The report is based on publicly available information to December 31, 2024.
PSP Investments is the pension manager for approximately 900,000 active and retired employees of Canada’s federal government, including federal public servants, the RCMP, and the Canadian Armed Forces and Reserve Force. PSP is a Crown corporation sponsored by the Government of Canada.
Assets Under Management (AUM): $264.9 billion (March 31, 2024)
PSP’s 2022 Climate Strategy Roadmap laid out some of the more ambitious interim targets among Canadian funds, and PSP is pursuing that roadmap by implementing sophisticated internal processes and tools to measure portfolio emissions and climate risks. This merited a score increase in the Climate Integration category in 2024. But PSP has yet to commit to net-zero financed emissions or disclose its holdings to its own members. The pension manager has made good progress on short-term climate targets, but has not set new targets for 2030 and beyond. It also obscures its exposure to fossil fuel investments and has not reported what percent of its portfolio has mature science-based transition plans. PSP saw its score decrease on Communication of Climate Urgency this year, as the federal pension manager’s language in its 2024 reporting appears to be a step back from some of the urgency expressed in its Climate Strategy Roadmap. PSP has yet to implement any exclusion on investment in fossil fuels.
2024 UPDATES
None.
OVERVIEW
PSP remains one of the few Canadian pension funds that has yet to commit to net-zero emissions by 2050 or sooner, giving it a failing grade in this category for three years running. View the Paris-aligned targets of other Canadian pension funds in this report’s Table 1: Emissions Reduction Targets.
DETAILS
PSP continues to state that it aims to “support Canada’s net-zero emissions by 2050 goal” and “use (its) capital and influence to support the transition to global net-zero emissions.” But it remains one of the few pension funds analyzed in this report that has yet to commit its own portfolio to net-zero emissions by 2050 or sooner.
Considering how sophisticated other elements of PSP’s climate strategy are, it is surprising that PSP still has not taken this primary and necessary step. If PSP’s objective is to “support the transition to global net-zero emissions,” it must demonstrate leadership and accountability, and signal to its own staff and stakeholders that climate change is a priority, by setting its own Paris-aligned target. There is no way to track progress against a long-term net-zero target if the target itself does not exist. Furthermore, PSP must recognize that advancing the transition to a net-zero future requires large institutional investors to decarbonize their portfolios faster than the real economy.
PSP notes that it seeks to evaluate the alignment of its investments with “sector-specific emissions reduction trajectories as outlined in the International Energy Agency’s (IEA) Net-Zero Scenario, guidance from the Science Based Targets initiative (SBTi), the Investor Leadership Network (ILN) sector decarbonization pathways, or other credible modelling sources in alignment with a 1.5°C climate scenario.” Unlike some other Canadian pension managers, however, PSP does not explicitly state that it seeks to reduce emissions in the real economy, instead resorting to vague statements about “advancing the transition to a low-carbon future”, “consider(ing) investment opportunities that could contribute to the low-carbon transition”, and “striv(ing) to invest in the transition economy.” PSP must recognize that fulfilling its mandate and investing in its members best long-term interests obligates the pension manager to accelerate global decarbonization and avoid dangerous emissions pathways. The first step for PSP must be setting an ambitious net-zero target and aligning its portfolio with that target.
Offsets
In its Corporate View on Climate Change, PSP says that “in hard-to-abate sectors, we will define an appropriate role for carbon removal and offsets. However, carbon removal and offsets will not be approached as an alternative to real reductions in portfolio emissions, but rather in addition to them.” It is encouraging to see that PSP recognizes the limitations of offsets, but the pension manager should go further by placing a strict limit on the role of carbon removal and offsets in portfolio company climate plans and in supporting the transition to global net-zero emissions by 2050. At the same time, PSP’s 2024 Annual Report features a case study of portfolio company Mosaic Forest Management and its issuance of its first carbon credits under the Verified Carbon Standard by deferring logging of private forested land throughout coastal British Columbia. It is not clear why PSP would choose to highlight Mosaic’s use of carbon credits as an example of climate leadership, or if PSP is allowing Mosaic to use offsets “as an alternative to real reductions in portfolio emissions” or selling carbon credits to other companies that are doing the same.
PSP has not joined a credible and accountable Paris-aligned investor body, such as the Net-Zero Asset Owner Alliance or the Paris Aligned Asset Owners, which would require it to limit its use of carbon offsets and account for scope 3 emissions.
2024 UPDATES
Reduced emissions intensity to slightly below 2021 levels in FY 2024, even as the percentage of AUM in-scope increased by 14%, likely putting PSP on track to achieve its 2026 target of a 20-25% reduction by 2026.
Reduced its absolute emissions by 11% between FY 2023 and FY 2024, following an absolute emissions reduction of 13% between FY 2022 and FY 2023.
Increased “green investments” from $48.9 billion in FY 2023 to $64.9 billion in FY 2024.
Increased “transition investments” from $7.8 billion in FY 2023 to $11.5 billion in FY 2024.
Reduced “carbon-intensive assets” from $12.7 billion in FY 2023 to $8.1 billion in FY 2024, although the FY 2024 total still represents an increase from PSP’s 2021 baseline.
Increased obtainment of scope 1 and 2 emissions data for portfolio assets from 54% in FY 2023 to 62% in FY 2024.
Did not report on target to ensure that 50% of its portfolio carbon footprint is covered by a mature science-based transition plan by 2026.
OVERVIEW
PSP’s score in this category is unchanged since 2022, as the fund has neither set new targets nor strengthened existing ones. The relative interim targets of 11 Canadian pension fund managers can be viewed in this report’s Table 2: Additional Climate-Related Targets.
