Ontario Pensions' Fossil Fuel Disaster?

Tyler Hamilton of the Toronto Star reports, Ontario pension funds lost $2.4B from oil, coal investments:
Ontario’s five largest pension funds lost an estimated $2.4 billion during the last half of 2014 because of investments in fossil-fuel assets, according to a study released Tuesday by the Canadian Centre for Policy Alternatives.

It calculated that the Ontario Teachers’ Pension Plan took by far the biggest financial hit, losing $1.77 billion from fossil-fuel bets during a time that saw the price of oil cut nearly in half.

“If they’re putting money into fossil-fuel stocks, it should be incumbent on managers and trustees to justify why they’re doing that,” said Marc Lee, a senior economist with Policy Alternatives.

The study analyzed 20 Canadian pension funds with $587 billion in assets under management, including the Ontario Municipal Employees Retirement System (OMERS), Healthcare of Ontario Pension Plan (HOOPP), Ontario Pension Board, and Ontario Public Service Employees Union (OPSEU) Pension Trust.

On average, about 5 per cent of assets under management were in the form of fossil-fuel company stocks, which had a total value estimated at $27 billion prior to the oil-price crash. Six months later, the value of those equities had fallen by $5.8 billion, which the study called a conservative estimate.

Lee said losses can largely be blamed on declining oil and gas prices. He conceded that the analysis was limited by the lack of detailed disclosure from the funds’ managers.

“It’s why there needs to be more transparency,” he said. “That’s the conversation we hope to trigger with this report.”

Canadian pension funds have been largely silent on the issue of climate risks, while funds in Europe and parts of the United States have been much more engaged in the discussion, and are taking action.

In France, for example, amended legislation now requires institutional investors to report their carbon footprints and efforts to reduce them. Lawmakers in California have gone so far as to pass a bill forbidding its big pension funds from investing in coal stocks.

Last week, in advance of the G20 summit in Turkey, Bank of England governor Mark Carney proposed the creation of an industry-led disclosure task force on climate-related risks.

Carney, who is also chair of the Financial Stability Board, has previously warned that the “vast majority” of fossil fuel reserves may have to be left in the ground if the world is to keep global temperatures from rising to dangerous levels.

Disclosure of climate risks, Carney told a Lloyd’s of London event in September, “will expose the likely future cost of doing business, paying for emissions, changing process to avoid those charges, and tighter regulation.”

More big investors are choosing to reduce their exposure to climate risks. A recent report from consultancy Arabella Advisors found that 430 institutions, including the Canadian Medical Association, have committed to phasing out their fossil-fuel investments to some degree.

Meanwhile, more than 100 institutional investors representing $8 trillion in assets have signed the one-year-old Montreal Carbon Pledge. Those that took the pledge have committed to “measure, disclose and reduce portfolio carbon footprints.”

Addenda Capital, The Co-operators and the United Church are among the Canadian signatories, but so far there is no commitment from Canada’s largest pension funds.

That includes the Canada Pension Plan Investment Board (CPPIB), which manages $273 billion of Canadians’ retirement savings.

A separate report released Monday by Corporate Knights Capital estimated that the CPPIB has sacrificed $7 billion (U.S.) in value since 2012 by not shifting investment from carbon heavy energy companies and utilities to companies that get at least 20 per cent of revenues from clean technologies or new energy.

Dan Madge, a spokesperson for the CPPIB, said the fund’s investment in Canadian equities closely resembles the broader TSX Composite, which is heavily weighted towards energy. Dropping a major sector from the portfolio “would not be prudent,” he said, adding that it would reduce diversification and prevent the CPPIB from engaging directly with energy companies on the need for better disclosure on climate risks.

“Engaging with companies on this topic and pressing for improvement are necessary to protect long-term value,” Madge said. “Selling our fossil-fuel holdings to investors who might not be as engaged as we are is not the most responsible course of action.”

Besides, he added, total long-term performance of the fund is what matters. On that front, the CPPIB fund has a 10-year nominal rate of return of 8 per cent.

Corporate Knights also analyzed 13 other prominent global funds, including the $40.5 billion (U.S.) Bill & Melinda Gates Foundation Trust Endowment, which gave up $1.9 billion, and the $5.6 billion University of Toronto pension and endowment fund, which sacrificed $419 million.

