Wind turbines in Niederaussem, Germany, as the sun rises on Nov. 2, 2022.Michael Probst/The Associated Press
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
Should Canada’s pension funds be required to invest in Canada? This perennial question is bound to crop up again as Canadians, roused into a patriotic fervour by U.S. President Donald Trump’s bullying, boycott American brands.
The problem with the idea, as any fund manager will tell you, is that limiting your investment to less than 3 per cent of the global market is going to tie the hands of managers, ultimately hurting the solvency of the plans. Besides, on the face of it, Canada’s pension funds aren’t bad corporate citizens. Although they have one of the industry’s lowest allocations to domestic equities in the world, once one adds in their private equity holdings, some 22 per cent of their capital is invested domestically.
But here’s a requirement that Canada’s pension funds should have in light of recent events: They should consider whether their investments serve not just existing beneficiaries but future ones as well. On top of their other requirements, these funds should have a climate mandate.
This issue has come to prominence again in light of the Trump administration’s climate denialism, and the consequent eagerness of some big asset managers such as BlackRock to scrap environmental considerations in their investment decisions. This week, Michael Sabia, president and CEO of Hydro-Québec, said a hostile United States risks isolating itself in a global clean-energy transition and that Canada must therefore double down on its relevant efforts.
For a fund manager looking to juice returns, the attraction of scrapping environmental considerations are obvious, since fossil-fuel companies are among the biggest dividend-payers yet remain relatively cheap. But in response, a group of international pension funds have said they’ll look for new fund managers who take climate change seriously.
The motives of those climate-conscious funds are equally obvious. With contributors who won’t receive a pension for another few decades, they have to concern themselves with the state of the fund not just today but several decades, and the possibility it might not even survive a climate collapse. It should seem obvious that pension managers should be thinking of the distant future.
Climate change poses financial risks, including asset devaluation, regulatory changes and economic disruption. By integrating climate considerations, pension funds can protect their long-term returns and safeguard retirees’ savings from climate-related financial shocks.
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So it’s a bit concerning that on that score, Canada’s record is far from perfect. This week, the charitable initiative Shift: Action for Pension Wealth and Planet Health put out its annual Canadian Pension Climate Report Card, an assessment of the climate policies of 11 of Canada’s largest pension funds. The Investment Management Corporation of Ontario, the Ontario’s University Pension Plan and the Caisse de dépôt et placement du Québec lead the pack in prioritizing climate change in their investment decisions, with the Ontario Teachers’ Pension Plan also putting in a creditable performance.
But others are less impressive. It’s not a big surprise the worst performer was the Alberta Investment Management Corporation. However, the biggest of them all, and the one you would think might take the most expansive view of the long-term well-being of Canadians, the Canada Pension Plan, saw an already bad performance get worse.
Julie Segal, herself a former fund manager who now works on climate finance for Environmental Defence, says part of the problem lies in the CPP’s mandate. Its trustees are assigned a purely fiduciary responsibility, namely to invest the fund’s assets with a view to achieving a maximum rate of return without undue risk of loss. She prefers the model of the Quebec Pension Fund, which is required to consider the interests of all Québécois in its investment decisions, not just those receiving a pension.
Requiring pension funds to take their long-term climate effects into account could also offer Canada an added advantage. The country punches above its weight in green tech startups, but below its weight in venture capital. The country could thus kill two birds with one stone: By steering pensions toward more climate-friendly investments, the government could both secure the long-term well-being of its citizens and give an immediate boost to one of the most dynamic sectors in the economy.
Moreover, Canada may face a moment of opportunity here. While the Trump administration is trying to block the energy transition, the rest of the world is forging ahead with it, and capital keeps flowing into the industry. Mr. Trump’s policies will therefore mainly hinder American firms. When the U.S. gets back on track with the rest of the world, as it inevitably will, Canadian producers could, with sufficient investment, reach the scale needed to be big players in that market.
It wouldn’t require a buy Canadian mandate. It would only need a buy better one, and the country’s investors and entrepreneurs would do the rest.