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Big-name investors are putting companies on notice: come up with a low-carbon strategy or look out

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Dave Murray

Climate scientists warned decades ago that stuffing the atmosphere with carbon was putting humanity on a collision course with nature. Fossil fuel companies and other carbon emitters did nothing.

In 1973, Munich Re rang the global-warming alarm bells. You might have thought a warning from one of the world’s biggest reinsurance companies—an apolitical observer not prone to hysteria—would encourage carbon-happy companies to start cleaning up their acts for the sake of the planet and the sustainability of their business models. Again, nothing.

Every year since 1995, the United Nations has held a summit on climate change, and every year, the science behind it became more credible, to the point where the deniers were relegated to Neanderthal status.

Some progress, but not much—global emissions continued to rise in spite of credible scenarios that life on a planet that is two degrees Celsius warmer, on average, than pre-industrial levels would be somewhere between unpleasant and catastrophic. Those extra two degrees could, according to climate scientists, bring severe droughts and flooding, potentially destroying enough crops to create famines and uncontrollable human migration, widespread desertification, melting ice caps that will increase ocean levels and sink coastal cities, and excessively warm, acidified oceans. But did these nightmare scenarios convince the biggest carbon emitters to put a tight lid on carbon output? Forget it.

But now, finally, it looks like the revolution is coming, and the trigger is not Munich Re or the UN or the thousands of scientists who think planet Earth is hurtling toward cosmic, deep-fried-Timbit status. The trigger is investors, from pension funds to millennials, who have social consciences; who are convinced companies pumping out greenhouse gases with abandon are setting themselves up for a fall that could destroy trillions of dollars in wealth; and who know that clean, or cleanish, energy can produce strong returns, so take that, ExxonMobil.

The investors’ push is both encouraging and discouraging. Encouraging, because it’s happening—and anything that moves the needle on the decarbonization dial is to be welcomed. Discouraging, because it’s a pity the scientists weren’t taken more seriously decades ago.

A milestone in the investor-led revolution came at the May 9 annual general meeting of Kinder Morgan, the U.S. energy infrastructure giant that wanted to build the $7.4-billion Trans Mountain pipeline from the Alberta oil sands to the company’s terminal in Burnaby, British Columbia, where the guck would be shipped to Asia (in June, the Canadian government nationalized the stalled project). At the meeting, shareholders delivered a wake-up call to the company by passing two environmental resolutions, both of which the company had strenuously resisted.

The first simply demanded improvements in Kinder Morgan’s environmental, social and governance (ESG) reporting, or sustainability reporting. The second was the biggie. The resolution requested that by 2019, Kinder Morgan produce a detailed report on the impact of its business on the internationally recognized goal of limiting the global temperature increase to two degrees Celsius (that was the main agreement of the 2015 Paris climate change accord, which was signed by most countries, including Canada). The so-called two-degree scenario (2DS) resolution also required Kinder Morgan to tell shareholders how it plans to transition to a low-carbon future.

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Dave Murray/Globe and Mail

Pat Miguel Tomaino, director of socially responsible investing at Boston’s Zevin Asset Management, the resolution’s lead filer, called the majority vote “historic,” because shareholder proposals on any matter rarely win in the United States, and successful propositions related to the environment are virtually unheard of.

This year, shareholders of Anadarko Petroleum, one of the biggest U.S. oil companies, also saw their 2DS resolution passed. According to Ceres, an American advocacy group that pressures companies to run sustainable businesses, a dozen other oil-and-gas and electricity-generation companies, when threatened this year with shareholder resolutions, also committed to producing 2DS reports. “The exciting thing is that shareholders are now engaging companies [on climate change] instead of just avoiding them,” says Tomaino.

The shareholders doing the engaging aren’t just goody-goody investors like Zevin. Supporters of the Kinder Morgan resolutions included the Vermont state treasury; the California Public Employees’ Retirement System, the largest U.S. pension fund; and the New York State Common Retirement Fund.

That’s a lot of financial firepower pushing companies into getting serious about disclosing their potential environmental liabilities, climate change adaptation strategies and carbon reduction plans. If they don’t make progress on their own, investors will take them by the ear and twist.

These investors feel that the compelling investment returns in the future will come from companies with low-carbon strategies. The fact that these strategies are the ethically right course for a planet under severe stress is a nice bonus.

Which brings us to Michael Sabia, the all-powerful boss of the all-powerful Caisse de dépôt et placement du Québec, one of the world’s top 20 pension funds, with about $300 billion in assets under management. He has emerged as one of the driving forces—perhaps the driving force—behind persuading companies to take climate change seriously.

