The case for Canada’s pension plan sticking to oil and gas

The fossil fuel divestment movement has scored a number of high-profile victories this year, with the Caisse de dépôt et location du Québec and the Montreal-based Laurentian Bank of Canada among the top institutions that have announced they are selling their interests in oil and gas companies or refusing to finance their operations in the future. But the biggest fish in the sea is still the one they can’t seem to fish yet: the Canada Pension Plan Investment Board.

With nearly $ 550 billion in assets under management and more exposure to Canada’s oil and gas industry than any other institutional investor in the country, it is the holy grail for divestment advocates. And based on your most recent statementThey seem to have a lot of work ahead of them. Rather than sell its shares in Canadian oil and gas companies, the CPPIB seems determined to use its financial clout to rush them on the path to net zero emissions as quickly and efficiently as possible.

In addition to oil and gas, it plans to invest strategically in sectors such as agriculture, chemicals, cement, steel, energy and heavy transportation, all with a view to rewarding companies that innovate faster and reduce emissions faster.

“Under our new approach to investing in decarbonisation, we seek to identify those companies that offer the greatest potential to generate value through their transition, regardless of the sector,” he said in a paper outlining your new strategy. “As such, CPP Investments can buy and hold promising companies with a significant carbon footprint if we believe they are fundamentally undervalued and there is an opportunity to generate value by helping them accelerate their decarbonization.”

To those in the climate community, this might seem like a long way of saying that they are capitulating to industry and the status quo. But that ignores the more complicated reality of what divestment can and cannot accomplish, especially when it comes to the oil and gas industry.

As OPEC successfully manages the rising oil market and prices continue to rise, these companies are seeing huge increases in their cash flows, which they can use to pay off debts and return capital to shareholders. If these types of pricing continue, companies will not be as dependent on Wall Street and Bay Street as they used to be for the debt and equity issues that fund their operations, and they could begin to disengage from ESG demands. minded investors. The longer those investors wait to use their leverage, in other words, the less influence they will have.

It also ignores the role that large providers of institutional capital can play in shaping business behavior. As I have written in the past, there is a different kind of golden rule at work here, which is that the people with the gold make the rules. Rather than sever ties with industry, banks and other large financial institutions should use their proverbial gold to create new rules, rewarding companies that more aggressively reduce their GHG emissions and punishing those that don’t. . If a company achieves certain climate goals, it should receive a lower cost of capital, one that allows it to outperform its peers and increase its market share, all other things being equal.

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That is already happening on the margins of the industry.

Buried in the fine print of a recent announcement of a corporate takeover by Tamarack Valley Energy are details about a so-called “sustainability-linked loan service” that he included in the agreement. It gives the company access to $ 100 million in borrowing capacity at rates determined in part by its performance on three “sustainability performance targets”: GHG emissions, decommissioning of old wells, and increased participation of the indigenous workforce. . Those objectives, if met, can reduce the cost of borrowing for the company by up to five basis points (0.05 percent) and increase it if they are not met.

And while five basic points are not big enough to change the behavior of the company on their own, it is a step in the right direction. Imagine what would happen if banks provided services that offered incentives of up to 50 basis points or more.

It’s easy for activists to push for general divestment from the oil and gas industry, and it’s understandable why many financial institutions are willing to do so. Right now, divestment is the easiest way out, especially for the managers of these institutions. Oil and gas stocks have underperformed relatively well over the past decade, and their meager returns are not worth grappling with pro-divestment campaigns, or their activists. But retreating from the battlefield here is more a sign of cowardice than a show of courage. Dressed in the finery of virtue and principle, it’s really about avoiding the hassle of having to fight.

Instead, we need the managers of our shared capital to use their influence and power for good. The CPPIB is the most suitable of all to do this, given the role it plays in financing our pensions. You have a clear and vested interest in the future, and you should want to protect the rest of your portfolio, and ours, from the potentially catastrophic impact of climate change.

The best way to do this is not by redeeming positions in high-issuing companies and buying more Shopify or Rogers stock. It is by staying in the fight and using your influence to shape behavior in the sectors and companies where it matters most.

For now, at least, the CPPIB seems to understand that.