This is the text of remarks I made today to Vancouver city council on divestment. Earlier this year, Council requested that staff report back on how the city's financial investments align with the city's mission and values, and various ethical programs like the city's purchasing policy and the greenest city initiative. So the meeting was essentially about the contents of the staff report.
The outcome of the meeting was a small victory for divestment. Council recommended:
THAT the City Clerk be instructed to notify the Municipal Pension Board inwriting of City Council’s position on responsible investing and encourage the Municipal Pension Plan (MPP) to continue their advancement of responsible investing using the UN Principles of Responsible Investment to further align the MPP investment portfolio with the City’s mission, values and the sustainable and ethical considerations outlined in the City’s procurement policy.Remarks to the City of Vancouver regarding Staff Report on Responsible Investing
October 7, 2013
My name is Marc Lee, and I am a Senior Economist with the Canadian Centre for Policy Alternatives, and the Co-Director of the Climate Justice Project, a multi-year research initiative with UBC and over 30 community partners.
First of all, thanks to the City for taking this important first step and recognizing that the city needs to align its financial investments with its mission and values. I want to use my time to persuade Council to consider divestment from fossil fuel industries.
Extreme weather, oil spills and other damages from extreme energy development suggest it is only a matter of time before the world gets serious about climate change.
The most recent Intergovernmental Panel on Climate Change (IPCC) report for the first time stated an upper limit on total greenhouse gas emissions. That is, a global "carbon budget" to keep temperature increase below 2°C. This is considered to be the threshold for "dangerous" climate change, and also the target for international climate negotiations.
Here is the problem: if you do the math, any plausible carbon budget for BC or Canada will mean the vast majority of fossil fuel reserves will need to stay in the ground. Because stock market valuations are premised on those companies extracting those resources, we have a "carbon bubble" on our hands.
I co-authored a report in March, called Canada's Carbon Liabilities: The Implications of Stranded Fossil Fuel Assets for Financial Markets and Pension Funds, that looks at this problem, and finds it to be a significant source of systemic risk to financial markets.
In particular, we look at pension funds, an asset class that is second to housing in importance to middle-class households. And as we saw during the housing bubble collapse, many pension funds were left holding sub-prime mortgage assets.
In terms of the staff report, I see a lot of self-congratulation for the BC Investment Management Corporation having adopted Principles for Responsible Investing. But I see no evidence that these principles have been applied, and, if anything, there is a mis-alignment between pension investments and the City's mission and values.
The BCIMC, for example, owns $406 million in Enbridge stock and a lesser amount ($5 million) in Kinder Morgan stock. It makes little sense for public sector pension funds to profit from pipeline companies whose pipelines are not wanted by the people of this province. The staff report does not specify Enbridge and Kinder-Morgan, although it is reasonable to assume the MPP resembles the holdings of BC IMC overall.
Among the 30 companies listed in Appendix E of the staff report (top ten of each of Canadian, global and emerging market equities), there are 6 of the top 50 carbon polluters in the world – Suncor, Potash Corp, Shell, Chevron, Exxon Mobil and Petroleo Brasilero – based on a recent report of the Carbon Disclosure Project.
In addition, Canadian Natural Resources gained notoriety recently for an uncontrolled tar sands spill in Alberta, the result of its in situ extraction practices.
Earlier this year, California NGO Global Exchange made a list of top "corporate criminals" in the world, "based on issues like unlivable working conditions, corporate seizures of indigenous lands, and contaminating the environment." Shell was number one, while the mining company Barrick Gold is number six.
So to the extent BC IMC has been applying principles for responsible investment, or in using their ownership stake to "engage in dialogue" with these companies about changing their ways, that has been a failure.
As Council moves forward our Carbon Liabilities report may be a useful tool. It contains a detailed appendix of 114 fossil fuel companies, and we look at their financial metrics, the potential carbon emissions from their reserves, and the associated damages (or carbon liabilities) if their fossil fuel reserves were to be combusted.
Linking the future economic security of City of Vancouver's workers to the success of fossil fuel giants is deeply problematic. But this is not just about doing the right thing by divesting from fossil fuels. Divestment is also the prudent financial move.
While pension funds account for many investment risks like inflation or political turmoil, risks associated with climate change and climate action have largely been ignored. In the face of climate action, fossil fuel assets will likely lose most of their value. Alternatively, a business-as-usual emissions path itself poses significant risk to corporate infrastructure, as well as to the economy as a whole.
Pension funds that ignore climate risk are not living up to their fiduciary responsibility. Fund management is not just about returns for existing retirees or soon-to-be-retired workers. Young workers must be treated equally, so quantifying and accounting for climate risk is necessary, as it will be several decades before they retire.
To conclude, I would encourage the City to ask the BCIMC these pointed questions about climate change, carbon budgets and risk management. The City should push the BCIMC to develop a "carbon stress test" for its investments, and a transparent process to assess the exposure and risks for different companies, and how those companies are planning to manage those risks, including their future capital expenditure plans.
And if the BCIMC is not willing to live up to the rhetoric of responsible investing, the City can and should withdraw its money and ensure it is invested somewhere else that is consistent with its values.