He’s not just bellowing about it, like a green-tinged evangelist; he has, in effect, made it the law. He has told his portfolio managers that the carbon footprints of their collective investments have to fall by 25% by 2025, and he has geared part of their pay to that goal. At the same time, he is insisting that the value of the Caisse’s portfolio of low- and zero-carbon assets will rise by 50%, the equivalent of $8 billion, by 2020.

Corporate Canada is paying attention. “Someone had to draw a line in the sand, and it was him. Good for Michael,” says Nancy Lockhart, an independent director of Toronto’s Barrick Gold, the world’s biggest gold producer, and the chair of its corporate responsibility committee. “I applaud Michael for stating [the Caisse’s] goal.”

Why did Sabia pick such ambitious targets? To be sure, he’s no nature freak chomping away on bark sandwiches. This is a man whose career lives or dies by investment returns. But the Caisse, like many other fund managers, realizes that the transition to a low-carbon economy—a transition vital to the health of the planet—is inevitable, accelerating and does not necessarily mean sacrificing investment returns. “I don’t buy the idea that there’s a trade-off between low-carbon assets and financial performance,” Sabia says. “Our low-carbon assets are very high performers.”

Low-carbon assets can often outperform the market, thanks in part to great leaps in technology and the plummeting prices of that technology (high-efficiency rooftop solar panels and offshore wind farms, to name but two). Solar panels are approaching giveaway prices. In the mid-1970s, the price of a panel, per watt, was more than $100 (U.S.). By last year, it had dropped to 37 cents, according to estimates by Bloomberg and the Earth Policy Institute. No wonder the chart for solar installations has gone vertical or that half of all global growth in electricity generation in 2017 came from renewables. The price is right.

The Caisse is keen on low-carbon, big-buck infrastructure projects, like Greater Montreal’s Réseau express métropolitain, a rapid transit system for which the Caisse is providing almost $3 billion in funding. To offset the carbon generated by its construction phase, some 250,000 trees will be planted. The Caisse expects to produce annual returns of 8% to 9% on the investment, and similar investments in low-carbon transportation systems are being considered in other countries, such as the U.S. and New Zealand. “There are so many opportunities to invest in high-return, low-carbon assets,” Sabia says.

Low-carbon investments still represent only a small part of Caisse’s overall portfolio. Some of the more prominent green and greenish holdings the Caisse says “contribute to the energy transition” include a 25% stake in the London Array, the world’s largest offshore wind farm, located in the Thames estuary; a 30% stake in Eurostar, the high-speed train that connects Britain to France and Belgium; and 52% of Invenergy, the American wind, solar, natural gas and electricity-storage company that has several projects in Canada.

But he knows reducing the carbon footprint of the Caisse’s portfolios can’t be done by ramping up low-carbon investments alone. Even Sabia admits it’s inevitable that some names will be ditched, even if they produce decent returns.

It must be dawning on Canada’s biggest companies that high performance will no longer guarantee them a spot in the Caisse’s portfolios, and if it hasn’t, they’re in for a shock. They should also know other funds will eventually mimic the Caisse’s strategy. If that’s not an incentive to squeeze some carbon out of the business, nothing is—short of regulations and taxes designed to reduce output, and they’re coming too.

Investments guided by ESG principles are nothing new. According to an ESG history compiled by Britain’s Hermes Investment Management, the Quakers Friends Fiduciary in 1898 adopted a policy of avoiding investments in weapons, alcohol and tobacco—a sin-free portfolio. The idea gained momentum and, after the Depression, investors everywhere became aware of socially responsible investing (SRI) and its governance-focused offshoot, responsible investing, as corporate fraud became distressingly commonplace.

SRI played a role in the anti-war protests of the 1960s, with protesters urging university endowment funds to exclude weapons makers from their portfolios—and some did. In 1971, Pax World Funds launched the first socially responsible mutual fund. The standout campaign of the early 1990s was the investment boycott of South Africa. In the United States alone, funds with assets of more than $625 billion (U.S.) had been screened to exclude South African investments, piling pressure on the regime to end apartheid. In Britain, the Pensions Act of 1995 required trustees to disclose their policies on social, ethical and environmental matters.

In the first decade of this century, SRI evolved into ESG. The key event was the UN’s launch, in 2006, of the Principles for Responsible Investment. Its six tenets, including incorporating ESG principles in investment analysis and decision making, are voluntary but have attracted signatories representing some $70 trillion (U.S.) in investments.

