Canada's Big Pensions Boost Stakes in Oil Sands?

Nia Williams and Maiya Keidan of Reuters report:

Canada's biggest pension managers boosted their investments in the country's major oil sands companies in the first quarter of 2021, raising questions about the funds' recent commitments to greening their portfolios.

The cumulative investment by the country's top five pension funds into the U.S.-listed shares of Canada's top four oil sands producers jumped to $2.4 billion in the first quarter of 2021, up 147% from a year ago, a Reuters analysis of U.S. 13-F filings show. Much of that increase, which bucked a declining trend since 2018, came from rising prices of shares already owned, but the funds also purchased more shares.

The five funds, in order of size, are Canada Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ), Ontario Teachers' Pension Plan (OTPP), British Columbia Investment Management Corp (BCI) and the Public Sector Pension Investment Board (PSP), which together manage more than C$1.4 trillion ($1.2 trillion) in assets.

Governments, companies and investors around the world have stepped up pledges to drastically reduce climate-warming greenhouse gas emissions. Some large pension managers, including the New York State Pension Fund and Norway's largest pension fund KLP, have exited oil sands companies. read more

Canadian pensions face pressure to balance a mandate to be environmentally responsible with their fiduciary duty to maximise returns. Canada's oil sands are a high-carbon industry, yet their rising shares prices are tempting for investors. read more

Some Canadian pension funds say they favour continuing to invest in fossil fuel producers to help those firms transition toward producing cleaner energy.

"We have a big problem with pension funds saying we believe in engagement, not divestment, but there's no sign of this engagement," said Adam Scott, director of pension activist group Shift. "The very act of owning them (oil sands companies) implies the funds do not support transition."

While first-quarter exposures to oil sands firms have risen, annual reports show three of the five pension funds decreased their overall energy exposure in 2020 from 2019. But the 13-F filings present a more up-to-date picture.

Compared with same period in 2018, the funds' investments in the four oil sands firms were down 0.9%.

While the Reuters analysis is restricted to four companies - Canadian Natural Resources Ltd (CNQ.TO), Suncor Energy (SU.TO), Cenovus Energy (CVE.TO) and Imperial Oil (IMO.TO) - it provides a glimpse into the funds' investments in northern Alberta's oil sands, the source of the highest emissions-per-barrel oil on the planet, according to a 2020 report from consultancy Rystad Energy.

CDPQ, OTPP and PSP decreased their cumulative exposure to energy to C$22.2 billion in 2020, from C$28.2 billion in 2019, according to annual reports.

But CPPIB, which manages C$497.2 billion in assets, saw exposure to fossil fuel producers rise 51.5% to C$17.6 billion at the end of March 2021, after falling for at least five years. The fund's investments in renewable energy producers rose 16% to C$7.7 billion over the last year by comparison.

CPPIB declined to comment on the 13-F holdings data.

BCI's annual reports do not break out energy investments as a percentage of overall holdings. Spokesman Ben O'Hara-Byrne said numerous factors affect changes in holdings, so percentages should not be used to derive assumptions about BCI's response to environmental, social and governance (ESG) "integration efforts."

A spokeswoman for PSP Investments said many of the investments were held in so-called "passive" portfolios containing a mix of assets based on a stock index designed to match overall market moves.

CDPQ did not comment specifically on its oil sands holdings, but a spokesman said fossil fuels represent a very small share of total assets owned by fund, which is targeting a carbon neutral portfolio by 2050.

OTPP has also committed to a net-zero portfolio by 2050 and will focus on climate-friendly investments that help shift away from fossil fuels, a spokesman said.

Randy Bauslaugh, co-Chair of McCarthy Tétrault's Pension Funds Group, on Wednesday said in a new paper that pensions have a legal responsibility to take into account the risks of climate change.

"Pension fund fiduciaries who fail to consider or manage climate-related financial risks and opportunities, may find themselves personally liable for economic, reputational or organizational loss resulting from that failure," he wrote.