PSP has largely achieved, or is on track to achieve, its relatively strong 2026 targets for emissions intensity reduction and “green,” “transition” and “carbon-intensive” assets, but needs to continue its progress by setting targets for 2030 and beyond. Loopholes in PSP’s reporting make it impossible to verify the climate-alignment of PSP’s portfolio. The pension manager has not yet reported on its target to ensure that 50% of its portfolio carbon footprint is covered by a mature science-based transition plan by 2026.
DETAILS
Emissions reduction
PSP’s short-term emissions reduction target, announced in 2022, committed to reduce portfolio emissions intensity by 20-25% below a 2021 baseline by 2026, expressed as tonnes of CO2e per $m revenue. As of March 31, 2024, PSP reported that it had reduced its portfolio emissions intensity to slightly below FY 2021 levels, likely putting it on track to achieve its 2026 target. This reduction was achieved despite the adjusted AUM in-scope increasing by 14%, which PSP attributed to improved emissions data quality.
PSP has not yet set a target for absolute emissions reduction, but reported that the portfolio’s absolute emissions (which PSP reports as “financed emissions”) decreased by 11% between FY 2023 and FY 2024. This decrease follows an absolute emissions decrease of 13% between FY 2022 and FY 2023. However, PSP does not include investee companies’ scope 3 emissions in its portfolio carbon footprint metrics.
PSP attributes the decrease in its two portfolio carbon footprint metrics (financed emissions and carbon footprint) to numerous factors, including:
An increase in the actual reported GHG data, instead of estimates.
An improvement in collection methodologies for private markets financial data (e.g., asset-level equity and asset-level debt) resulting in more accurate attribution factors.
A variation in year-over-year position size driven by market values and macroeconomic conditions, including inflation.
Companies implementing their transition plans, which resulted in a decline in their GHG emissions.
PSP could provide greater transparency by following the lead of Swedish pension fund AP2, which meaningfully breaks down emissions reductions resulting from portfolio changes in company holdings in comparison to emissions reductions resulting from actual decarbonization at portfolio companies.
Having made strong progress toward its emissions reduction targets, PSP must re-focus its portfolio decarbonization efforts by setting interim targets for 2030 and beyond, on the way to net-zero by 2050 or sooner.
PSP’s early emissions reduction progress may not continue in a steady or linear way, however. PSP reported in 2024 that its emissions may increase in the short-term: “As we strive to invest in the transition economy, we anticipate a short-term rise in our portfolio carbon footprint, followed by a gradual decline as the effects of emissions reduction due to expediting of decarbonization transition plans of our portfolio companies begin to take hold.”
Investment in green assets
In 2022, PSP committed to increase investment in “green assets” from $40.3 billion in 2021 to $70 billion in 2026. These are defined as “investments in low carbon activities that lead to positive environmental impacts,” including “dark green,” “light green” and “enabling.” PSP’s green assets increased to $48.9 billion at the end of FY 2023 and increased further to $64.9 billion at the end of FY 2024. PSP does not provide a breakdown of green assets that are “dark green”, “light green” and “enabling”. PSP also issued a $1-billion green bond in FY 2024.
Notably, PSP’s definitions of “light green” and “enabling” open the door to greenwashing. Using the definition of “investments in activities that achieve 30% better GHG performance than a relevant sector benchmark”, it would be possible for PSP to inappropriately categorize an oil and gas producer that has relatively lower upstream emissions intensity than its peers as a “light green asset” under its taxonomy. Similarly, PSP defines “enabling green assets as “investments that enable climate mitigation and adaptation, aiding the transition to a low carbon economy… Eligible if majority of revenues are derived from one or more low carbon activities.” This means that PSP could possibly be categorizing an electric utility that derives 49% of its revenues from coal and 51% from renewables as an “enabling green asset.” It’s possible that PSP’s “two-dimensional framework to assess climate alignment” would automatically rule out oil and gas producers or fossil fuel utilities from being considered light green assets because of their higher carbon intensity in comparison to the carbon intensity of PSP’s total fund. If not, PSP’s Green Asset Taxonomy could lead to a skewed understanding of the transition risks facing PSP’s portfolio. This greenwashing risk becomes even more problematic considering that PSP doesn’t include investee companies’ scope 3 emissions in its portfolio carbon footprint metrics.
Investment in transition assets
PSP set a target in 2022 to increase investment in “transition assets” from $5.1 billion in 2021 to $7.5 billion by 2026. These are defined as “Investments that have committed to make a substantial contribution to the low-carbon transition through the establishment of public targets and disclosure practices,” including “early” and “mature”.
PSP surpassed this target in FY 2023, reaching $7.8 billion in transition assets, three years ahead of schedule. PSP explains that in FY 2023 it “reclassified a large individual asset from carbon-intensive to transition asset based on its newly established asset-level targets.” It also identified more eligible transition assets in its portfolio than anticipated when it first implemented its Green Asset Taxonomy, the scope of which was expanded in FY 2023 to include listed corporate bonds.
By the end of FY 2024, PSP further increased its investments in transition assets to $11.5 billion. PSP does not provide a breakdown of transition assets that are “early” and “mature”. But PSP “explains the decrease in carbon-intensive assets and the increase in transition assets” to an increase in the coverage and quality of reporting from investee companies and a “large number of assets” in its Natural Resources portfolio (which mostly includes timber and agriculture assets) developing transition plans.
Similar to its categorization of “green assets”, PSP’s definition of “transition assets” could mislead plan members into thinking these investments are low-risk and Paris-aligned when they may not be. Defined as “investments that have some short or long-term targets in place, but are not aligned to science based approach,” it could be possible for PSP to inaccurately categorize an oil sands company that has a net-zero by 2050 commitment and a short-term per-barrel-emissions target in place as an “early transition asset” under its taxonomy. Again, this becomes even more relevant considering that PSP doesn’t include investee companies’ scope 3 emissions in its portfolio carbon footprint metrics.
