Thursday, June 28, 2018

OPTrust vs BCI on Climate Change?

Benefits Canada reports, OPTrust sets out climate change action plan:
The OPSEU Pension Trust is setting out a climate change action plan, including eight areas of focus that aim to make the pension fund more resilient and agile in taking on the problem.

“Climate change is one of the most significant challenges facing us today,” said Hugh O’Reilly, president and chief executive officer at the OPTrust, in a news release. “As investors in so many sectors around the world, we need to better understand its impact so we can protect our members’ interests.”

“We don’t yet have the data or tools we need to determine whether, and if so to what extent, climate change poses a risk to our members’ pensions. We are committing to build climate change risk into our investment approach, starting now.

The areas for action, which the OPTrust plans to implement over the next five years, include:
  • Continuing to drive for better disclosure of the information investors need to price carbon risk;
  • Collaborating with peers, regulators and companies in which it’s invested to achieve meaningful change;
  • Continuing to build awareness and alignment among investment professionals through education;
  • Defining a clear baseline to measure the plan’s exposure to industries and geographies that are at higher risk for climate change impacts;
  • Integrating an approach that considers the impact of climate risk on the fund and in its portfolio construction;
  • Focusing on achieving greater disclosure within its portfolio of companies and incorporating climate change-related metrics in the evaluation of new investments;
  • Driving for improved performance on environmental, social and governance issues and advocating for certainty in the regulatory environment; and
  • Continuing to publicly report its efforts in managing climate change risk.
Published earlier this year, the OPTrust released a report in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures, covering issues around governance, risk management, strategy and metrics and targets. The news release noted that the pension fund’s climate change action plan builds on these commitments and aims to lead to a better understanding of the risks and opportunities that climate change poses to its investments.

“The transition to a carbon-neutral economy will be increasingly disruptive,” said O’Reilly. “As investors and as responsible stewards of our members’ capital, we have to be prepared to face these challenges. This is still near the beginning, but it is a critical step forward.”
OPTrust put out a press release, OPTrust takes action on climate change:
Climate change is having profound impacts, and markets need to respond. It is vital for pension plans to measure the impact and manage risk, according to the Climate Change Action Plan issued today by OPTrust.

"Climate change is one of the most significant challenges facing us today. As investors in so many sectors around the world, we need to better understand its impact so we can protect our members’ interests,” said Hugh O’Reilly, OPTrust President and CEO.

“We don’t yet have the data or tools we need to determine whether, and if so to what extent, climate change poses a risk to our members’ pensions,” O’Reilly added. “We are committing to build climate change risk into our investment approach, starting now.”

The Climate Change Action Plan contains eight areas for action that will make OPTrust more resilient and agile to meet the investment challenge. Among others, the areas for action include defining a clear baseline to measure the pension plan’s exposure, considering climate risk factors when assessing investments, and pushing for increased disclosure of climate change-related information from portfolio companies.

With its 2017 Funded Status Report, issued earlier this year, OPTrust became one of the first pension plans to report in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD recommends disclosure in four areas: governance, risk management, strategy, and metrics and targets. The Climate Change Action Plan builds on these commitments, and will lead to a better understanding of the risks and opportunities climate change poses to our investments.

“The transition to a carbon-neutral economy will be increasingly disruptive,” O’Reilly said. “As investors and as responsible stewards of our members’ capital, we have to be prepared to face these challenges. This is still near the beginning, but it is a critical step forward.”

OPTrust's Climate Change Action Plan, along with the 2017 Responsible Investing Report and the responses to the TCFD recommendations included in the 2017 Funded Status Report, are all available at optrust.com.

About OPTrust

With net assets of over $20 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with over 92,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.
So what is this all about? Go back to read an earlier comment of mine, OPTrust taking climate change seriously, where I noted:
Hugh explained to me that OPTrust is taking climate change and responsible investing based on environmental, social and governance (ESG) factors very seriously and this was an effort to really drill down and holistically assess OPTrust's approach to responsible investing, a first of its kind in Canada to my knowledge.

Hugh began by stressing that this isn't about "divesting" from the fossil fuel industry. (OPTrust doesn't believe in divestments except for tobacco where it butted out for good and for good reasons. Instead, OPTrust believes in engagement along with its peers to force companies to take climate change seriously).