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Dave Murray

One crucial ESG event in this decade saw Canada’s own Mark Carney, governor of the Bank of England and chairman of the Financial Stability Board, and Michael Bloomberg launch the Task Force on Climate-Related Financial Disclosures (TCFD). It urged companies to report their climate change risks to both help them make the transition to a low-carbon economy and allow investors to put a price on their investments’ potential liabilities, from flood risk to stranded assets, as once-in-a-century climate-related disasters turn into once-in-a-decade catastrophes.

At last count, over 250 companies and pension funds, with a combined market value of more than $6 trillion (U.S.), had supported the TCFD. The first Canadian company to sign up was Barrick. Other Canadian signatories include Royal Bank, British Columbia Investment Management, Telus and Suncor. Yes, Suncor, the biggest Canadian player in our dirtiest industry, the oil sands.

Andrew Parry, head of sustainable investing at Hermes, which has also signed up to the TCFD, says investing on ESG principles is becoming popular partly because of the changing nature of investors themselves. Millennials are not like their parents or grandparents, who mostly wanted fat returns and damn the planet. “Millennials want to see their values reflected in their portfolio managers,” he says. “We have to see our role more broadly than just producing financial returns. We are embedded in society.”

His point is that carbon output, or lack thereof, is now integrated into the day-to-day thinking of the new generation of investors. Hermes itself is so concerned about climate change risk that it uses satellite imaging data to determine, say, whether a real estate development in southeast Asia is vulnerable to extreme weather. Mention “climate change,” he says, and investors go into a coma. But mention “climate volatility,” and they pay attention.

Investors have two main strategies to encourage companies to take the black out and put the green in. The first is persuasion. Investment managers will make it known that they want the companies they invest in to minimize their climate change risks and make plans to move to low-carbon operations. Shareholder resolutions, which are used far more frequently in the United States than in Canada, are part of this approach—persuasion with a stick. The second strategy is divestment, which has its pros and cons. Kevin Thomas, executive director of Toronto’s Shareholder Association for Research and Education, known as SHARE, is not a big fan of divestment, noting that if a fund sells its shares in an excessively carbon-intensive company, another investor will just pick them up. “Divestment is withdrawing from the battle,” he says. “Better to be in the battle.”

So what are companies doing to minimize the chances of falling out of investors’ good books? Senior executives and directors at top companies will have to respond to increasingly activist investors. They won’t buy the line that certain businesses are insulated from the ill effects of climate change, an argument still trotted out by a few obstinate CEOs, especially of the oil-and-gas variety. “We are under a bit of pressure,” says Steve Williams, Suncor’s CEO. “We support disclosure and transparency, and we have been taking action on climate change for decades.”

Barrick’s Lockhart has a similar message. She says Barrick’s sustainability strategy is not in direct response to shareholder pressure; instead, “our strategy is to get ahead of any shareholder pressure.”

Barrick’s industry—gouging huge holes in the earth to remove gold—is grubby and destructive, and requires enormous amounts of water, electricity and diesel fuel, whose extravagant use can exacerbate climate change. Barrick no longer needs to be reminded of those inconvenient facts. Its stated goal is to reduce greenhouse gas emissions by 30% over 2016’s level by 2030. To get there, some of Barrick’s diesel trucks will be converted to electric power, and the company is trying to boost its supply of electricity from renewable sources. In the Dominican Republic, Barrick and partner Goldcorp are spending about $7.5 million (U.S.) to covert an oil-burning plant to natural gas. The plant will cut emissions by 260,000 tonnes of carbon dioxide equivalent a year and save $54 (U.S.) per ounce in operating costs over the life of the mine—evidence that cleaner is not always costlier.

Suncor is taking climate change seriously. It has to, since in Europe, “Suncor” and “tar sands” are synonymous. Suncor is relying on technology to bring down its carbon intensity—the carbon output per barrel produced. The intensity of Suncor’s underground oil sands operations and related base plants has dropped by 45% since 1990; the goal is to knock it down by another 30% by 2030. Here’s the catch: Lower carbon intensity does not mean lower overall carbon output. As new pipelines allow Suncor’s production to keep climbing, total emissions will climb with it. Between 2015 and 2020, they are expected to rise by a quarter.

What might a fund manager charged with scaling back the carbon intensity of their portfolio do when they see Suncor simultaneously becoming cleaner (lower carbon intensity) and dirtier (higher carbon output)? Williams says, “I see a sensible and rational conversation with them. If all these guys do is choose to exit, that does not solve the problem at all.”

Indeed. But the ever-warmer world is changing investment strategies. Suncor, and companies like it, might find themselves turfed from fund portfolios, potentially making them investment pariahs, no matter how good their returns. A carbon cleanup driven by investors, not hindered by them, is in progress, and that’s encouraging. Money talks.