Investment in carbon-intensive assets
PSP set a target in 2022 to halve its exposure to “carbon-intensive assets” from $7.8 billion in 2021 to $3.9 billion in 2026. These are defined as “investments in sensitive high-carbon sectors or that fail to show quantifiable low emission performance,“ including “High Carbon” and “Hard to Abate” assets. After rising to $13.1 billion in FY 2022, PSP’s exposure to carbon-intensive assets decreased slightly to $12.7 billion in FY 2023, primarily due to improved data collection. Corresponding to its increase in transition assets, PSP reported a decrease in “carbon-intensive assets” to $8.1 billion in FY 2024, marking a “turning point” where PSP’s exposure to transition assets exceeds that of carbon-intensive assets.
It is unclear which individual holdings PSP considers to be “green” or “transition” assets, making it impossible to verify if those assets actually have credible climate targets and transition plans. With Shift estimating that PSP has at least $6.2 billion in fossil fuel assets (see Fossil Fuel Investments under Fossil Fuel Exclusions), it is likely that PSP inappropriately categorizes at least some fossil fuel assets as “green” or “transition” assets under its Green Asset Taxonomy. At the end of FY 2024, the Green Asset Taxonomy had been applied to 78% of PSP’s portfolio.
Portfolio footprint covered by mature science-based transition plans
In 2022, PSP committed to ensure that 50% of its portfolio’s carbon footprint is covered by a mature science-based transition plan by 2026. PSP did not report on its portfolio’s progress toward this commitment in FY 2023 or FY 2024. However, in FY 2023 PSP carried out asset-level GHG data collection for its Natural Resources portfolio.
Other climate-related targets
Obtainment of scope 1 and 2 emissions data
PSP set a target in 2022 to obtain scope 1 and 2 emissions data for 80% of in-scope portfolio assets by 2026. In FY 2023, PSP obtained reported emissions data for 54% of in-scope assets. By the end of FY 2024, that proportion increased to 62%, “driven mainly by the efforts of (its) Credit Investments group to collect more data, but was also boosted by the continued focus of (its) other asset classes to increase coverage.”
Long-term debt financing for sustainable bonds
PSP said in its 2023 Sustainable Investment Report that it plans to steer at least 10% of long-term debt financing toward Sustainable Bonds by 2026. By the end of FY 2024, PSP had “raised (its) sustainable bond financing to 7.1% of PSP Capital’s debt outstanding.”
2024 UPDATES
Seems to have softened and de-prioritized its communication of the urgency of climate change in 2024.
OVERVIEW
While PSP continues to recognize climate change as a systemic risk, the investment manager seems to have de-prioritized its communication of the urgency and existential nature of the climate crisis in the years since publishing its Climate Strategy Roadmap. This reduced emphasis on communicating climate urgency has led PSP’s score in this category to slip from a B+ to a B between 2023 and 2024.
DETAILS
PSP acknowledges that climate change is an urgent systemic risk, citing science from the IPCC, and asserts that it aims to support the transition to global net zero emissions.
Example
“PSP Investments recognizes that climate change is considered a long-term systemic risk, as supported by scientific evidence from the Intergovernmental Panel on Climate Change (IPCC). We acknowledge the potential material impact of climate change on investment risks and returns across various sectors, geographies and asset classes.”
But PSP seems to have de-emphasized the climate crisis in its communications in the years since the release of its Climate Strategy Roadmap. In its 2024 Annual Report, neither the CEO nor Chair mention climate change. Some of PSP’s staff with climate experience are no longer working for the pension manager, including former CIO Eduard van Gelderen and senior staff that were seconded to work for the Canada Growth Fund. It is unclear if this turnover may have left a temporary gap in PSP staff’s abilities to advance climate strategy objectives and communicate the urgency of the climate crisis to senior leadership.
In other reporting in 2024, PSP tends to speak about climate change as just another risk among many, failing to centre climate in PSP’s investment strategy, acknowledge the enormous power that a $265-billion asset owner has in influencing the trajectory of the energy transition or recognize that a stable climate is fundamental to its members’ retirement security. As an independently governed federal crown corporation, PSP should adopt and align its operations with Canada’s legally mandated climate obligations.
Example
“One aspect of sustainability is climate change considerations, which present both risks and opportunities for PSP Investments. As a long-term investor, we believe that incorporating material climate considerations into our investment decisions is important for delivering the long term risk-adjusted returns needed to support our mandate.”
“We believe that the ways in which pension investors like PSP Investments could be affected by climate change are diverse, complex and interconnected. Climate change impacts, both direct (such as extreme weather events and climate policies) and indirect (such as market anticipation of future risks), should be considered in our investment strategies. We believe that climate change is one of the factors that will impact the long-term performance and risk profile of our investment portfolio.”
PSP fails to acknowledge double materiality in its communications on climate change. It is clear that the climate crisis presents risks and opportunities for the portfolio, but the investment manager is silent on the fact that PSP’s investment and asset management decisions also affect the trajectory of the energy transition and climate crisis.
2024 UPDATES
No update to proxy voting guidelines since February 2023.
Inconsistencies in PSP holding companies accountable to its own climate-related expectations or voting in line with its own proxy voting guidelines.
No update on progress in ensuring external managers adhere to a Paris-aligned investment strategy.
No evidence of collaborative engagement on climate.
Little evidence of engagement or advocacy related to climate-related policies.