...

I also agree with Hugh O'Reilly's philosophy that the best way to impact change is by investing in the very industries we are concerned about, whether it's oil and gas, big pharmaceuticals or firearms.

What else did Hugh O'Reilly tell me? The focus on OPTrust is on funded status, not shooting the lights out in terms of returns. In fact, compensation of senior executives is focused on funded status and a portion of every employees bonus is related to this too. Hugh and Jim Keohane even wrote an op-ed on the need to place funded status front and center at all pensions.

This assessment on climate change doesn't change that focus, it emboldens them to be better in terms of responsible investing in order to better align their interests with those of their beneficiaries over the long run. Again, it's more complicated than simply divesting out this or that industry which is why I urge you to take the time to read the position paper here and the accompanying Mercer report here.
In other words, the focus at OPTrust remains firmly on keeping its fully funded status but as good stewards of capital, they also want to take the lead on climate change and start drilling down across their public and private market portfolios to understand their exposure to climate change and see if they can reduce those risks and improve returns.

I say "take the lead" but as Hugh admits in the press release, we're still in the early innings of a transition to a carbon-neutral economy, so there is a long way to go. Still, OPTrust is taking climate change very seriously and has laid the groundwork to focus on key areas of action.

In fact, Hugh O’Reilly posted this on LinkedIn: “Looking at our portfolio through this lens has identified that 7.6% of OPTrusts’s portfolio is invested in renewable energy and green real estate. This represents our direct investment in the transition to a low carbon economy.”

Importantly, this isn't "pie in the sky" environmental socialism. This is a major pension plan taking concrete, measurable steps to focus on how climate change impacts its portfolios and taking actions to rectify or improve their portfolios to reduce these risks and improve returns.

"Yeah but President Trump doesn't believe in climate change and walked away from the Paris Accord". It doesn't matter what Trump or anyone else thinks, OPTrust and many of its peers are uniting on this issue and have identified climate change as a real risk to their investments and they're taking steps to address these concerns.

Climate change is a very real concern for all of Canada's large pensions for a simple reason, it's a huge risk and can have a substantial impact on a pension's long-term performance.

Again, the investment managers at these large pensions in charge of responsible investing aren't there to smile and hug trees and protect wildlife, they have a very serious job to assess risks posed by climate change across all the portfolios and to recommend actionable ideas to mitigate those risks and improve long-term returns.

Lastly, while I'm on the topic of tree-hugging environmental socialists, I did notice the British Columbia Investment Management Corporation, now called BCI, is getting pummelled yet again in the media for fuelling the climate change crisis:
If you have a public pension in B.C., your retirement savings are likely fuelling the climate change crisis.

The pensions of over half a million British Columbians are administered by the British Columbia Investment Management Corporation (BCI), formerly known as the bcIMC. It’s the fourth-largest pension fund manager in Canada and controls one of the province’s largest pools of wealth, totalling $135.5 billion.

In 2016, Canada signed the Paris Agreement, acknowledging that global warming must not exceed two degrees Celsius above pre-industrial levels and further committing to work toward a 1.5 degree C limit. As one of the province’s largest financial managers, BCI’s investment decisions are critical for the urgent and sustained emission reductions that both targets require.

BCI’s holdings include investments in some of the world’s largest oil and gas companies.

To determine how it is responding to the climate crisis, our just-released report, Canada’s Fossil-Fuelled Pensions: The Case of the British Columbia Investment Management Corporation, asks: is BCI investing funds in ways that support the shift to a two degree Celsius global warming limit?

Unfortunately, the answer is no. We found that instead of curbing investments to align with the two degree limit, BCI promotes the status quo on carbon-heavy investments.

For example, BCI investments in Kinder Morgan rose to $65.3 million in 2017, nearly doubling its $36.7 million 2016 investment. Since 2016, BCI has over $3 billion invested in the top 200 publicly traded fossil fuel reserve holders. It is invested in 74 per cent of the oil and gas companies with the largest fossil fuel reserves and 30 per cent of the biggest reserve-holding coal producers.

BCI doesn’t believe these investments are a problem. It claims that its ability to be an “active owner” through shareholder engagement will create more lasting change in their investee corporations than if they withdrew or “divested” their money on ethical grounds.

