Of late, the Canada Pension Plan Investment Board (CPPIB) has made headlines for taking this concept to a whole new level. It has voted to retract its pledge to go net-zero emissions by 2050. This decision follows increasing calls over the best approach to address the risks climate change poses to the long-term economic health of pension funds. CPPIB’s latest projections, while dire, still underestimate the potential consequences of climate change, raising questions about the long-term viability of its investment strategies.
By CPPIB’s own timeline, in early 2022, they had publicly committed to lead their organization and investment portfolio to be completely net-zero by mid-century. What we learned through recent advocacy is that, thankfully, the board has decided to take another route. Critics contend that this decision does not reflect a commitment to responsible long-term financial planning, all the more in light of our changing climate.
Impact of Climate Change on Pension Funds
Their call comes amidst mounting evidence that the implications of climate change on the global economy are catastrophic. A report from Swiss Re predicts a four percent drop in global GDP if temperatures rise to just 2 degrees Celsius. If the world were to heat by 3.2 degrees Celsius, that number could rise to a shocking 18 percent. For Canada and the rest of Canada’s allies, which include the U.S. and the U.K., this is a ten percent loss in GDP. Note that this forecast only applies to unmitigated warming scenarios.
In particular, experts have been raising the alarm about disastrous implications for pension funds. Adam Scott, executive director of Shift Action for Pension Wealth and Planet Health, emphasizes the urgency of the situation, stating, “Climate change is one of the largest systemic financial risks faced across the planet.” He argues that CPPIB’s abandonment of its net-zero goal is a serious breach of its obligation to manage Canadian pension funds responsibly.
Despite these cautions, CPPIB has to report that carbon emissions attributable to its investments have flat-lined year on year. This ongoing stagnation is deeply concerning. It rightly raises concerns about the board’s pledge to sustainability and level of understanding of the financial world in which it flies.
The Shift Away from Net-Zero
CPPIB’s choice to ditch its net-zero pledge is presented as a cautious step back from making “misaligned” investment decisions. In their FAQ response, they stated, “Forcing alignment with rigid milestones could lead to investment decisions that are misaligned with our investment strategy.” Beyond that, they made clear their plan to spend more time producing results on investments, instead of lawyering up over legal unknowns.
Graham, chief executive of CPPIB, has made it his mission to bring climate into the core of their portfolio. He feels that’s essential to achieving long-term success. Nonetheless, critics remain skeptical. “These professionals that we’ve paid to do this don’t seem to understand the business that they’re in and what’s required to do their jobs,” Scott said. In doing so, he made the case that CPPIB has a long-term, generational duty to Canadians to keep their retirement savings safe.
The timing of the decision could not be worse, as other Canadian pension funds begin to catch up and significantly outperform CPPIB on climate metrics. Fully-funded Caisse de dépôt et placement du Québec, Investment Management Corporation of Ontario, and Ontario’s University Pension Plan have all received As. They did this by taking big strides with their sustainability efforts.
Future Projections and Financial Sustainability
In light of CPPIB’s recent changes, questions arise about the future sustainability of Canada’s pension funds. The Office of the Chief Actuary has projected that Canada’s pension plan will remain financially sustainable until at least 2100. This projection could be threatened if we don’t sufficiently account for climate risks.
According to Deloitte, the opportunity from moving toward a net-zero economy amounts to $43 trillion in economic upside. What an incredible benefit that could be realized over the next 50 years. This jarring difference serves to underscore the gulf and lost opportunity CPPIB creates by retreating from its pledge to be a leader in sustainability.
As CPPIB ranks second among 25 global pension funds for highest returns over the past decade, observers note that financial performance must align with long-term viability. Critics claim that by failing to incorporate sustainability into its investment approach, CPPIB is jeopardizing its financial future as well as its reputation.
“We take our responsibility to Canadians very seriously and operate with a clear mandate — to maximize returns without undue risk of loss.” – CPPIB
