OTPP Should Stop Investing in 'Climate Failure'?

Two Ontario teachers, Teri Burgess and Natasha Bartels, wrote an op-ed for the Tonto Star imploring the Ontario Teachers’ Pension Plan to stop investing their money in climate failure:

As Ontario teachers, we work hard to prepare young people for the challenges of the future. In a world ravaged by the climate crisis, that can’t mean only teaching, mentoring and coaching. It also means doing our part to ensure that students will graduate into a world with a livable climate.

Unfortunately, our pension savings are working against the clean energy future our students need.

Our $205 billion Ontario Teachers’ Pension Plan (OTPP) continues to invest billions of our savings in climate-polluting fossil fuels, and only a small percentage in climate solutions.

Investments that accelerate the climate crisis are immoral and jeopardize the future of our students. They’re also a risky financial decision, with oil companies writing down assets and losing billions of dollars in value.

As the climate crisis worsens, pressure is building to ensure that fossil fuels stay safely in the ground.

Science shows that if we have any hope of stabilizing the climate at levels that are safe for our students, we must phase out the extraction and combustion of oil, gas and coal by mid-century. That means an immediate end to the expansion of fossil fuel infrastructure.

Ensuring a bright future also requires massive new investments in zero-carbon technologies and infrastructure. Climate solutions are expanding exponentially, creating a valuable opportunity to grow our pensions in the long-term.

To its credit, OTPP has taken steps to increase its expertise in climate science and understand climate-related financial risks. Small but smart investments in renewables, energy storage, and green real estate have helped reduce our pension’s carbon footprint by 15 per cent between 2018 and 2019. 

However, OTPP’s investments in climate solutions make up a tiny portion of our portfolio, while we estimate more than $8 billion is invested in companies and infrastructure that fuel the climate crisis.

It’s unacceptable to us that our pension finances companies and infrastructure that directly undermine the future of the young people we teach. This bet on a dying industry runs counter to the fund’s fiduciary duty to invest in our best interests. 

It’s time for OTPP to align its investments with a safe climate. That means committing to a plan that includes: a screen on new oil, gas and coal investments; phasing out all fossil fuel investments by 2025; decarbonizing our portfolio by 2030; establishing ambitious targets for increased investments in profitable climate solutions; and engaging companies we own to refrain from lobbying activities that undermine ambitious climate policy.

There is nothing radical about these expectations. In fact, numerous large pension funds are already doing this in Quebec, Europe, Australia and the U.S.

We expect OTPP to take immediate action to protect our pension savings and ensure a livable climate for all teachers and our students.

Let me begin my comment by stating what you will read below are my and solely my opinions and I have not contacted anyone at OTPP about this particular article as I read it tonight.

Also, I will be nice given my wife is a teacher and I respect teachers tremendously, especially during the pandemic as they're front line workers that deserve our praise and I'm actually shocked that teachers are not getting vaccinated after our seniors and healthcare workers (along with police officers and firefighters, they should be next in line once we get more vaccines, whenever that is).

I actually spoke to my wife about this op-ed over dinner and even though she doesn't agree that pensions should divest from fossil fuels, she told me bluntly: "Teachers have a right to voice their opinion, and many do find it hard to teach one thing in the classroom and see their hard earned pension monies being invested in something we know is destructive for the climate. Remember, it's our pension monies and that of other public servants supporting all these suits getting millions at CDPQ, OTPP, and elsewhere. They need us just as much if not more than we need them."

Yes mam! I hear you and she does make a good point about teachers and other public servants being captive clients of these large Canadian pensions.

She also warned me "don't write about this topic, it's contentious," to which I replied "contentious" is my middle name (and she just rolled her eyes).

Seriously, I don't like writing about this and other contentious issues but I feel like there has been an increasing political encroachment on our large, well governed public pensions and it's starting to worry me a little.

I wrote about it on Monday night when I went over whether PSP Investments is putting profits over people stating this:

[..] it's time for PSP Investments, CPP Investments and others to go on the offense and state very clearly what your objective is (balancing assets and liabilities by maximizing returns without taking undue risks), how independent governance is critical in obtaining this objective and why you essentially run a huge conglomerate of businesses and while ESG permeates all these businesses, it is done to enhance returns, not detract from them.

The prime purpose of every pension is to have enough assets to meet future obligations.

To all the public-sector unions that have an axe to grind with their own pension, please do your due diligence, and realize how lucky you are to be part of great pensions that are the envy of the world.

I don't know whether it's Twitter, Facebook or Linkedin, but there are increasingly political groups who want to have a say as to how our large public pensions invest.

The problem? Apart from the fact that many spread misinformation to advance their cause, or just blatantly lie, there's a bigger concern that what they are arguing for is actually counterproductive to the goals they aspire to.

Again, from Monday's long comment:

The politicization of our public pensions is something I'm dead set against.

And unfortunately, I see it every day and it's a function of social media and how everyone now thinks they're an expert on pension investments.

They're not, apart from tobacco, there's really no strong case to divest from any investment, especially oil and gas. 

If you don't believe me, listen to CalSTRS which put out a report stating:

We believe divestment is a last resort action that can have a lasting negative impact on the health of the fund,” the report said, “while severely limiting our ability to shape corporate behavior for long-term sustainable growth.”  

CalSTRS says it “is imperative” to continue to actively engage companies on climate change issues, both fossil fuel and non-fossil fuel companies.