We investigated BCI’s engagement strategies, including its shareholder voting history and collaboration with third-party organizations promoting responsible investment. We found that when it comes to climate action, BCI’s “active ownership” falls short.

Shareholder voting, also known as “proxy voting”, is one of BCI’s key responsible investment strategies, but in the context of climate change, is it effective? We found that companies often ignore climate-related shareholder resolutions and their eventual responses can be minimal at best. Exxon — which BCI’s holds an ownership stake in — claims that its business model “face(s) little risk” from climate change despite its commitment to blow past the two degree limit.

This is obviously an inadequate response to the scale and urgency of the climate crisis. By acknowledging the serious threats that climate changes poses, but only using shareholder engagement to address it, BCI is an obstacle to the transition away from fossil fuels which the two degree limit demands.

Not taking climate change seriously in its investment decisions not only breaches BCI’s claim to “responsible” investment on ethical grounds, it also threatens the financial stability of B.C. pensions.

A recent study published in Nature and Climate Change shows that falling prices in renewables and low-carbon technology means the demand for fossil fuel investments will drop before 2035, leaving companies with trillions in assets that cannot be sold. Last year the World Bank announced it would end financial support for oil and gas companies by 2019 and financial institutions around the world are following suit. Banking giants HSBC, BNP Paribas and ING recently announced they would end financing for greenfield oilsands projects, coal power plants and Arctic drilling projects.

If BCI committed to divestment from fossil fuels, it would join a host of institutions like churches, pension funds and state-owned investment funds that have pledged to fully or partially divest. Globally, over $6 trillion of investments have been declared fossil fuel free.

We have started moving towards a post-carbon world. Our report shows, however, that BCI is stuck in the 20th century of fossil-fuelled investment. As one of the province’s most powerful financial institutions, and the manager of most public pensions in B.C., we can’t afford to suffer the impacts of its choices.
Now, I'm going to try to restrain myself but when I read academic drivel by environmental zealots who clearly don't understand what they're talking about when it comes to pensions and climate change, my blood pressure shoots through the roof!

First of all, when you read stuff like "we have started moving towards a post-carbon world", be very weary of such nonsense. We are nowhere near moving towards a post-carbon world, and neither do I believe this is achievable over the next 100 years.

There will be incremental gains, renewable energy investments will grow by leaps and bounds because they still represent less than 5% of the world's energy sources.

More importantly, BCI is a pension fund which has a clear mandate to maximize total returns without taking undue risks. Fully or partially divesting from fossil fuels is an option but one that comes at a very high price (I know, retired hedge fund guru Tom Steyer thinks otherwise, but he's clueless too).

Again, pensions are not there to advance someone's social or environmental cause. Pensions are there to match assets with liabilities, period. If addressing climate change risks across portfolios can improve long-term returns, great. If not, then forget it. It's that simple.

I have a real issue with academics and environmental zealots peddling nonsense to call for divesting out of fossil fuels. Everything comes at a cost. Are the members of that pension plan willing to bear that cost (it's their money!)? Are governments willing to bear that cost (they contribute to these public pensions)? Are taxpayers willing to bear that cost through more taxes?

I've called out BCI for its toxic work environment but I have no issue with its investments in fossil fuels. BCI, like all of Canada's large pensions, is taking responsible investing very seriously and prefers corporate engagement over divestment as a means to influence companies.

Is it perfect? Of course not. None of these pensions are perfect and some are more engaged than others when it comes to climate change, but we need to stop peddling nonsense once and for all because it spreads myths about how these pensions are addressing climate change.

For all you environmental zealots mad at BCI, go plant or hug a tree, do whatever makes you feel good about addressing climate change but please stop publishing rubbish, it's embarrassing and shows how ignorant you really are about our large pensions and their mandate.

Maybe Gordon Fyfe should plant a tree and take a picture and post it on BCI’s website.

Alright, I'd better stop, I can feel my blood pressure climbing and it has nothing to do with Gordon.

Below, OPTrust’s mission is paying pensions today, preserving pensions for tomorrow. Listen to a discussion between Hugh O'Reilly and members of OPTrust. Listen to what matters most to them.

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