Seniors face oil and gas pension time bomb 'reminiscent of those of Nortel and Sears'

Ontario Premier Doug Ford's outrageous claim that the federal government's price on pollution would create a "recession" that will "hurt seniors" is precisely backwards, according to new research — it might actually save Canada from one.

Canadian oil and gas public equity shares form a major part of retirement savings for many Canadians, and equity and debt issued by global fossil fuel firms also constitute a portion of Canadian pension funds, says Winnipeg-based think tank, the International Institute for Sustainable Development.

Thousands of employees at Canadian oil and gas companies also have defined benefit pension obligations, adds the report. All of them would suffer if the companies are all caught off guard in a world that has no more room for planet-warming carbon emissions.

The author of the report, Céline Bak, has bluntly warned that a large chunk of the fossil fuel reserves of Canadian oil, gas and coal companies are at deep financial risk as countries dramatically slash their consumption of dirty energy.

Addressing this risk will require orderly "transition strategies" to help markets flow capital to assist oil and gas companies transition away from high-carbon fuels.

This would help guard against an economic shock that could occur a few years down the road if governments and industry wait until it's too late to scale back their pollution.

A price on carbon would also improve the landscape for clean technology firms in Canada, which are competing in an environment where the pollution they are addressing is cheap.

But time is running out. The report concludes that the oilpatch may actually be facing a period of less than 12 years to keep producing at current rates and under current costs, before blowing through Canada's carbon budget.

“Should any of these companies fail, Canada would be faced with pension defaults reminiscent of those of Nortel and Sears Canada; this would have a potentially devastating impact on pension beneficiaries, and particularly on women, who by virtue of salary gaps are less able to save privately for retirement,” wrote Bak.

“Once the implications of the Paris Agreement are fully priced into the market, oil and gas asset valuations will shift. If this change is sufficiently large, debt covenants may be triggered in companies. This will in turn impact financial institutions, including banks, insurance companies and pension funds. Debt downgrading could ensue, and bank capitalization thresholds could be impacted."

Canadian capital markets include US$436 billion representing oil and gas companies. But over a quarter of Canada’s 43 billion barrels of proven and probable reserves of oil will have to be left in the ground, if the planet is to limit global warming below 2 C this century, according to the IISD.

Bak's report estimated that Canada has 43 billion barrels of proven and probable reserves based on an evaluation of the 2016 financial statements of 49 public companies with Canadian reserves.

It said known Canadian oil and gas reserves likely exceed the Paris Agreement target of limiting global average temperature rise to well below two degrees Celsius by between $120 and $270 billion.

Is Canada's central bank probing climate liabilities?

Bak, an IISD senior associate and president of consulting firm Analytica Advisors, said Canada's financial "ecosystem" would be more transparent if it were tweaked so climate risk disclosure is made mandatory.

“The intent of disclosure is it enables analysts, chief economists, bank CEOs, pension CEOs, and savers like us (to) see the alignment of a given company’s strategy with certain climate scenarios,” said Bak in an interview.

“Over time, if all these pieces come together, we should be able to make really easy decisions about how investments — whether they’re pipelines, or investing in new (fossil fuel) exploration globally — are aligned with the Paris Agreement. Because at the moment, we don’t have that information.”

National Observer was the first to report that one of the institutions targeted by IISD for change, the Toronto Stock Exchange, is in the process of completing one of the group's recommendations: joining a voluntary United Nations body that promotes greening financial markets and environmental disclosure.

Once that happens, the largest stock exchange in the country will be expected to engage with the companies it lists on issues related to sustainable development. The owner of Toronto’s exchange says that, along with its sister exchange in Calgary, it accounts for more oil and gas firms than any other in the world.

Bak recommends several other changes to Canada's central bank, the Bank of Canada, as well as federal business laws, and banking and securities regulators.

In less than four months, the central bank will elaborate on the big risks facing the country's economy as it moves closer into an election campaign where climate change is expected to be among the top issues.

The Bank of Canada produces this biannual list of economic risks in a report called the Financial System Review. Last June, it warned that household debt, an imbalance in the housing market and cyber threats were among the top economic risks in Canada.