“We are focused on understanding and responding to the risks that climate change presents to our portfolio and to sustainable economic growth,” the report said. 

In other words, divesting sounds cool but it's counterproductive and could really jeopardize the overall health of your plan.

CalSTRS manages billions on behalf of California's teachers and it has had huge pressure to divest from fossil fuels, and is rightly pushing back.

Why not divest from fossil fuels? For me, the biggest argument is diversification. Traditional energy may seem like a dying industry, and to be sure, it will one day be extinct, but the reality is we need oil, coal and natural gas to power our world and we will continue to need these sources for another 100 years. And these investments will produce great yields and returns for a very long time.

I had a chat with a buddy of mine recently on how billionaire hedge fund manager Paul Singer (Elliot Management) is heavily invested in some coal stocks.

My buddy replied: "Smart man, you need coal to power all these electric vehicles everyone is supposedly going to be driving by the end of the decade. We simply won't get enough electricity from wind, solar and other renewable energy sources."

I said: "But what about the Biden administration closing coal plants?" He replied: "Leo, once you start getting major power outages, nobody is going to complain about coal plants, people are delusional and way too ideological, when it comes to climate change, you need to be practical and realistic."

Now, my friend is an engineer/ MBA who has worked on major hydroelectric projects and he definitely knows what he's talking about. He tells me all the time: "If our large pensions really wanted to make a difference in fighting climate change, they'd band together to invest in more nuclear reactor plants but it's never going to happen for a lot of reasons. All those solar and wind farms don't add up to anything compared to nuclear power but they get nice press releases."

He's right, in fact, the World Nuclear Association states flat out:

To combat climate change, the world must rapidly reduce its dependency on fossil fuels to reduce greenhouse gas emissions. Nuclear energy is low-carbon and can be deployed on a large scale in the time frame required, supplying the world with clean and affordable electricity.

But in Canada, only one pension plan, OMERS, has a nuclear power company (Bruce Power) as part of its portfolio.  

Anyway, getting back to Ontario Teachers' Pension Plan and the points these teachers raise above.

I recently spoke with Teachers' CIO, Ziad Hindo, on how the pension plan will achieve net zero emissions by 2050.

OTPP, and all of Canada's large public pensions, take responsible investing very seriously and are always gauging the long-term risks of their investments. They know climate change represents a real risk to their portfolio investments and are committed to reducing their carbon footprint for the good of their pensions, not for political reasons.

They are investing in new clean technologies and are looking to reduce their carbon footprint across their public and private portfolio because it makes good business sense and enhances returns over the long run.

But they are not divesting out of fossil fuels because they need that extra diversification to enhance returns and it represents good, solid dividend income for them.

It's like when a retiree with no defined-benefit pension comes to me to ask me where to invest their savings as bond yields are too low.

I don't tell them "biotech, pot stocks or solar stocks" even if they are the flavor of the day, I tell them: "BCE, Telus, Royal Bank, Sun Life Financial, Manulife, and Enbridge, most definitely Enbridge."

Nobody tells me "a pipeline, really?" People need yield, period and even though these stocks are not a substitute for bonds (far from it), when you need safe yield in a low bond yield world, you'll go wherever you find it."

Anyway, I highly suggest Ontario's teachers read my recent comment on how OTPP is committed to going net zero by 2050.

Ontario's teachers are very lucky to have their pensions managed by one of the best pension plans in the world. I know Teachers' CEO, Jo Taylor, is very committed to sustainable investing, stating this:

“As a global pension plan, we will leverage our scale and influence to transition to a low-carbon economy and create a sustainable climate future,” said Jo Taylor, President and CEO. “With coordinated action net zero by 2050 is an ambitious but achievable goal. We are committed to playing our part alongside other organizations and governments around the world to effect significant, positive change.”

But I also think teachers have a right to voice their concerns. I just would tell them it's much better engaging privately with representatives of their pension plan than writing these op-eds in the Toronto Star or other newspapers.

And if you really want to get into it with me, just email me at LKolivakis@gmail.com and I'll be glad to answer your concerns and questions.

Lastly, my wife the teacher reminded me of something else, "it's a very slippery slope" when you start divesting from industries based on political, ideological or religious grounds. 

She makes a good point, one I've raised before on my blog. As an example (just an example), what if Ontario's Muslim teachers banned together to oppose investments in casinos, alcohol beverage companies, tobacco (actually OTPP did divest from cigarettes), pot stocks, etc." based on their religious beliefs?

They certainly are entitled to their beliefs and are well within their rights to voice their concerns but where do we draw the line? 

Yes, climate change is a lot bigger, poses huge problems for current and future generations, but we need to be very smart about what we advocate for and when it comes to our pensions, we really need to trust their governance model and that they have the best interests of their members at heart.

Below, CNBC's Bob Pisani looked ahead to the day's market action earlier today discussing the performance of various sectors.

Also, earlier this year, Inclusive Capital Partners founder Jeff Ubben left ValueAct and to move into social investing. CNBC's Leslie Picker joined 'Closing Bell' to discuss his parting remarks to the finance industry.

Interestingly, Ubben is now being considered for a board seat at ExxonMobil as shareholders are pushing the company to go more green

The best way to change Big Oil for the better is to engage with it, not divest from it, so I hope he does get a seat on that board.