ANALYSIS: New climate report shows OTPP is listening to teachers- but there’s much more to do

The Ontario Teachers’ Pension Plan (OTPP) has finally revealed just how far it plans to go to protect its members' retirement savings and the planet from the climate crisis. 

Canada’s third largest pension committed to net-zero emissions by 2050 in January, and in September set interim targets for getting there, but it wasn’t until this week that the OTPP disclosed crucial details on how exactly it plans to achieve its goals.   

The details came in the form of the OTPP’s 2021 Annual Responsible Investing and Climate Change Report, Shaping a better future, as well as in a number of new climate-related documents including:

• A new Climate Change FAQ

• A Pathway to Net Zero by 2050 summary

• Updates to its Corporate Governance Principles and Proxy Voting Guidelines

The new report and accompanying responsible investing (RI) documents demonstrate that the OTPP is listening to teachers’ climate concerns, adding substance to its net-zero emissions by 2050 commitment, and raising the bar for climate leadership among Canadian pension funds.

Last month we saw the OTPP announce its plan to reduce the carbon intensity of its portfolio by 45% by 2025 and 67% by 2030, using a 2019 baseline. With this month’s RI report, it’s clear that the OTPP is undertaking a crucial transformation to protect teachers’ retirement savings and use its financial might to tackle the climate crisis. The OTPP has recognized the climate crisis as the existential emergency it is and placed climate at the centre of its investing strategy. 

The OTPP has invested in climate solutions, developed internal tools to measure and reduce emissions, and sharpened its climate engagement strategy to pressure companies to reduce emissions. However, there remain some major gaps in its strategy. The OTPP must go much further to catch up with pension funds around the world that are leading on climate. In particular, the OTPP must demonstrate how its entire portfolio can be aligned with what is required to limit global heating to only a 1.5°C increase, and either show how its significant fossil fuel holdings have credible climate-safe transition pathways or remove these financially risky investments from its portfolio.  

Here are Shift’s highlights and analysis of the OTPP’s new climate report:

A Renewed Sense of Climate Urgency

One of the most stark changes in the OTPP’s new climate documents is its recognition of the gravity and urgency of the climate crisis and the pension fund’s role in confronting it. In a new Climate Change FAQ, the OTPP says “Climate change is the greatest challenge faced by the modern world. As a leading asset owner, we can play a critical role in addressing climate, an issue that impacts our members, employees, operations, portfolio companies and communities.” In its RI report, the OTPP acknowledges that “Climate change permeates the entire investing landscape” and that its “long-term ability to meet our financial obligations is connected to how well the world is doing.” The OTPP goes on to say that

As a long-term and global investor, we are an active steward and engaged owner of businesses – not only to earn returns, but to help shape a better future... Our plan isn’t only about bringing Ontario Teachers’ to net zero; it’s about helping the world around us get to net zero, too… As a leading global investor, we have an important role to play – we need to use our capital and influence to accelerate the global transition to a net-zero world.  

These are encouraging words that recognize that the OTPP has a major role to play in mitigating the global climate crisis and that, ultimately, its ability to pay out teachers’ retirement savings is dependent on ensuring a safe climate. 

Massive Growth in Investments in Climate Solutions

The OTPP now reports that it holds more than $30 billion in green investments that enable the net-zero transition, reduce greenhouse gas emissions and build a sustainable economy. The RI report highlights renewable energy (Equis Development), sustainable agriculture (Vayda), and real estate (Cadillac Fairview’s laudable waste diversion efforts and reductions in carbon emissions and water use). We applaud the OTPP’s ongoing and growing investments in profitable climate solutions that help to build a climate safe future.  

Portfolio Carbon Footprint Reduction

The OTPP plans to reduce the carbon intensity per dollar invested of its portfolio by 45% by 2025 and 67% by 2030, using a 2019 baseline. Going forward, the OTPP is adopting a new carbon accounting method that measures the carbon footprint of more than 70% of the portfolio, while working to find ways to measure emissions from the remaining sectors that are currently hard to quantify. 

 Picture: OTPP RI report, p. 14

The OTPP reports reducing its carbon intensity for every million dollars invested by almost 11% between 2019 and 2020, from 47 tCO2e/C$million) to 42. At the same time, the OTPP portfolio’s absolute carbon emissions increased by 3% between 2019 and 2020, from approximately 6.3 megatonnes of carbon dioxide to approximately 6.5 megatonnes. 