OVERVIEW
PSP has communicated relatively strong climate-related expectations to investee companies and has many of the right tools, guidelines and processes to align companies with net-zero, but the investment manager provides little detail on how it’s enforcing expectations for companies, partners and external managers, regularly votes against climate shareholder proposals, and is not particularly active on climate-related policy engagement.
DETAILS
Expectations and escalation
PSP has described its engagement approach as tailored to investment type, exposure, investment time horizon, objectives sought and likelihood of success. PSP stated in its Green Asset Taxonomy Whitepaper in 2022 that its engagement milestones include, in the near-term, the development of a Paris-aligned strategy and science-based emissions reduction targets, and in the long-term, “ensuring companies have a business model consistent with net-zero emissions and an effective transition plan to achieve this by 2050.”
In 2023, PSP referenced credible organizations in assessing whether its assets are climate-aligned: “In considering whether investments support the long-term goals of the Paris Agreement, we seek to evaluate whether our investments demonstrate alignment with sector-specific emissions reductions trajectories as outlined in the International Energy Agency’s (IEA) Net-Zero Scenario, guidance from the Science-Based Targets Initiative (SBTi), the Investor Leadership Network (ILN) sector decarbonization pathways, or other credible modeling sources in alignment with a 1.5-degree climate scenario.” PSP also said in its 2022 Climate Strategy Roadmap that it has a willingness to escalate its engagement, up to and including divestment, if decarbonization progress is not made.
However, PSP does not appear to be following through on the relatively ambitious expectations it set for investee companies in 2022 or the strong and escalatory engagement program that these expectations require. While PSP committed in 2022 to develop a climate escalation policy in 2023 that can be applied to public issuers and private portfolio companies, there is no evidence that this escalation policy has been developed or implemented. The pension manager’s 2023 policies contain loopholes that allow PSP to allow companies to continue with business-as-usual (see Proxy Voting section below).
Portfolio companies
PSP reported in 2024 that its “engagements with partners and portfolio companies focused primarily on encouraging the development of credible sustainability and transition strategies. (It) witnessed positive momentum across (its) private markets’ portfolio related to transition planning and will strive to continue engaging with (its) investee companies to develop credible plans going forward.”
But beyond these two lines, PSP offers little evidence that it is following through on these engagement commitments. PSP reports the growth in “green assets” and “transition assets” and decrease of “carbon-intensive assets” in its portfolio. But there is no breakdown of individual assets, and the definitions of both “green” and “transition” allow PSP to apply these categorizations to companies that may not actually have credible transition plans and pathways.
PSP’s 2023 Green Bond Impact Report includes a case study on Angel Trains, a portfolio company that owns and operates the largest passenger rolling stock in the UK. The case study highlights that 80% of the company’s revenues come from electric or bi-mode trains, that 99% of investment in new trains are electric or bi-mode trains, the development of a battery hybrid concept for some trains, research into alternative fuels and hydrogen, and a 5-star GRESB rating. But PSP doesn’t describe how its engagement or green bond issuance actually led to these outcomes.
In its 2024 Annual Report, PSP features a case study of Hydromega Services, a renewable energy company with mostly hydropower assets in Ontario and Quebec. But Hydromega would likely already be categorized as a green asset, so the case study does not explain how PSP’s investment, engagement and stewardship has the potential to decarbonize carbon-intensive or hard-to-abate assets.
PSP also features Mosaic Forest Management in its annual report as a case study, noting that Mosaic issued its first carbon credits under the Verified Carbon Standard by deferring logging of private forested land throughout coastal British Columbia. But PSP’s own Corporate View on Climate Change says that “offsets will not be approached as an alternative to real reductions in portfolio emissions,” so it is odd that PSP would choose to highlight Mosaic as an example of its efforts to mitigate climate change and contribute to global net-zero goals.
Proxy Voting Guidelines
PSP last updated its Sustainable Investment Policy and Corporate Governance and Proxy Voting Principles in February 2023. With loopholes that give companies and directors wiggle room to fall short of PSP’s climate-related expectations, PSP’s policies and guidelines are weaker than its industry peers. An analysis by Investors for Paris Compliance of PSP’s proxy voting guidelines and other engagement policies found that they “need improving.”
In 2023, PSP put in place a “watchlist” of companies “with the greatest impact on (its) public equities portfolio’s carbon footprint — those classified as high-carbon and hard-to-abate assets without transition plans.” PSP “may consider” voting against director nominations for those companies as a way to hold them accountable. In FY 2024, PSP provided no updates on this “watchlist”, making it impossible to determine if PSP’s engagement is having an impact or if PSP is holding companies accountable.
PSP’s proxy voting record on climate is mediocre at best, and PSP does not appear to be escalating its engagement or regularly holding companies accountable to its own expectations and guidelines. According to a February 2024 analysis by Investors for Paris Compliance of 26 key climate-related shareholder proposals aligned with Climate Engagement Canada and Climate Action 100+ principles, PSP voted for just half of the proposals, ranking PSP 20th out of 35 institutional investors in its degree of support.
In one instance in 2024, PSP voted against a shareholder proposal at Enbridge’s annual general meeting that called for full disclosure of Enbridge’s scope 3 emissions. PSP’s vote against the proposal contradicts its guideline that indicates it “generally support(s) shareholder proposals seeking enhanced climate-related disclosures.” PSP admits that it does not have sufficient data to include investee companies’ scope 3 emissions in its portfolio carbon footprint metrics or Green Asset Taxonomy, making it bizarre that it would vote against a reasonable proposal calling for improved scope 3 emissions disclosure from a high-risk fossil fuel company.