We talked to four of Canada’s top CEOs about how their companies are dealing with climate risk

CHARLES BRINDAMOUR | CEO, Intact Financial Corp.

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Andrew Rowat/Globe and Mail

“The threat that climate change poses is only too real. Canadians from coast to coast have experienced first-hand the ravages of severe weather as a result of a changing climate. In fact, in Canada and globally, the insured losses from natural disasters have more than quadrupled over the past 30 years. More importantly, for every insured dollar of damage, there is between $3 and $4 of uninsured economic costs. The impact of climate change is one of the most important challenges facing society.

As Canada’s largest property and casualty insurance provider, we saw the disruption potential in climate change years ago and have integrated climate impact management directly into operations. We use data and machine learning to better analyze and forecast risks, and build on our claims capabilities to help customers affected by catastrophic events quickly, particularly in disaster management. We continue to transform our product and pricing models to reflect this new reality.

We also invest in key partnerships to build Canada’s resilience. Our research partnership with the Intact Centre on Climate Adaptation at the University of Waterloo helps Canadians prepare and adapt to the effects of extreme weather. Tackling climate-related challenges requires a collective effort.

It is imperative that we build right the first time, on all levels—provinces, cities and homes. All levels of government need to implement standards and building codes to encourage resilience and continue to boost infrastructure spending. The benefits are clear: $1 invested in critical infrastructure results in a socioeconomic return of 20%.

We need to act now to protect our communities, and build for a better, more climate-resilient future for everyone. If Canada is to avoid management by disaster, we must anticipate storms rather than chasing them.”

KELVIN DUSHNISKY | President, Barrick Gold Corp.

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MARIANA BAZO/Globe and Mail

“The impacts of climate change are increasingly being felt around the world, and mining is no exception. Barrick is taking a proactive approach, implementing a climate change strategy that rests on three pillars: understanding and mitigating the risks associated with climate change; reducing our impacts and emissions; and improving disclosure. Risks to our business include severe weather that can damage equipment and infrastructure, tighter regulations such as carbon pricing, and the stability of water and energy supplies. We’re targeting a 30% reduction in emissions by 2030, in line with the national targets of many of our host governments. To achieve this, we’re evaluating a range of projects, including switching to less carbon-intensive energy sources such as solar and natural gas. We also see significant opportunities to reduce costs and improve efficiency through innovation and investment in low-carbon technologies. In 2017, we committed to supporting the recommendations of the Financial Stability Board Task Force on Climate-Related Financial Disclosures. We also joined the Carbon Pricing Leadership Coalition and continue to urge the government to incentivize companies that show innovative leadership in combatting climate change.”

DAVID MCKAY | President and CEO, RBC

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“Climate change is the most pressing issue of our age, presenting environmental, social and financial challenges to the communities in which we live and work. The financial services industry has a critical role to play. In line with the Paris Agreement, we support the development of policies to price carbon, reduce emissions and incentivize economic growth. Government actions cannot succeed without support and partnership from business; private-sector solutions and capital can help turn these principles into a reality. Strategic investments are required today in order to finance the transition to a low-carbon future that our communities require.

RBC has benefited from a long-standing commitment to reducing carbon emissions and improving energy efficiency in our own operations. We are also proud to be a leader in carbon trading and green bond underwriting, and have grown our focus on renewable energy and the financing of clean-tech businesses in recent years.

Above all, we view climate change as a business priority and will support all of our clients in the low-carbon transition through our products, services and advice. As part of these efforts, we are currently participating in a UN Environment pilot to develop methodologies to assess the impact of climate change on our business.”


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“Leaders don’t shy away from challenges. They face them. So last year, Suncor released our first Climate Report, building on our Report on Sustainability, which we’ve produced since the early 1990s.

There’s no question we face a challenge to meet growing energy needs, while significantly reducing greenhouse gas emissions. Companies that want to lead and compete globally must develop strategies for resilience, deploy technologies to reduce emissions, and support strong public policy.

Sharing this information helps create greater certainty for investors, which means greater stability for our business. Disclosure also sends a strong signal to future investors that we are ready to compete in a low-carbon world. I believe transparent reporting will push us to challenge our own thinking, ultimately making us more innovative and better prepared for the future.

Suncor supports the voluntary disclosure recommendations in the Task Force on Climate-related Financial Disclosure, which provide a useful framework to describe how businesses are managing climate risk and ensuring corporate strategies remain resilient in a low-carbon future.

Ultimately, for the oil and gas sector, disclosure is about taking the reins when it comes to our own destiny, confronting uncertainty and doubt with clarity and vision. For that reason alone, we should be ready and willing to embrace it.”

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