The reduction in carbon intensity occurring simultaneously as an increase in absolute carbon emissions illustrates a fundamental problem with portfolio carbon intensity reduction targets. It is entirely possible for absolute emissions to continue to grow as intensity decreases simply because the portfolio continues to grow. While we recognize that the portfolio must continue to grow in order to pay out teachers’ pensions for years to come, the OTPP fails to explain how its use of interim emissions intensity targets will lead to the fund achieving absolute long-term emissions reductions aligned with its net-zero by 2050 commitment. Only absolute emissions matter to the climate, so if the OTPP is serious about decarbonization, it must explain how the portfolio’s absolute emissions will fall to zero by mid-century.

Furthermore, there are major flaws in the OTPP’s carbon accounting that could undermine the entire strategy. OTPP’s carbon footprint does not measure Scope 3 emissions, which make up the vast majority of lifecycle fossil fuel emissions, such as when oil, gas and coal are burned in a car, furnace or power plant. We recognize that there are data and technical gaps that prevent investors from accurately measuring and assigning Scope 3 emissions. And we recognize that the OTPP is trying to overcome this by developing decarbonization playbooks, starting with sectors with high scope 3 emissions, such as consumer goods, oil and gas, and transport. However, until the OTPP begins reporting the Scope 3 emissions associated with its portfolio, we can’t have confidence that the real-world emissions of the companies and assets in its portfolio are actually declining.

New Internal Climate Capacity and Governance

Green Bond Council

After issuing its first green bonds in November 2020, the OTPP plans to continue to use green bonds to invest in climate solutions. We are encouraged to see that the OTPP has established a Green Bond Council to ensure that green bonds are externally verified and are actually being invested in companies and projects that cut emissions. We are pleased that the OTPP will also publish annual reports that provide detailed information on the use and allocation of green bond proceeds, and their associated impact.

In-house energy transition expertise

With its new Virtual Energy & Renewables Team and its Sustainable Energy Transition Team, the OTPP has created new investment teams dedicated to finding new investment opportunities in climate solutions, as well as to seek out investments in existing energy markets that could drive the energy transition. OTPP is also developing 'decarbonization playbooks' to help guide decarbonization pathways for relatively high-emitting sectors. These are critical steps, as developing this expertise in-house is essential for finding value and growing the fund in the future. We remain concerned that pension funds like the OTPP are not clearly distinguishing between industries that have credible and profitable decarbonization pathways (such as steel, cement and transport), and those that do not (such as oil and gas production). There is considerable risk in pursuing sustainable fuel investments that could become dead ends in the transition.

Net-zero scenario analysis by portfolio companies

The OTPP has updated its proxy voting guidelines to identify scenario analysis and emissions reductions as shareholder proposal “focus areas.” The guidelines explicitly note the importance of climate risk oversight by company boards and climate risk reporting using TCFD recommendations. The OTPP now also expects owned companies to assess the resilience of their business model under different climate scenarios, including a credible net-zero scenario. The OTPP will “consider” this analysis when voting on climate-related shareholder proposals, but does not actually clarify what it will take to vote against a climate-related shareholder proposal, or what will happen if a company remains in non-compliance. 

The OTPP reports that it had 16 instances of engagement with companies on climate change and 43 on sustainability disclosures in 2020. This seems very low, given the number of high-risk companies held in the portfolio. Through its membership in Climate Action 100+, the OTPP also claims to have pressured 35 companies to commit to “enhance their climate change practices” and 26 to make “commitments on net-zero targets.” But this represents only a small fraction of the thousands of companies held in the OTPP’s portfolio and fails to explain how these portfolio companies have aligned their business model with climate safety. Evidence to date of meaningful engagement, resulting in change at the scale required, is scarce. 

The OTPP also highlights a case study in which it engaged a “downstream energy company” over the course of two years to adopt Scope 1 and 2 emissions reduction targets, get started on carbon capture and storage targets, and adopt a climate risk reporting framework, with next steps including aligning company targets with the Paris agreement and disclosing Scope 3 emissions. The OTPP has thus far failed to explain how this company has aligned its business model with a safe climate, which begs the question of why it is held in the OTPP’s portfolio at all.

Lobbying and Political Activities

When it comes to lobbying, the OTPP’s guidelines are still too weak. The OTPP says it will “typically support shareholder proposals related to political activities and expenditures that improve board oversight and expect[s] companies to provide regular reporting on their political expenditures and activities.” But in the end, the OTPP believes that “the onus is on a company to demonstrate that its public position is aligned with its political activities and actions,” and  “incongruencies should be explained and remedied.” The political power of the fossil fuel industry and other high-carbon sectors is arguably the number one impediment to ambitious climate action in Canada and around the world. The OTPP must take a much stronger stance against companies that are engaging in lobbying and public relations activities to delay, obstruct and dismantle climate policies, laws and regulations. This point is particularly relevant considering companies that the OTPP owns have a well-documented record of doing exactly that, such as Puget Sound Energy and Bristol Airport. As of June 30, 2021, the OTPP even continued to hold shares in ExxonMobil, one of the most notorious purveyors of lobbying and lies to keep the oil flowing.  

