Investors and owners fuel change towards low carbon future

By: John Devine, Alliance for Retirement Income Adequacy (ARIA)

*This story was first published on, a website dedicated to providing a discussion point for retirement income adequacy issues in Canada and around the world

Responsible for delivering a secure and adequate retirement income stream to their members, Canada’s big public sector pension plans are also ideally positioned to play a key role in limiting and reversing the impact of climate change.

They, and other large institutional investors, can do this by engaging and influencing companies they own and/or invest in that fuel climate change, Kevin Thomas, director of shareholder engagement at SHARE, told an audience of pension managers at the Conference Board of Canada’s Pension Summit 2016.

“We are owners of these companies and we want them to succeed and be sustainable over the long term. And we have power to do something about that,” he said, adding engagement is a useful tool in moving companies towards a low carbon economy and future, as envisioned by the Paris Agreement which entered into force on Nov. 4, 2016.

As of early October, 118 of 197 participants of the Paris convention had ratified the agreement, including Canada. It commits countries to develop strategies to keep the rise in global temperature this century to well below two degrees Celsius “above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius,” according to the agreement.
Further, the “agreement aims to strengthen the ability of countries to deal with the impacts of climate change.”

Progress is being made in these efforts, Thomas told his audience, adding that the world was changing, even as he spoke, and that it’s a time to be hopeful about the continuation of that change.

“I believe very strongly that conversations … between asset owners – pension funds and other large institutional investors – are critical to making that change.”

During his presentation, he talked about how climate change will impact investments, including in the oil and gas industry, and how pension funds should deal with that ­– as well as the value of engagement rather than divestment.

Although words like disrupter are commonly used to describe new trends and developments, their meaning and significance can get lost through their overuse, said Thomas. Climate change, however, is a real disruptive force to economies, investments and the environment, and demands attention, he said.
It’s important “for economists, pension plan trustees and investment professionals to understand real disruption and to be able to distinguish between real disruptive forces and what might be just overstated hype … things that actually have an impact on our economy versus things that don’t.”

How big an impact depends on how quickly the transition to a low carbon economy is made, and that calculation is important to understand, according to Thomas. Climate change is going to “cause damage to our investments,” including real assets subject to environmental disasters like floods, droughts, and fires.

Perhaps more difficult to manage is the potential investment loss related to assets that get stranded … fossil fuel resources that can’t be developed if the Paris targets are to be met. And there’s still a lot of it in the ground.

“The disconnect is that if we want to meet that (Paris) target of 1.5 to two per cent warming, we can’t burn all of … those resources. Those assets cannot be sold and used.

“The rough estimate is that proven oil, coal and gas reserves are about three times the size of the burnable amount we (can use) to keep to our global carbon budget … and keep warming to within two degrees.”

If the Paris targets are met, then fossil fuels, investments that “are on the books now,” become stranded assets because at some point there’s no point in developing them, said Thomas, adding there are other “pathways” for those assets to become stranded – less reliant than on governments actually meeting their commitments.

“The first two are new technologies and new players. Those are the disruptors again, the real disruptors. They are making renewable energy sources much more viable, and we are already seeing that in better battery storage, in better and cheaper electric cars, all of which will have a huge change on the oil and gas sector.”

Indeed, if you follow the money it could be said a lot of investment has already made up its mind about the reality of climate change, leaving the conversation about whether it is real or not, caused by human activity or not, behind. Last year, said Thomas, was the first in which more money was invested in renewable energy than fossil fuels – “a huge change.”

Other developments that suggest a reason to be hopeful for a low carbon environment include exceeding earlier projections for the development of renewable energy, and countries getting more of their energy from those renewables. Germany, for instance, gets about 30 per cent of its energy from renewable sources, said Thomas, up from six per cent 15 years ago.

“The world’s top carbon polluter, China, is actually on course to meet and actually exceed its carbon reduction targets for 2020 and 2030. Those changes are happening already.”

Statistics, he continued, from the International Energy Agency, show that the growth in greenhouse gas emission flattened in 2014 and 2015. Although this has happened before, it was connected to global economic downturns, like the Great Recession. The difference this time is that emissions remained flat even as growth occurred globally: 3.4 per cent in 2014 and 3.1 per cent in 2015.

“And the IEA actually credited that to two things: growth in renewables and improvements in energy efficiency.”

Haste is important in the transition to a low-carbon future, cautioned Thomas, who cited a Mercer report, Investing In a Time of Climate Change, which explored the impact of climate change on large institutional investors by developing four different warming scenarios of two degrees to four degrees. It found that renewable energy has a large upside potential under all the scenarios, while the coal sector, for example, could lose up to 74 per cent of its value in the next 35 years.

“That’s why it’s important we transition to a lower carbon economy sooner rather than later.”
Canada’s public sector pension plans are already incorporating environmental, social, and governance (ESG) factors into their investments decisions, with a commitment to long-term sustainability of assets and the promotion of responsible investing (RI) principles.

And although some investors talk about divestment of fossil fuels, Thomas continued that engagement could have a powerful impact.

“What it really comes down to is institutional investors speaking with companies, using their voice as active owners, to change the way those companies operate and bring them along in that transition.”

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