PSP lags behind its peers in the Canadian pension sector in its approach to proxy voting because it does not announce in real-time how it will be voting at shareholder resolutions at companies’ annual meetings, delays the reporting of its proxy votes by up to three months after a meeting, and does not provide rationales for its votes. These are changes that PSP could implement quickly and easily, but PSP has so far chosen not to.
For example, the British Columbia Investment Management Corporation (BCI) has considered voting for more prescriptive climate proposals since 2021, has escalated its votes against directors for climate-related reasons, and now requires publicly-traded companies to incorporate climate assumptions and risk assessments into their audited financial statements. Similarly, OPTrust’s proxy voting guidelines encourage companies to have “climate-competent boards”; the Ontario Teachers’ Pension Plan’s guidelines state it expects companies to provide short-, medium-, and long-term greenhouse gas emissions reduction targets and report their progress towards those targets; the University Pension Plan (UPP) has committed to a year-over-year strengthening of its climate-related proxy voting guidelines; and the Investment Management Corporation of Ontario’s (IMCO) guidelines spell out specific net-zero-aligned requirements for management-sponsored proposals on climate change.
External managers
In FY 2023, PSP reported that it used an in-house framework to assess the ESG practices of external managers and ensure that their approach is aligned with PSP’s Sustainable Investment Policy. PSP’s 2023 Sustainable Investment Report describes a “sustainability assessment framework” for external managers that includes climate change strategy or guiding principles, systematic identification of risks and opportunities related to climate change, tracking of portfolio carbon footprint, and disclosures aligned with TCFD recommendations. The assessment found that in FY 2023, 84% of PSP’s exposure to externally managed investments was managed by external managers or general partners with “active” or ”leading” approaches to sustainability-related factors. However, only 36% of these partners were TCFD supporters and just over two-thirds had dedicated ESG staff.
In FY 2024, PSP reported that, for externally managed investments, it “integrates climate considerations, alongside other sustainability risks,” that PSP “launched a web-based due diligence tool that gives us insight into the sustainability practices of our external managers and general partners” and that it “regularly survey(s) the climate change strategies of new general partners and external managers. But PSP provided no updates or data on how its framework was leading to improvements from external managers in managing climate risk, or how PSP would address a lack of progress in this area.
Collaborative engagement
There was little evidence that PSP was involved with any collaborative engagements on climate change in 2024. PSP said that it “continued its involvement with Climate Engagement Canada” in FY 2024 after joining the initiative in 2023, but offers no further reporting on this involvement. PSP is not listed on CEC’s list of participants. PSP is not a member of Climate Action 100+.
Policy engagement
In FY 2024, PSP reported that it contributed to a climate scenario analysis led by the Bank of Canada to evaluate the resilience of the Canadian financial system to climate shocks, which PSP says helped it to broaden its understanding of how climate change might impact its portfolio and benchmark its strategies against those of industry peers. In June 2024, PSP signed onto a joint letter with other Canadian pension funds to support and strengthen the Canadian Sustainability Standards Board’s draft sustainability disclosure standards.
Beyond these examples, PSP appears to be doing little in terms of engagement or advocacy to secure climate-related policies that are critical to limiting global temperature increases to safe levels. PSP’s absence from the policy engagement space is particularly notable in comparison to funds such as UPP and BCI, which have shown leadership in this regard.
2024 UPDATES
Still no disclosure of either a comprehensive inventory of PSP’s assets or its fossil fuel exposure.
Improved tools, processes and training for staff and board on climate-related risks and opportunities.
Appears to have changed “oil and gas” economic sector reporting in its Natural Resources portfolio to “other” in 2024.
House of Commons committees called for PSP to enhance transparency and disclosure, and to fully disclose private equity investments.
Continues to measure and report the portfolio’s biogenic emissions.
Conducted climate scenario analysis using a “failed climate transition scenario, leading to a potential 4.2°C rise in average global temperatures by 2100.”
Added “including climate” to the “Sustainability” competency for board members.
A fossil-entangled director was appointed to PSP’s board in September 2023, but resigned one month later.
OVERVIEW
PSP has made progress in integrating the consideration of climate risks across its portfolio and is collecting robust emissions and sustainability data to manage these risks, leading to an increase in PSP’s score from C+ to C in this category in 2024. But PSP continues to hide or obscure its portfolio holdings from members and seems to shy away from doing what’s necessary to help avoid the “failed climate transition scenario” that it stress tests its portfolio against.
DETAILS
Transparency and disclosure of holdings
PSP has a series of webpages with information about its portfolio broken down by asset class, along with a few sample investments, breakdowns by economic sector, and geographic distribution. But PSP does not disclose a comprehensive list of its investments and their valuations, unlike its Canadian peers such as the Canada Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ) and British Columbia Investment Management Corporation (BCI).
In November, the House of Commons Standing Committee on Environment and Sustainable Development formally called on the Minister of Environment and Climate Change and Minister of Finance to require enhanced transparency and disclosure from federally-regulated public pension funds, including PSP, and to fully disclose their investments in private equity funds.
Disclosure of fossil fuel assets
PSP appears to be obfuscating its exposure to fossil fuel assets and ignoring requests from plan members and the public for this information. (See more in Interim Targets, Fossil Fuel Exclusions, and Fossil Fuel Investments sections.)
Despite persistent requests from Public Sector Pension Plan members for PSP to fully disclose a list of assets allocated towards companies involved in high-risk fossil fuel exploration, extraction, transportation, refining and combustion, PSP again did not do so in 2024. At PSP’s Annual Meeting in October 2024, PSP board members and executives ignored, sidestepped and dodged numerous questions about PSP’s approach to climate risk and investments in fossil fuels. They also couldn’t provide an example of a “carbon-intensive asset” for which PSP developed a credible climate transition plan. PSP did not post an audio, video or written recording of its annual meeting, instead simply posting the slides that were presented at the meeting. An audio recording by a plan member and shared with Shift is the only version of the meeting that is publicly available. PSP did not provide written answers to plan members who submitted questions by email.