Managing and Reporting Emissions

The OTPP is making strong progress in pressuring portfolio companies to measure, report and manage emissions. Among private companies owned by the OTPP, the pension fund has boosted emissions reporting to 56% in 2020, from 37% in 2019. In 2021, the OTPP also began producing resources to support its investment teams and portfolio companies in measuring emissions. Investment teams have a target in 2021 to increase reported vs. estimated emissions in private portfolios by 20% this year, which will help to enable portfolio companies to set emissions reduction targets and develop net-zero plans. The OTPP expects two-thirds of the portfolio’s carbon emissions to be covered by credible, science-based net-zero plans and targets by 2025, and 90% by 2030. Currently, only 6% of this portfolio’s carbon emissions are covered by a credible net-zero plan.

Picture: page 11 of the RI report.

Engagement & Divestment

The OTPP remains adamant that it prefers engagement over divestment, but this argument is illogical. Engagement and divestment are not mutually exclusive-- both are required. While the fund has rightly strengthened its engagement strategy to ensure portfolio companies are aligned with net-zero and to help guide them through the transition, the OTPP fails to explain what happens to companies that don’t measure up after repeated attempts at engagement. 

For example, what happens if a company in the OTPP’s portfolio, after engagement efforts, reports that its business model is not aligned with or resilient to a credible net-zero emissions scenario? How would the OTPP enforce its net-zero expectations of owned companies, should its engagements fail to achieve the desired result? What happens if a company is found to be lobbying inappropriately to undermine climate action? It seems obvious that the OTPP should consider divestment in these cases. Divestment is an essential tool in addition to engagement that must be part of a pension fund’s toolkit to manage climate-related financial risks.

The OTPP has already quietly divested from underperforming or high-risk, high-carbon companies in recent years. In its 2019 Climate Change Report (see p. 19), the OTPP noted that its “year-over-year portfolio carbon footprint was reduced by approximately 15%... mainly due to the sale of a particularly high-carbon-intensity private asset.” Meanwhile, this month, Reuters reported that the OTPP is in talks to sell Chisholm Energy, a Texas-based private oil and gas company owned by the pension fund, suggesting that the OTPP is indeed quietly divesting from high-risk, high-carbon fossil fuels in the absence of a fossil fuel exclusion policy.

The Big Gaps

Failing to Define Net-Zero

The OTPP’s new Climate Change FAQ simply says “net-zero refers to a balance of emissions released into and removed from the atmosphere.” It also claims that “we’ve taken a rigorous approach to developing our targets that aligns with global efforts to limit global warming to well below 2°C and striving for 1.5°C.” Yet the OTPP provides no further explanation of what net-zero means and no analysis to show how its portfolio is aligned with well below 2°C or 1.5°C. Markets are rife with creative accounting and greenwashing that deeply undermines real action to cut absolute emissions. In the absence of any credible carbon offsets, the OTPP should adopt a precautionary approach of focusing on achieving zero emissions within its portfolio to avoid these pitfalls.  

Taking Fossil Fuel Divestment Off The Table

Even as a growing number of investors exit fossil fuels, the OTPP refuses to use exclusionary investment screens. From New York to the United Kingdom to Sweden to Australia to Quebec, pension funds are protecting their members’ savings by excluding risky fossil fuels from their portfolios. Yet the OTPP remains adamant in its belief that “retaining a seat at the table is better than walking away” and that it will “push our portfolio companies to decarbonize rather than simply divesting.” By taking divestment off the table, the OTPP is neglecting to use a critical tool in its toolbox-- the threat to withdraw capital from high-risk companies that refuse to align their business model with climate safety. 

The OTPP claims that “divestment does not reduce emissions; it simply removes them from our portfolio,” whereas “engagement with companies in fossil fuel sectors supports economic growth and energy security while accelerating the transition to a low-carbon world.” It’s odd that suddenly the OTPP has forgotten its fiduciary duty to avoid the serious financial risks of investing in companies and sectors facing disruption and decline. The OTPP goes on to say that:

“Long-term capital has an important role to play in an orderly and inclusive transition toward a net-zero economy… To successfully transition into companies that will thrive in a low-carbon world, today’s companies need patient capital and pragmatic owners. We are willing to play this role. We believe it is our responsibility to support the transition of businesses to a more sustainable global economy. We can help reduce emissions if we remain active and engaged investors who push our companies to set credible transition plans and demonstrate progress towards these goals. Our involvement may help accelerate a company’s transition. This approach – while more challenging than divesting – lowers emissions and protects and enhances value in these companies as they shift to sustainable business models.”  