But the central bank isn't yet ready to say whether its next review, scheduled to be released on May 16, will include a warning about the staggering losses looming over many Canadian businesses, due to a lack of transparency about the risks they face from global efforts to crack down on carbon pollution and the impacts of climate change.

"We are in the process of planning our 2019 Financial System Review and cannot say at this point whether it will address disclosure of climate related risks," said Bank of Canada media relations consultant Alex Paterson.

He said because the central bank is not directly responsible for the regulation and supervision of banks and insurers, as many central banks are, its involvement with climate risk "stems from its overall responsibility for assessing risks to the stability of the Canadian financial system."

It is also related to its international engagement, he said, in particular as a member of the Financial Stability Board (FSB) and through its participation in the G20 Green Finance Study Group.

The FSB's Task Force on Climate-related Financial Disclosures has put forward recommendations for how firms can more consistently disclose climate financial risks.

Bank of England governor Mark Carney, who chaired the FSB from 2011 to 2018, told G7 officials in Halifax in September that “the more action there is on climate policy, the more the market is going to be anticipating this direction, the more it’s going to shift to those opportunities."

The IISD wants to see the Bank of Canada clarify the degree to which disclosure of climate-related risks and opportunities, including through the task force's recommendations, is relevant to its financial system review.

Voluntary disclosure problematic, says author

In Canada, the Office of the Superintendent of Financial Institutions (OSFI) is the bank and insurer regulator.

OSFI public affairs manager Sylviane Desparois said in a statement that "OSFI expects all financial institutions to quantify their climate risk exposures and develop strategic approaches to managing the transition to fewer carbon-linked assets."

The agency, established in 1987 to supervise federally registered banks and insurers, trust and loan firms, and private pension plans subject to federal oversight, doesn't enforce mandatory requirements to be more transparent about climate risk, making this a voluntary system.

The problem with voluntary disclosure is that companies reasonably focus on complying with the law, not with guidance, according to Bak.

“In fact, one could argue that certain laws in Canada make it very difficult to disclose climate related risk, because certain lawyers may interpret that kind of disclosure as speculative,” she said.

Her report also calls for an independent body within the OSFI, called the Chief Actuary, to report on the risk of climate adaptation to the fully funded status of the Canada Pension Plan Investment Board, which manages $366 billion in pension funds.

The Office of the Chief Actuary said in a statement sent through Desparois that it uses economic forecasts that "may" factor in climate impacts, when it develops the assumptions underlying its reports on the Canada Pension Plan.

IISD also recommends that Canadian securities regulators review members’ supervisory practices for climate-related financial disclosures. The Canadian Securities Administrators (CSA), which represent provincial and territorial regulators, said last year that nearly half of firms it probed for such data were only disclosing "boilerplate" information or nothing at all.

Canadian securities law also doesn't require firms to disclose reserves that have been linked with jointly held assets, such as Syncrude’s proven reserves, the IISD report stated.

Amendments to business law address diversity

In addition to institutional changes, the IISD report says the Canadian Business Corporations Act should be amended to require firms to include certain climate and environmental disclosures. It also suggests two new pieces of legislation, requiring regular reports on assessing climate risks for federal organizations and for natural resources firms.

In 2018, the Liberal government passed Bill C-25, which amended the Canada Business Corporations Act, providing for greater disclosure related to diversity, among other changes.

But the bill does not mention the term climate change specifically. Hans Parmar, media relations for Innovation, Science and Economic Development Canada, said a statutory review of the act in 2014 did include a discussion on corporate reporting on environmental matters.

"The government will continue to review the issue, including new evidence such as the IISD report, as it considers future actions and improvements to this law," said Parmar.

Both the offices of Environment and Climate Change Minister Catherine McKenna and Natural Resources Minister Amarjeet Sohi declined to say whether the ministers planned to introduce new green transparency rules or laws before the 2019 federal election.

Both pointed instead to Canada’s Expert Panel on Sustainable Finance, which delivered an interim report this fall and is expected to release full recommendations in the spring. It stated how climate disclosure is “critical” for informed decision-making.

“There is a common view that Canada’s system of professional services is strong and well developed. However, expertise concerning climate-related issues remains nascent and requires further capacity building,” the interim report stated.