PSP also appears to have removed “oil and gas” as an economic sector from its Natural Resources webpage. A version of this webpage dated May 28, 2024 shows 1.5% of the Natural Resources portfolio to be composed of “agriculture”, “timber” and “oil and gas”. Subsequent versions of the same webpage feature only “agriculture”, “timber” and “other”. PSP made similar changes to economic sector reporting for the Natural Resources portfolio in its 2024 Annual Report, which showed 2.4% invested in “other”, whereas previous years’ annual reports showed “oil and gas”. It is not clear if PSP divested the oil and gas assets in its Natural Resources portfolio, or if it is obfuscating its exposure to oil and gas assets by labelling them as “other”.
Climate disclosures and emissions accounting
PSP published its Climate Strategy Roadmap in April 2022 and has reported regularly on its climate progress in annual reports, sustainable investing reports and climate-related financial disclosures, most recently in September 2024. The Climate Strategy Roadmap states that additional climate-related targets and plans will be developed for 2027 to 2030.
PSP’s emissions accounting is robust in comparison to most other Canadian pension funds. While PSP does not yet include investee companies’ scope 3 emissions in its portfolio carbon footprint metrics, PSP reported that its financed emissions and carbon footprint calculation applied to 78% of its AUM in FY 2024, using a PCAF-informed methodology. This is an improvement from 66% in FY 2022 and 68% in FY 2023. The asset classes covered include Infrastructure, Fixed Income, Public Equities, Natural Resources, Private Equity, Real Estate, Credit Investments and its Complementary Portfolio (in order of declining degree of emissions data quality). The quality of PSP’s emissions data is improving, with 62% of scope 1 and 2 emissions for in-scope assets being reported directly by companies in FY 2024, compared to 54% in FY 2023, and on its way to its target of 80% by 2026.
Notably, PSP reported the distribution of its portfolio’s carbon emissions across economic sectors, comparing FYs 2023 and 2024, which PSP says “can provide valuable insights into the climate-related risks and opportunities inherent in a portfolio and help to identify areas where, from a materiality perspective, investors can best contribute to climate mitigation efforts.”
PSP is unique in the Canadian pension sector in that it reports its biogenic emissions, as a large investor in and owner of agriculture and timberland assets. Biogenic emissions are GHG emissions that result from natural processes and biological sources, such as livestock digestion, manure management and the decomposition of organic materials. PSP’s biogenics emissions metrics apply to 65% of its Natural Resources portfolio.
Scenario analysis
PSP has developed internal tools to monitor its portfolio against its climate metrics, factor material climate risks into investment decisions and consider low-carbon investment opportunities. PSP also conducts regular climate scenario analysis and stress-testing of its portfolio using “a set of generally accepted climate scenarios […]: Paris Agreement success or failed transition.” The scenarios were "developed in collaboration with an external technical advisor” and “highlight the contrast between a failed climate transition scenario, leading to a potential 4.2°C rise in average global temperatures by 2100, and an orderly net-zero transition scenario” (emphasis added).
PSP concludes that the failed climate transition scenario “could significantly reduce investment returns due to severe physical risks, whereas an orderly transition, despite presenting moderate risks, aligns better with sustainable investment returns.” PSP goes on to report that its “active management approach, dynamic portfolio construction and climate-aware investment choices lead to better positioning of the policy portfolio from a risk and return perspective compared to the reference portfolio provided to PSP Investments by the Treasury Board of Canada Secretariat each year, under all climate scenarios considered.”
PSP’s approach to scenario analysis is grossly inadequate and the conclusions it draws are alarming. A 4.2°C rise in global temperatures wouldn’t just “significantly reduce investment returns due to severe physical risks.” A temperature increase of this magnitude is expected to have existential, catastrophic consequences for the financial system, human societies and all life on earth. Considering the devastating impacts that Canadians are already feeling below 1.5°C of global heating, PSP should be bolstering the integrity and robustness of its scenario analysis exercise and ensure it’s taking all measures possible to avoid such failed transition scenarios for its portfolio and its members.
Board and staff climate expertise
In its 2024 Annual Report, PSP includes a board competencies matrix that identifies five directors as having “Sustainability” competency. New in 2024, PSP added a footnote beside the “Sustainability” competency that reads “Includes climate. All Directors received internal training on climate change-related topics and/or training from an external provider.” Five directors are identified as having this competency.
Amongst staff, PSP reported that it:
“provided in-depth sustainability training to investment professionals in all of our asset classes in fiscal 2024”;
appointed sustainability champions within each asset class;
deployed a bespoke sustainability due diligence tool for its private market investment teams;
delivered more than 30 hours of sustainability training, including on climate change, to over 300 PSP employees across 21 sessions, tailored for each asset class;
convened four gatherings of PSP’s internal, multi-asset class group (the Climate Innovation Summit), focused on knowledge sharing and the implementation of our climate strategy;
launched an internal investment research platform that focuses on the connections between sustainability and transversal investment themes;
advanced the implementation of a hub-and-spoke operating model to help embed sustainability practices across the organization, with the Sustainability and Climate Innovation group as a “centre of excellence”; and
automated PSP’s Green Asset taxonomy and developed a “climate pathways navigator prototype” to help asset classes make better climate-informed projections.