But the OTPP is failing to distinguish between high-risk fossil fuel-dependent companies and other high-carbon industries. Investment to help high-carbon companies cut their emissions only makes sense if that company has a profitable and credible transition pathway (such as cement, steel, mining and transportation). Otherwise, the requirement to protect the financial interests of beneficiaries must take precedence over continuing to engage climate laggard companies. Fossil fuel companies do not generally have profitable or credible transition pathways, requiring pensions to use screening and divestment to eliminate exposure. Here in Canada, the Caisse de dépôt et placement du Québec recognizes this reality. That’s why it committed to entirely eliminate oil production companies from its portfolio by the end of 2022.

Not only does the OTPP refuse to divest from fossil fuel companies, but it even leaves the door open to investing in more fossil fuel companies or projects:

“Although the economic relevance of fossil fuels is declining, they remain an essential part of the global economy and fulfilling the world’s energy needs. The transition toward a net-zero economy - and away from fossil fuel - is under way, but it is happening at different speeds around the world. When we invest in fossil fuels, we will invest in companies that: 

-possess the capacity to decarbonize and perform well in the net-zero transition; 

-have a role to play in the energy transition by offering solutions such as low/zero-emission fuels; 

-understand the importance and urgency of climate change. 

Any company in any sector that does not take climate change seriously will not attract our capital.”

 We are not aware of any fossil fuel company that meets any of these criteria. In May, the International Energy Agency said that limiting global heating to 1.5℃ means there can be no investment in new fossil fuel supply projects from now on and an immediate phase-out of existing fossil fuel projects is needed. Similarly, leading research institutions in collaboration with the United Nations Environment Programme found that oil and gas production must decrease by 3% per year between 2020 and 2030 to ensure a safe climate future. It is unacceptable that the OTPP continues to gamble both a stable climate and teachers’ retirement savings by refusing to acknowledge this reality.  

Pretending that oil, gas and pipelines are “transition assets”

In its Climate Change FAQ, the OTPP defines “transition assets as new investments which are initially high emitters, but have an explicit decarbonization thesis as part of the value-creation plan for the investment,” stating that “the key objective is to significantly reduce operational emissions.” Yet the OTPP makes no reference whatsoever to “transition assets” in its RI report. The pension fund does include a brief case study on SGN (formerly Scotia Gas Networks), the second largest fossil gas distribution network in the UK in which the OTPP holds a 37.5% stake. The case study highlights SGN’s efforts to reduce gas leakage, use 100% renewable energy, and electrify its vehicle fleet, and mentions in particular a pilot project in which SGN will explore converting a tiny section of its pipeline network from fossil gas to carbon-free green hydrogen. The OTPP neglects to mention that switching to hydrogen as a home energy source is highly unlikely, with no cost-effective or scaleable pathway for providing 100% green hydrogen to U.K. homes using the existing fossil gas pipeline network. Rather, the SGN pilot appears to be greenwash, obscuring the reality that the UK’s ambitious climate goals require rapidly eliminating the fossil gas that SGN distributes and replacing gas boilers that provide home heating with heat pumps. Relying on an unproven, expensive, unscalable pilot project that prolongs the life of fossil gas pipelines is highly risky for teachers’ pensions and the climate.

Apart from this dubious reference to fossil gas pipelines as a “transition asset”, the OTPP’s RI report is completely silent on the OTPP’s significant oil, gas and pipeline investments, which we estimate to be at least $6.6 billion. In the midst of a worsening climate crisis, it is not good enough for the OTPP to claim that fossil fuel infrastructure is a “transition asset” and refuse to disclose to teachers and the public what will become of its multi-billion dollar fossil fuel holdings.

Portfolio Carbon Footprint by Sector

The problem we raise above about the OTPP’s approach to high-carbon sectors and “transition assets” is illustrated by the pension fund’s own calculations of its carbon footprint by sector. While “energy” makes up just 4% of the OTPP portfolio, it is responsible for 17% of portfolio emissions. This is particularly problematic considering that the OTPP holds massive renewable energy assets in this portfolio. Similarly, “utilities” make up just 5% of the OTPP portfolio, but are responsible for 25% of portfolio emissions. This is likely due to the OTPP’s significant holdings in integrated utilities that include fossil gas pipelines and power plants. It is clear that meeting its interim reduction goals will require the OTPP to shift capital out of these areas and into carbon-free energy companies. 

Picture: OTPP RI report, p. 14