Had the U of T divested from fossil fuels three years ago, it could have generated a large enough return to pay tuition for its entire student body for four years, said Brett Fleishman, a senior analyst at 350.org.

The University of Toronto Asset Management Corporation declined comment for this story.

Demand for insight on how carbon risks can affect stock holdings led the Toronto Stock Exchange to launched three new indices last month that track a “fossil-free” and two carbon-reduced versions of the S&P/TSX 60.

This article is part of a series produced in partnership by the Toronto Star and Tides Canada to address a range of pressing climate issues in Canada leading up to the United Nations Climate Change Conference in Paris, December 2015. Tides Canada is supporting this partnership to increase public awareness and dialogue around the impacts of climate change on Canada’s economy and communities. The Toronto Star has full editorial control and responsibility to ensure stories are rigorously edited in order to meet its editorial standards.

How weak energy prices hurts pensions

The Canadian Centre for Policy Alternatives looked at how falling oil and coal prices from June to December 2014 affected fossil-fuel equity holdings in 20 Canadian pension funds.

Here are the estimated losses:

Ontario Teachers’ Pension Plan: $1.77 billion

Ontario Municipal Employees Retirement System: $192 million

Healthcare of Ontario Pension Plan: $53 million

Ontario Pension Plan: $154 million

Ontario Public Service Employees Union Pension Trust: $188 million

Source: Canadian Centre for Policy Alternatives
You can read the report from the Canadian Centre for Policy Alternatives here. There's no doubt that Ontario's large public pension funds have lost a ton of money in energy and commodity shares over the last couple of years, and they will lose more in the future as I see no end to the deflation supercycle. The same goes for all of Canada's large public pension funds which also invest a portion of their portfolio in Canada's resource rich S&P/ TSX.

There's also been a push to divest away from fossil fuel assets around the world. In June, Norway’s $890 billion government pension fund, the largest sovereign wealth fund in the world, said it will sell off many of its investments related to coal, making it the biggest institution yet to join a growing international movement to abandon at least some fossil fuel stocks.

In September, California passed a bill requiring the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to divest their holdings in companies that receive at least half their annual revenue from coal mining.

Over in Boston, Jameela Pedicini, the inaugural vice president of sustainable investing at the Harvard Management Company, will depart in December for the New York-based Perella Weinberg Partners. Pedicini, who will leave HMC after just two and a half years, departs after her department suffered criticism from environmental groups over the Management Company’s steadfast refusal to divest the endowment, now valued at $37.6 billion, from the fossil fuel industry.

So what's wrong with this "social awakening" to push large pensions and endowments to divest away from fossil fuel assets and into socially responsible investments? On one level, nothing, provided they can find suitable investment opportunities elsewhere which will allow them to make their rate-of-return objective in clean energy and other socially responsible investments.

But as I argued three years ago when bcIMC was slammed over unethical investments, once you push the envelope on responsible investing, you quickly divest from many companies in all industries, including big pharma, big tobacco, big banks, and big fast food companies that need lots of cows to make hamburgers (and cow emissions are more damaging to the planet than cars).

There's something else I want you to think about, pension funds have a fiduciary duty to achieve their return objective without undue risk. That's investment risk, not undue risk to the environment. Clean energy sounds great, and I'm all for it, but these stocks are also very volatile (mostly follow trends in energy prices), not to mention these companies aren't as big as fossil fuel companies so it's impossible for pensions to easily make the switch out of fossil fuel into clean tech.

And another thing, what if all those investors betting big on a global recovery turn out to be right?  You will see a massive rally in coal, steel, oil and oil drilling stocks. I wonder then if the Canadian Centre for Policy Alternatives will publish research on the cost of divesting out of fossil fuels (it's easier being an armchair quarterback when the prevailing trend is going your way).

Below, former hedge fund all star Tom Steyer provided his insights on sustainable investing at CalSTRS' June board meeting. He raises excellent points that all pensions need to consider as they look to bolster their sustainable investments.

Lastly, all of Canada's large public pensions have a governance that precisely shields them from government interference. They can and should be more transparent on all their investments but the last thing I want to see is them bow down to pressure from tree-hugging vegetarians wearing Birkenstock sandals (not that I have anything against them but I'm Greek and we look at vegetarians differently. OPA!!)