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  • CCPA in Europe for CETA speaking tour October 17, 2017
    On September 21, Canada and the European Union announced that the Comprehensive Economic and Trade Agreement (CETA), a controversial NAFTA-plus free trade deal initiated by the Harper government and signed by Prime Minister Trudeau in 2016, was now provisionally in force. In Europe, however, more than 20 countries have yet to officially ratify the deal, […]
    Canadian Centre for Policy Alternatives
  • Twelve year study of an inner-city neighbourhood October 12, 2017
    What does twelve years of community organizing look like for a North End Winnipeg neighbourhood?  Jessica Leigh survey's those years with the Dufferin community from a community development lens.  Read full report.
    Canadian Centre for Policy Alternatives
  • Losing your ID - even harder to recover when you have limited resources! October 10, 2017
    Ellen Smirl researched the barriers experienced by low-income Manitobans when faced with trying to replace lost, stolen, or never aquired idenfication forms. Read full report here.  
    Canadian Centre for Policy Alternatives
  • CCPA recommendations for a better North American trade model October 6, 2017
    The all-party House of Commons trade committee is consulting Canadians on their priorities for bilateral and trilateral North American trade in light of the current renegotiation of NAFTA. In the CCPA’s submission to this process, Scott Sinclair, Stuart Trew, and Hadrian Mertins-Kirkwood argue for a different kind of trading relationship that is inclusive, transformative, and […]
    Canadian Centre for Policy Alternatives
  • Ontario’s fair wage policy needs to be refreshed September 28, 2017
    The Ontario government is consulting on ways to modernize the province’s fair wage policy, which sets standards for wages and working conditions for government contract workers such as building cleaners, security guards, building trades and construction workers. The fair wage policy hasn’t been updated since 1995, but the labour market has changed dramatically since then. […]
    Canadian Centre for Policy Alternatives
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The Progressive Economics Forum

Is your pension in climate denial?

Fossil fuel divestment campaigns have become a focus for climate change organizing, targeting university endowments, churches, foundations and pension funds. While the motivations are primarily moral—if it is wrong to wreck the climate, it is wrong to profit from that wreckage—there are important economic arguments for divestment.

If we are to have a reasonable chance at staying below 2°C of global warming – the target for international negotiations – between two-thirds and four-fifths of proven fossil fuel reserves (those already near development) will need to stay underground, forever.

This situation is even more dire for Canada due to our economic reliance on fossil fuels, plus our high costs of production. Figure 1 from our new report, Pension Funds and Fossil Fuels: The Economic Case for Divestment (co-authored with Justin Ritchie), presents a cost curve ranking of future oil production around the world, from lowest to highest cost, mapped against various estimates of a global carbon budget.

In a world of constrained carbon, the lowest-cost reserves are likely to be developed first. Canada is a relatively high-cost producer, with Canadian heavy oil projects (in green) requiring a breakeven price of $70-85 per barrel. To meaningfully address climate change, a large share of Canada’s bitumen reserves cannot be developed.

Screen Shot 2015-11-17 at 11.52.01 AM

Institutional investors, including some pension funds, are increasingly aware that fossil fuel company business models are not compatible with a habitable planet. But this is not reflected in the annual reports of Canadian public pension funds, which don’t mention climate change as a material risk to pension sustainability.

In effect, Canadian pension funds have been living in a form of climate denial through their major holdings of fossil fuel stock, and are thus exposed to risks from new policies to address climate change. Integrating an understanding of climate policy risk that includes the potential for new regulations, carbon pricing, emission caps and unburnable carbon reserves is a logical next step in the conversation on sustainability within the pension world.

In addition to climate policy, a number of other risk factors could turn today’s fossil fuel stock into tomorrow’s stranded assets:

  • Commodity price risk – As we have seen since mid-2014, low commodity prices have shelved new investment in Alberta’s oil sands, and hit the bottom lines of companies. We estimate that the accompanying drop in share prices amounted to a loss of $5.8 billion for Canada’s top 20 public sector pension funds. 
  • Energy innovation risk – The cost of renewable electricity generation in recent years has fallen close to fossil-fuel-based energy. Renewables, plus conservation and energy efficiency, may be better poised to meet new energy demand.
  • Carbon liability risk – The link between carbon emissions and damages is evolving, and as Governor of the Bank of England Mark Carney recently commented, it is possible we will soon see fossil fuel producers held liable for damages. This is similar to tobacco companies being sued for health damages resulting from use of their products. A new investigation of Exxon’s climate denial practices by the New York Attorney General also points towards future litigation.
  • First Nations and community opposition risk – Fossil fuel mega-projects are facing delays and opposition wherever proposed. Enbridge’s Northern Gateway and TransCanada’s KeystoneXL pipeline projects are the most recent to get shelved due to popular protest. Even though the previous federal government had approved the Enbridge pipeline, legal challenges from affected First Nations meant it was unlikely the project would ever get built.

In this context, the concept of fiduciary duty needs a rethink. Because of the long-term planning horizons of pension funds, climate change must be taken seriously by trustees, and funds must equally represent the interests of young workers for their eventual retirements.

Divestment from fossil fuels is, in our opinion, consistent with fiduciary duty. But funds can and should also play a transformative role in building and scaling up the green infrastructure needed for a zero-carbon world. Infrastructure requires up-front capital investment with a return paid out over decades, which aligns well with the needs and long-term horizons of pension funds. A great deal of that money will need to come from the public sector through vehicles such as green bonds.

We recommend a four-point plan: (1) higher standards of disclosure so there is daylight on fossil fuel holdings; (2) carbon stress testing to clarify the risks associated with fossil fuel holdings, and develop criteria to evaluate best and worst performers; (3) engagement with companies about their capital expenditure plans; and, (4) developing a process for divestment from fossil fuels and re-investment in green alternatives.

* Thanks to Justin Ritchie for his excellent research in support of this report.

 

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