Board fossil fuel entanglement
One of 12 PSP directors has a current fossil fuel entanglement. Miranda C. Hubbs is a Director of Imperial Oil, the Canadian subsidiary of ExxonMobil. Investor engagement coalition Climate Action 100+ assesses Imperial Oil to be failing to align with Paris Agreement goals in ten of eleven criteria. Corporate watchdog and think tank InfluenceMap finds that Imperial Oil fails to meet any criteria for aligning its policy engagement with the 1.5°C goal of the Paris Agreement. In 2024, Imperial Oil broke oil and gas production records and plans to increase production further by between 433,000 and 456,000 barrels per day in 2025. No serious observer would come to the conclusion that Imperial Oil has a credible climate plan. Ms. Hubbs’ legal obligation to maximize returns for the shareholders of Imperial Oil appears to be in direct conflict with her fiduciary duty to Public Service Pension Plan members. This potential conflict should require her recusal from discussions on governance matters related to climate and energy that come before the PSP board.
At PSP’s Annual Meeting in October 2024, PSP board members and executives didn’t meaningfully respond to concerns from Public Service Pension Plan members that a PSP director’s legal obligation to an oil and gas company might conflict with their fiduciary duty to PSP members.
Notably, PSP reported in 2024 that "Judy Fairburn was appointed to the Board of Directors on September 20, 2023 and resigned on October 25, 2023, due to a significant change in her personal circumstances." Ms. Fairburn is a current director of Petronas and the Business Council of Alberta and a former director of MEG Energy. She had a long career with Shell, Cenovus and Encana, and was a director of Alberta Innovates and Sustainable Development Technology Canada. It is unclear if Ms. Fairburn’s close ties to the oil and gas industry were considered in the decision to appoint her to PSP’s board.
Executive and staff compensation and climate
In FY 2024, PSP reported that its “incentive plan is aligned with the organization’s strategy and priorities. The senior management team’s objectives include priorities and indicators of progress related to the firm’s corporate objective to advance its climate capabilities.” It remains unclear how exactly “climate capabilities”, targets or emissions reductions are factored into executive compensation. To improve its score in this category, PSP must be more specific in how climate factors are factored into compensation, and must extend this climate-compensation link to incentivize all investment staff to achieve climate targets.
Accountable Paris-aligned membership
PSP is not a member of any accountable and credible Paris-aligned investor body.
2024 UPDATES
None.
OVERVIEW
PSP has no public exclusions on fossil fuels or related infrastructure, and continues to hold $8.1 billion in “carbon-intensive assets” in “sensitive high-carbon sectors” or “that fail to show quantifiable low emission performance.” For a comparison of PSP’s lack of fossil fuel exclusions with respect to other Canadian pension managers, see this report’s Table 3: Fossil Fuel Exclusions.
DETAILS
PSP’s 2022 Climate Strategy Roadmap and 2023 Sustainable Investment Policy both express a willingness to consider exclusion or divestment for companies that face material climate-related risks or are unwilling or unable to mitigate climate risks. But neither of these documents were updated in 2024. PSP does not appear to be reducing its exposure to fossil fuels, even as the impacts of climate change escalate and the oil and gas industry demonstrates intransigence in the face of the scientific consensus calling for an immediate end to expansion and rapid phase-out of production.
In its 2024 Annual Report, PSP acknowledges the role of its Infrastructure portfolio in providing the capital and expertise necessary to build new assets and to adapt existing ones to use less fossil fuels”. PSP also states that “carbon-intensive investments may face increasingly strict regulatory requirements, affecting their returns, hence the risk of lower valuations.” But there is little evidence that PSP is prioritizing the decarbonization of fossil fuel assets or the reduction of its exposure to fossil fuel companies facing transition risks.
PSP committed in 2022 to halving its then $7.8 billion exposure to “carbon-intensive assets without credible transition plans” by 2026. After PSP’s “carbon-intensive assets” increased to $13.1 billion in FY 2022, PSP decreased them to $8.1 billion by the end of FY 2024. PSP attributed the decrease largely to its timber and agriculture assets developing transition plans, which suggests that much of PSP’s remaining “carbon-intensive assets” are oil and gas companies.
PSP reports that 31.8% and 11% of the carbon emissions of its in-scope portfolio for FY 2024 come from the “Utilities” and “Energy” sectors, respectively. Yet just 2.4% of its public equities portfolio, 0.1% of its credit portfolio, 29.6% of its Infrastructure portfolio (and an uncategorized part of its private equity portfolio) are invested in “Utilities”. And just 2.4% of PSP’s public equities portfolio, 1.6% of its private equity portfolio, 1.8% of its credit portfolio, and 4.7% of its infrastructure portfolio is invested in “Energy”.
This suggests that a disproportionate amount of PSP’s financed emissions come from its investments in high-risk fossil fuel utilities and oil and gas producers. It will be difficult for PSP to achieve its target to reduce its “carbon-intensive assets” to $3.9 billion by 2026 without exiting at least some of these fossil fuel investments. PSP may recognize that holding onto fossil fuel assets during a worsening crisis exposes its portfolio to escalating transition, regulatory and reputational risks, while these companies themselves exacerbate the systemic risks caused by extracting, transporting and burning more oil, gas and coal. Without increased transparency on PSP’s portfolio and which individual assets PSP categorizes as “green”, “transition” and “carbon-intensive”, it is difficult to confirm whether or not PSP is quietly shedding fossil fuel assets.
ESTIMATED INVESTMENTS IN FOSSIL FUELS
$6.2 billion – $8.1 billion
Based on extrapolation from PSP’s reporting, described below, Shift estimates PSP has an estimated $6.2 billion - $8.1 billion in fossil fuel investments as of March 31, 2024. For a list of all of the disclosed fossil fuel investments held by Canadian pension funds analysed in this report, see this report's Table 4: Fossil Fuel Investments.