Alex Kimani and Tsvetana Paraskova of Oilprice.com also report that Canada’s largest pension funds stick to lucrative oil sands bets: 

Canada’s oil sands industry is too carbon-intensive for the environmental, social, and governance (ESG) targets of some of the world’s largest institutional investors. But not for Canada’s own pension funds.  The five largest Canadian pension funds, which manage US$1.2 trillion in total assets, saw their combined investment in the U.S.-listed shares of the major oil sands producer surge by 147 percent in the first quarter of 2021, to a total of US$2.4 billion, according to a Reuters analysis of filings to the SEC.  

Most of the jump in the value of investments of the pension funds merely reflected the rise in share prices of stock already held. Yet, the funds also bought more shares in the largest Canadian oil sands producers, according to the Reuters analysis. 

Regardless of the way in which the pension funds boosted investment in oil sands in the first quarter, the fact remains that unlike other pension funds and some of the world’s largest sovereign wealth funds, Canada’s pension funds have not pledged or made divestments in one of the most emissions-heavy way of producing oil. 

The funds, Canada Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ), Ontario Teachers’ Pension Plan (OTPP), British Columbia Investment Management Corp (BCI), and the Public Sector Pension Investment Board (PSP) collectively increased the value of their investments in Canadian Natural Resources, Suncor Energy, Cenovus Energy, and Imperial Oil, according to the Reuters analysis. 

Some of Canada’s pension funds have committed to carbon-neutral portfolios by 2050. Commenting on the analysis for Reuters, a PSP Investments spokeswoman said many of the fund’s investments were in passive portfolios tracking stock indexes. Representatives of other funds told Reuters that their exposure to fossil fuels as a whole is a tiny percentage of total assets held. 

Nevertheless, the funds have been criticized by activists for not doing enough to account for climate risk in their portfolios by divesting from the oil sands business.

Commenting on this week’s high-profile case in which a Dutch court ordered Shell to slash emissions, holding it directly responsible for contributing to climate change, pension activist group Shift said: “Pension funds take note: This case highlights the growing climate-related legal risks faced by oil and gas companies amidst a wave of litigation against the fossil fuel producers most responsible for the climate crisis.”

“We have a big problem with pension funds saying we believe in engagement, not divestment, but there’s no sign of this engagement,” Shift’s director Adam Scott told Reuters. 

Other institutional investors and pension funds have already dumped their stakes in oil sands companies. 

In May last year, Norway’s Government Pension Fund Global, the world’s largest sovereign fund which has amassed its enormous wealth from Norway’s oil, decided to exclude Canadian Natural Resources, Cenovus Energy, Suncor Energy, and Imperial Oil over “unacceptable greenhouse gas emissions.” Even the Public Investment Fund (PIF), the sovereign wealth fund of the world’s largest oil exporter Saudi Arabia, has recently sold all the 51 million shares it held in Suncor. 

Among pension funds, the New York State Common Retirement Fund said last month it would divest its US$7-million investment in Canadian oil sands firms after determining that seven companies “failed to show they are transitioning out of oil sands production.” 

The evaluation of the fund’s oil sands holdings are part of a broader review of climate risk in energy investments, and the fund will next evaluate shale oil and gas companies, it said.  

The Bank of Canada also warned in its latest Financial System Review (FSR) from earlier this month that climate-related vulnerabilities are first among “ongoing issues that we all need to take seriously now to protect our financial system and economy in the future.” 

“The potential impact of climate risks is generally underappreciated, and they are not well priced. That means the transition to a low-carbon economy could leave some investors and financial institutions exposed to large losses in the future,” Bank of Canada Governor Tiff Macklem said.

The environmentalists are at it again, criticizing Canada's large pensions for investing in "high carbon companies."

Let me just begin by stating this is just more nonsense that grossly distorts reality and once again omits to clarify certain things.

First and foremost, the number one job of any pension is to make sure there are enough assets to pay liabilities down the road. 

This is their fiduciary duty, not solving the global climate crisis.

To do this, they need to be properly diversified across many sectors, including energy.

Interestingly, as at the end of last year, energy stocks only accounted for 2.3% of the S&P 500 while information technology stocks accounted for 28%. 

That's because tech stocks rallied like crazy last year and energy stocks were down 50% at the beginning of Q4 2020 before the big rally started there (I told my readers to start looking at Big Oil in September 2020). 

