Building Climate Resilience in Canada’s Pension Funds

  • K. Monohan, Smart Prosperity Institute
  • A. Islam, Smart Prosperity Institute

Executive Summary

Canada’s pension funds have a long history of financial strength, continually adapting to new risks and emerging from the financial crisis and COVID-19 pandemic relatively unscathed. This resilience has allowed Canadian workers to trust in the security of their retirement incomes.

• But climate change presents new types of risks, including as the global economy transitions to a low-carbon model at a potentially disruptive speed, and also as the physical impacts of climate change worsen and accelerate.

• Canadians will continue to be increasingly concerned about how these climate risks are being managed — and in addition, they will not want their retirement savings to contribute to the problem.

• In order to build climate resilience, many of Canada’s largest pension funds have committed to net-zero emissions by mid-century, and some also claim to be bolstering investments in climate solutions such as renewable energy.

• Beneficiaries, researchers, and other stakeholders, however, will currently find it impossible to track progress on these commitments, given the opaque nature of disclosure on related metrics and lack of mandatory requirements to deliver on the promises.

• In order for pension funds to be truly climate resilient, they must invest only in areas that are aligned to net-zero pathways, as well as guarding against physical risks — including in companies with clear, real, and verified net-zero transition plans of their own. With their supersized financial strength, pension funds could set credible net-zero plans as a condition for lending.

• Additional promises to invest in renewable energy or other climate solutions, while valuable in their own right, should be kept separate from the critical objective of mitigating climate risk through a net-zero aligned portfolio. But if these types of ‘upside’ investment promises are made, pension funds should back these claims with transparent and disaggregated data.

• Canada’s sustainable finance landscape is currently dynamic, with the Office of the Superintendent of Financial Institutions (OSFI) having recently put forward new guidelines on climate risk management and disclosures for federally regulated financial institutions. But there is no single authoritative figure providing this guidance across all pension funds. The fragmented regulatory structure points to the need for a coordinated approach across federal and provincial bodies. In the meantime, however, pension funds should be encouraged to follow best practices for climate  related disclosure and third-party standards for vetting the credibility of their net-zero targets.