Canadian pension plan managers try to weight risks of climate change

Pension-plan managers are increasingly becoming concerned about how it can hurt the bottom line

CALGARY – A decision by an Ontario public pension manager to study the potential consequences of climate change is the latest sign that pension plans are increasingly becoming concerned about how it can hurt the bottom line.

OPTrust released a report last week that reviewed how four climate scenarios, factoring in policy changes and disasters including hurricanes and wildfires, would affect its $18 billion portfolio.

“The reality is there’s a lot of talk about climate change, there’s lots of thinking about it, but from an investor’s perspective we’re just at the beginning of the conversation,” said OPTrust CEO Hugh O’Reilly.

O’Reilly, who manages the plan on behalf of the Ontario Public Service Employees Union, said its a struggle to figure out the risks given how little companies reveal.

“In the context of issues around climate change and carbon, and the effect of climate change on companies we invest in, the standards of disclosure, they’re just, we can’t make meaningful or informed decisions,” he said.

The report by consultancy firm Mercer showed that under a best-case, two-degree Celsius rise in global temperatures — achieved with climate change policies and mitigation action it described as ambitious and stringent — investments in some industries such as energy and mining could take a hit, while other areas like infrastructure, real estate and agriculture could benefit.

Under a worst-case scenario, with a four-degree C rise by the end of the century and higher physical damage factored in, the report found no upside and advocated prevention.

The study comes as insurers, pension plans and other organizations particularly exposed in the coming decades to climate change try to figure out how to measure the risks and what to do about them.

Last September, a report from Toronto-based law firm Koskie and Minsk concluded that climate change is one of the biggest risks faced by Canadian pension plans, and managers may be forced into taking public stands to fulfil their legal duties.

In December, in launching its climate assessment program in the U.S., Mercer said that even under the two-degree C scenario the average U.S. public pension could lose billions in dropped asset values. It also said that not acknowledging and responding to such risks could be a breach of fiduciary duties.

The European Union passed new rules last year requiring pension funds to consider the risk of environmental, social and governance risks in their investment decisions and to document their efforts in their investment policy principles.

Other pension plans in Canada have also been taking note, starting with acknowledging the risk and assessing their portfolios, as well as pushing individual companies to improve environmental practices.

Last year, the Canadian Pension Plan Investment Board, Canada’s largest pension manager, created a climate change working group to review risks and opportunities.

“Climate change is among the most complex and challenging issues that we consider as a long-term investor,” said CPPIB spokesman Dan Madge by email.

He said the CPPIB, which manages about $300 billion on behalf of 19 million Canadians, shares concerns on the lack of reliable and standardized data when assessing greenhouse gas emissions in investment portfolios.

The Public Sector Pension Investment Board said climate change is a concern, but factoring it in is a challenge.

“There is still no uniform approach to measure and report climate change risk, and the quality of the information disclosed about climate change risk varies tremendously,” the pension plan said in an email.

La Caisse de depot et placement du Quebec said in its latest annual report that it supported 19 shareholder resolutions on climate change, and specifically pushed for more disclosure on the issue from Royal Dutch Shell and BP, two companies the pension manager invests in.

Other pension plans have been quieter on the issue. The Ontario Municipal Employees Retirement System and the Healthcare of Ontario Pension Plan make no mention of climate change in their latest annual reports.

Looking for more?

Get the Best of Maclean's sent straight to your inbox. Sign up for news, commentary and analysis.