BC Municipalities act on climate. Why is their pension plan ignoring it?

Yesterday marked the start of the Union of BC Municipalities (UBCM) week-long annual meeting. The municipalities are talking about the financial implications of climate change but their pension fund has its head in the sand.

B.C.'s Municipal Pension Plan (MPP) refuses to address climate risk in defiance of the world's leading financial voices who are responding to the financial implications of climate change and the market transition away from fossil fuels. Just this month the world's largest asset manager, BlackRock, warned that "investors can no longer ignore climate change."

The MPP represents 309,000 contributing and retired municipal employees across the province. The fund is managed by the BC Investment Management Corporation (bcIMC) who invests over $120 billion on behalf of a much larger pool of 11 public sector pension plans in the province. Last month bcIMC and the MPP published a joint rebuttal to plan members who had called on the fund to assess and act on climate-related financial risks, and to consider divesting its fossil fuel holdings. In their response, the MPP trustees and their bcIMC investment managers dismissed the global shift to low carbon energy systems as a material financial risk to their investment strategy, dismissing the advice of the world's largest investors.

Pension plan members rebuffed

Almost all municipal public sector employees in the province belong to the MPP. Last year, members of the shared pension concerned about the ethical and financial implications of climate change requested that their fund managers articulate a strategy for addressing fossil fuel risks in the business as usual investment approach taken by bcIMC fund managers. The response published in August rejects targeted divestment as a risk management strategy and states that the “bcIMC does not believe divestment is an effective strategy for addressing long-term and persistent" risks such as climate change.

The bcIMC-MPP report to pension savers indicates a misunderstanding of the investment implications of climate change and associated policy action to phase out fossil fuel use. Rather than acknowledge the legitimate financial concerns relating to the pension plan's holdings in oil sands and coal companies, and ethical concerns linked to climate change, the report focuses on defending a status quo investment approach that is no longer fit for purpose in the context of economy-wide decarbonization. From U.S. banks to the world’s largest investment manager BlackRock, long-term investors are responding to climate-related investment risks and exiting high-cost, high-carbon assets.

Climate change is a material market risk

At a presentation to investors in New York last week, the Center for International Environmental Law stressed that "climate change is a material market risk." For pension plan administrators, "failure to act with reasonable care, skill, caution, loyalty, impartiality, and fact-based inquiry in the face of climate-related risks could expose fiduciaries and their... investment advisors to legal liability." According to HSBC, one of the world's largest banks, "establishing expectations around future asset value resilience to the changing norms brought about by climate change is difficult, but critical" for pension funds and other investors.

Unfortunately for MPP pension savers, the bcIMC’s “head in the [oil]sand” approach to climate risk management comes at a time when both the United States and China have ratified the Paris Agreement, and some of the world’s largest investors are betting on a rapid market transition to low-carbon energy systems.

Hollow arguments to avoid tackling climate-related investment risks

In its defense of a high-risk, high-carbon investment strategy, the MPP report makes several incredulous claims. The report claims that its investment managers at bcIMC are unable to address fossil fuel-related investment risk as a distinct issue because only the broader classification of “energy” is used in the global investment industry. This is explanation is grasping at straws.

The report authors also claim they are unable to provide a professional response on fossil fuel divestment because “'fossil fuel-related companies is not a term that has a common definition.” This definitional challenge has not stopped some of the world’s largest index providers and fund managers, including the Norwegian sovereign wealth fund and state pensions in New York and California from coming up with a definition and implementing a low-carbon investment strategy. These strategies exclude targeted coal and oil sands holdings from equity portfolios based on financial risk factors.

bcIMC’s final straw man argument is that “ownership [in hydrocarbon companies] gives an investor the right to raise concerns and influence a company on matters relating to corporate governance, as well as [climate change]. Whilst this is technically true, the report does not provide a single example of where bcIMC engagement has led to changed behaviour on climate change-related matters by an investee company.

According to Rakhi Kumar, head of corporate governance at State Street Global Advisors, one of the world’s largest asset managers, “climate change is a global issue. It is a portfolio risk. [At State Street] we don’t see climate issues stopping at geographic borders.” Speaking in Berlin last week, Governor of the Bank of England and Chair of the G20 Financial Stability Board Mark Carney was clear that as the energy transition gathers pace, the more pension funds “invest with foresight; the less [they] will regret in hindsight. Financial stability risks will be minimised if the [energy] transition begins early and follows a predictable path, thereby helping the market anticipate the transition to a two-degree world.”

It is time for the bcIMC to acknowledge that all of its MPP pension contributors deserve more respectful and professional responses to climate-related investment risks to their savings. The fund could start this process by integrating a climate change risk policy into its investment principles and providing more detailed information to members on how it will decarbonize the shared portfolio.