Climate change is one of the biggest risks faced by Canadian pension plans and plan managers may be forced into taking public stands to fulfil their legal duties, says a new legal study.
“Climate change risks must be taken into account, and pension trustees may protect the longer term interests of their beneficiaries by acting as effective public-policy advocates for climate change regulation,” says the report from the Toronto-based firm of Koskie and Minsky, one of Canada’s leading pension law firms.
“The urgency of climate change, coupled with its potentially severe consequences, suggest that pension fiduciaries may engage governments on climate change issues to attempt to achieve a collective outcome that they are incapable of achieving alone.”
The report was commissioned by Shareholder Association for Research and Education (SHARE), a non-profit environmental investing consultancy that advises clients with a total of about $14 billion in assets, said spokesman Kevin Thomas. It was undertaken because pension managers need to think more long-term than other fund managers.
“The typical pension plan is thinking 70 years down the road,” Thomas said Tuesday. “They have to make sure that their current and future beneficiaries are all taken care of.”
In that kind of time frame, the report concludes that climate change creates a series of risks for investors. Those risks include regulatory change, extreme weather, access to resources and costs of factors such as energy.
Managers need to consider which companies in their portfolios are unduly exposed to those risks, said Thomas.
“There’s some things you can do in terms of screening your portfolio or engaging with the company to change practices.”
But the report goes further. It says trustees may also have a responsibility to preserve an overall economy in which it is possible to prosper. It notes previous studies have found balanced portfolios are likely to do much better if global warming is limited to two degrees Celsius.
“There is no meaningful distinction between ‘non-financial’ criteria that may affect financial performance and financial criteria,” says the report. “Trustees must take both into account when making investment decisions.”
One thing trustees can no longer do is deny what’s happening, says the report.
“In making investment decisions, climate change denial is not an option,” it says.
Traditionally, trustees haven’t been vocal, Thomas said. But it is becoming more common.
“In recent years we’re seen pension fund trustees being increasingly vocal about issues like climate change.”
Thomas’ own group has joined in. On Tuesday, SHARE co-signed a letter to Alberta Premier Rachel Notley asking her to give full consideration to encouraging renewable energy as her government’s climate-change panel plots the province’s path.
Notley has asked the panel to draw up a renewed climate change plan for Alberta. It is expected to report later this fall.
“Effective climate policy can stimulate innovation and bolster the diversification of the Alberta economy,” says the letter, signed by more than 100 foundation heads and pension plan managers representing more than $4.6 trillion.
“Well-designed policies will encourage scaling up of these investments and Alberta is well positioned to benefit.”
— Follow Bob Weber on Twitter at @row1960.