PSP’s private investments in fossil fuels include 100% co-ownership of TriSummit Utilities, which includes subsidiaries:
Apex Utilities Inc. (fossil gas utility in Alberta);
Eastward Energy (fossil gas utility in Nova Scotia);
Pacific Northern Gas Ltd. (fossil gas utility in northern British Columbia); and
Enstar Natural Gas (fossil gas transmission and distribution pipeline operator Alaska Pipeline Co., with a 65% interest in Cook Inlet Natural Gas Storage Alaska).
Regulatory filings to September 30, 2024 show PSP holding shares in publicly-traded fossil fuel companies in Canada, including Canadian Natural Resources, Enbridge, Suncor and TC Energy, and other countries, including Cheniere Energy, Chevron and ExxonMobil.
PSP disclosed in its 2024 Annual Report that 5.6% of its public equities portfolio, 1.6% of its private equity portfolio, 1.8% of its credit portfolio, and 4.7% of its infrastructure portfolio is invested in “Energy”. Additionally, 2.4% of PSP’s Natural Resources portfolio is listed as invested in “Other”. Based on previous year’s reporting of the Natural Resources portfolio, this number likely refers to energy assets. Using PSP’s AUM as of March 31, 2024, these figures add up to $6.2 billion (2.3% of AUM), forming the lower end of Shift’s estimate of fossil fuels in PSP’s portfolio.
PSP disclosed that its portfolio contained $8.1 billion in "carbon-intensive assets" in its FY 2024 Climate Related Financial Disclosures. “Carbon-intensive assets” are defined in PSP’s Green Asset Taxonomy Whitepaper as “high carbon or hard to abate assets with no evidence of a transition plan”. PSP Investments does not disclose a list of individual “carbon-intensive assets,” so Shift cannot confirm if this classification solely comprises fossil fuels. According to PSP’s definition of “green” and “transition”, assets in these two categories may also be fossil fuel companies. This $8.1 billion (3.1% of AUM) figure forms the higher end of Shift’s estimate of fossil fuels in PSP’s portfolio.
Overall
Publicly acknowledge the consensus science, including from the Intergovernmental Panel on Climate Change (IPCC) and the International Energy Agency, that limiting global temperature increase to 1.5°C requires an immediate end to expansion as well as the rapid phase-out of oil, gas, coal and related infrastructure.
Build on public advocacy for mandatory standardized climate risk disclosure to become a vocal proponent of stringent, ambitious, Paris-aligned climate and energy policies that provide certainty for companies and investments.
Join a credible and accountable Paris-aligned investor body, such as the Net-Zero Asset Owner Alliance or the Paris Aligned Asset Owners.
Paris-aligned target
Commit to net-zero emissions by 2050 or sooner.
Place a strict limit on the role of carbon removal and offsets in portfolio company climate plans and in PSP’s support for the transition to global net-zero emissions by 2050.
Interim targets
Set medium-term emissions intensity reduction targets (2030 and beyond).
Pair interim emissions intensity targets with absolute emissions targets.
Report which individual assets are categorized as “green”, “transition” and “carbon-intensive” under PSP’s Green Asset Taxonomy and subject these categorizations to peer review.
Report on progress toward target to ensure that 50% of its portfolio carbon footprint is covered by a mature science-based transition plan by 2026.
Communication of climate urgency
Acknowledge double materiality -- that the climate crisis presents risks and opportunities for the portfolio, but also that PSP’s investment and asset management decisions affect the trajectory of the energy transition and climate crisis.
Climate engagement
Require all portfolio companies to have credible net-zero plans in place by 2030.
To ensure companies are rapidly developing and implementing profitable and credible climate plans, update PSP’s Sustainable Investment Policy, Corporate Governance and Proxy Voting Principles, and Climate Strategy Roadmap to clarify how long PSP will continue to engage companies and what thresholds those investments need to cross to constitute “material reputational and/or financial risks” necessitating divestment.
Make public PSP’s engagement “watchlist” of high-carbon, hard-to-abate companies/assets.
Publicly state expectation that owned companies:
have credible, science-based net-zero pathways, with escalation up to and including divestment for those that do not meet timebound engagement milestones;
tie executive compensation to the achievement of climate targets;
refrain from lobbying against climate action, directly or through industry associations; and
refrain from directing capital toward fossil fuel expansion.
Establish timebound, results-based targets for engaging with external fund managers on Paris-alignment.
Require that all new or renewed external fund manager contracts adhere to a Paris-aligned investment strategy.
Disclose how PSP will vote on shareholder resolutions, and publish proxy votes and rationales in real-time.
Climate integration
Disclose commitments to private equity funds, as well as all private equity relationships, to parliamentary committees, going back 10 years to 2015. The disclosures should contain information on how relationships with private equity firms and financial commitments to private equity funds were subsequently disbursed, including dollar amounts, companies and projects.
Continue efforts to obtain, measure and disclose scope 3 emissions data.
Undertake a more robust climate scenario analysis that better captures the economic, financial, ecological and social impacts of failed transition scenarios.
Require climate expertise on the Board of Directors, explicitly differentiated from “Sustainability” expertise.
Avoid climate-related conflicts of interest and refrain from re-appointing directors with concurrent corporate directorships with fossil fuel companies to the Board.
Establish minimum time that must elapse in between holding a fossil fuel directorship and joining the board.
Tie executive and staff compensation specifically to the achievement of climate targets, and disclose the weighting of climate targets in compensation.
Fossil fuel exclusions
Place an exclusion on any new investments in coal, oil, gas and related infrastructure.
Divest from fossil fuel producers.
Commit to a time-bound and managed phaseout of existing fossil fuel assets.
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