This year, energy stocks are on fire leading the S&P 500 in terms of year-to-date gains:

The rally in energy stocks is due to a lot of factors:

• cyclical stocks are rallying as vaccinations allow the global economic recovery to take place
• the weakness in the US dollar helped boost commodity (oil) prices
• there has been a shift away from growth into value shares

Will this continue going into yearend? Nobody knows but the fact remains the rally in commodity and energy stocks was powerful and it allowed the S&P/TSX to make record gains:

To add insult to injury, let's say you divested out of energy stocks and invested in solar stocks at the end of last year, where would that leave you? Not in a good place:

Where am I going with this? While energy stocks don't enjoy the weights they used to (in both the Canadian and US stock market), missing an important rally in this sector can cost pensions a fortune.

In short, there's a cost to divesting out of oil & gas which is a cost Canada's large pensions aren't willing to take, and rightfully so.

By the way, there is a cost to divesting out of anything including tobacco but at least there, you can make the argument that engagement is truly futile because the end product is lethal. That's why even though I'm not a believer in divesting, I still applaud CDPQ, OTPP and others who signed the tobacco-free pledge as I can't stand cigarettes and unlike energy companies which offer us energy, tobacco companies offer us nothing but misery and increased healthcare costs.

All this to say, I don't lump Big Tobacco and Big Oil together, I see why engagement with the latter is actually necessary and fruitful.

If you don't believe me, just read the findings from the PRI which show that engagement is taking place, it's ongoing and it can lead to better outcomes.

People need to take a step back and stop demonizing Canada's oil & gas corporations.

Regular readers of my blog know my cynical views on climate change, we're screwed because there are way too many people on this planet and that's the number one cause of climate change, not oil & gas companies:

Want to fight climate change? Have fewer children | Carbon footprints | The Guardian https://t.co/MpW1xNjPEz

— Leo Kolivakis (@PensionPulse) May 31, 2021

So, let's please stop listening to environmentalists criticizing Canada's large pensions for not doing enough to fight climate change.

They all are doing plenty, have active targets on reducing their carbon footprint significantly over the next decade(s). 

Do they still invest in traditional energy? You bet but it's a small part of their portfolio and they should be investing in this sector, it makes logical sense and reduces the costs of their pension plan.

What about Norway and Saudi Arabia's sovereign wealth funds that got out of Suncor? What about them? Who cares? Suncor shares have rallied this year along with other energy stocks:

Stop watching what others do, trust Canada's top pensions, they're paid to take risks where it's warranted, including investing in energy stocks when the value is right.

Lastly, what about litigation risk?:

Randy Bauslaugh, co-Chair of McCarthy Tétrault's Pension Funds Group, on Wednesday said in a new paper that pensions have a legal responsibility to take into account the risks of climate change.

"Pension fund fiduciaries who fail to consider or manage climate-related financial risks and opportunities, may find themselves personally liable for economic, reputational or organizational loss resulting from that failure," he wrote.

Fair enough, but there's also litigation risk from failing to meet your fiduciary duty and not investing in the best interests of your contributors and beneficiaries.

And as I stated, all of Canada's large pensions take responsible investing very seriously and actively embed it in their investment strategy (some more than others).

So let's all take this nonsense that "Canada's biggest pension managers boosted their investments in the country's major oil sands companies in the first quarter of 2021, raising questions about the funds' recent commitments to greening their portfolios" with a shaker of salt.

If you ask me, they're bending over backwards to accommodate all these environmentalists taking over our politics, and that makes me very nervous. 

Enough is enough already, I'm all for ESG investing but not for reckless divesting which makes a subset of the population feel better but jeopardizes the solvency of pensions.

Below, watch a heated exchange between Conservative MP Pierre Poilievre and former Bank of England (and Canada) Governor Mark Carney. 

Poilievre goes after Carney for opposing pipelines in Canada while the firm he works at (Brookfield Asset Management) invests in them elsewhere.

Now, Carney is the Head of ESG and Impact Fund Investing at Brookfield, he's been a vocal critic of Canada's energy sector and a supporter of the Liberal party and its policies. 

If you ask me, he needs to be very careful or else he will suffer the same fate as Michael Ignatieff and become yet another intellectual liberal elite that nobody pays attention to.

All I can tell you is that I'm glad Canada's largest pensions invest in oil sands and pipelines and aren't taking their cues from Carney or anyone in Ottawa.