Divestment is “more urgent” in Toronto than NYC
A growing list of large institutional investors around the world – state and provincial pension funds, university endowments, and most recently, New York City itself, have been aggressively divesting from fossil fuel investments so as to do their part in mitigating against climate change.
Here in Toronto, it’s been a different story. Prominent institutional investors, like the University of Toronto and the Ontario Teachers Pension Plan, have been slower to fully embrace the divestment movement in the same way as many of their American counterparts.
At least one Toronto city councillor believes City Council should reverse that trend, and should begin looking at all options available to ensure sure neither municipal capital nor municipal pension funds can profit from fossil fuel-based investments going forward.
“I pay into one of the biggest pensions in Canada [OMERS], and I want to make sure that that money doesn’t have any carbon dioxide on its hands,” said Coun. Mike Layton (Ward 19, Trinity-Spadina). “Just like it doesn’t have any blood on its hands in profiting from conflict, I want to make sure the fund is also not profiting from the degradation of our natural environment.”
New York City mayor Bill de Blasio recently announced that the city will divest its pension funds – worth $189 billion – from fossil fuel reserve owners in the next five years, a move which caught the attention of Layton, who has argued in the past for greater in the fight against climate change. At the time of the announcement, New York City’s five pension funds held roughly $5 billion in the securities of over 190 fossil fuel companies.
Unlike NYC’s pension system, the City of Toronto uses the Ontario Municipal Employees Retirement System (OMERS), a province-wide pension fund for municipal employees that operates at arm’s length from the municipalities that fund it. The city is therefore unable to unilaterally divest in the same way that de Blasio has done – to great fanfare among environmental groups.
According to the OMERS 2017 Annual Report, the OMERS portfolio had 5.2 percent exposure to the energy industry in 2017 – up from 4.7 percent in 2016. The report does not outline the specific energy industry investments within the portfolio.
According to an OMERS webpage that has recently been removed however, three of the private pension fund’s 20 ‘Major Investments’ are fossil fuel companies listed on the Toronto Stock Exchange. These include Enbridge Inc., TransCanada Corporation and Seven Generations Energy, which totaled more than $1.26 billion of its $85 billion in net assets as of December 31, 2016, according to an archived version of the site that was available as recently as January.
When asked if there have been any internal discussions surrounding divestment from fossil fuel-related assets from OMERS’ portfolio or if fund managers were currently looking at divestment models utilized by other municipalities, universities or organizations, Neil Hrab, media representative with OMERS, said “while it is not our practice to comment on actions taken by other pension plans, or on individual investment holdings, we can confirm that we take Environmental, Social and Governance issues very seriously.”
Jeff Rubin, senior fellow with the Centre for International Governance Innovation, says that apart from ethical arguments surrounding fossil fuel divestment, the recent economic performance of the Canadian energy sector makes fossil fuel divestment “more important and urgent for Toronto than it is for New York.”
“I say that only because of the huge weight that fossil fuel stocks and in particular oil sands stocks have in the TSX composite, which is about four times the weighting than oil and gas in the S&P 500,” Rubin said. “Typically a pension fund or an endowment fund like the City of Toronto or the province of Ontario would hold more fossil fuel stocks than their counterpart in the U.S., just because of the greater weighting of those stocks in the Canadian equity markets than in the American equity markets.”
Rubin also noted that the ‘traditional arguments’ against other divestment movements grounded in ethical considerations, including tobacco, apartheid South Africa, munitions, and now fossil fuel holdings, is that institutional investors “can’t afford the financial consequences and need to continue maximizing greater returns for their endowment funds and pension plans.”
“The reality is that quite apart from ‘saving the world,’ the primary motivations for getting out of [fossil fuel funds today] is to save your portfolio, because they have been an absolute disaster,” Rubin said. “In fact, divesting from these resources will provide a significant increase in their rate of return.”
Toronto has a few legacy pensions it manages, although these will most likely be merged into OMERS in the next year, said Paula Chung, a spokesperson for the city.
Although the City of Toronto itself may not have the clear-cut opportunities to divest from fossil fuels as New York City does, Toronto City Council recently approved a new investment policy in December 2017 to align with the latest regulations of the Toronto Investment Board.
According to Chung, Toronto’s capital funds – including reserves and reserve funds, sinking funds for debt retirement, and short-term funds for the city’s operation, all totaling some $6 billion – do not currently include fossil fuel investments, due to the decades old regulations set by the province that limited the types of investments the City could make.
Consequently, Toronto has traditionally been mostly restricted to investing in government and bank bonds. The establishment of the board therefore represents a very big change for the city, according to Randy LeClair, a senior investment advisor with the City of Toronto.
“We’ve gone from a prescribed list of investments that was set down by the province in regulation, saying we can only invest in basically government bonds and some bank bonds with a certain credit rating, to a fairly wide open ‘prudent investor standard,’” said Leclair.
“It definitely puts the onus on the city to decide how they would like to go forward with their investment activities.”
The new investment policy includes a section on Environmental, Social and Governance (“ESG”) considerations, “which directs the Investment Board to incorporate ESG factors into its investment decision-making through its due diligence processes when choosing Investment Managers,” according to the staff report made to the Executive Committee in November 2017. “The City has chosen to monitor the developments of ESG factors and will reconsider its approach as and when appropriate to do so.”
City Council has asked that the investment board come back with a report in June 2018, specifying whether or not ESG considerations could or should be implemented in the city’s shorter-term investment decisions going forward.
But Layton said he believes City Council made it very clear that incorporating ESG factors into future capital investment policies was the direction they would like to take.
“I don’t know how much of an impact we’ll be able to have, particularly on the report that is currently being drafted, but we can always follow it up with instructions that this is the road we want to go down and we need to pursue all options, said Layton. “I think this notion of our pension funds needs to also be explored – it’s not necessarily something that will come directly through city council, but I do know there are those working on it in Canada.”
Jordy Gold, Director at Shift, said that although the decision was made early on that the initiative would not be focused on divestment, the young organization aims to support Canadian pension holders and influencers as they engage with their pension funds to prepare for both climate related-risk and opportunities.
“We should absolutely be pushing for more low carbon investments, we absolutely need to have more disclosure around pensions to understand what’s going on and to have a conversation, and we need to pay some real attention to the climate-related risks that are involved,” said Gold.
Whether or not large institutional investors in Ontario such as OMERS will follow New York City’s example and move to divest from fossil fuel holdings remains to be seen, but “if OMERS were to announce they were divesting from fossil fuels, that would certainly catch people’s attention,” Rubin said.
“It would set a powerful precedent for other municipalities in the country and indeed for all institutional funds.”