IMCO announces interim climate targets to reduce portfolio emissions

March 01, 2023
IMCO announces interim climate targets to reduce portfolio emissions
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OPB understands that environmental issues such as climate change and a transition to a low-carbon economy are important to our members and stakeholders. OPB recognizes that climate change poses a material and increasing risk to a range of assets we may invest in and, together with the Investment Management Corporation of Ontario (IMCO), is committed to making meaningful progress in managing climate change risk through our investments.

Last November, OPB’s investment manager, the Investment Management Corporation of Ontario (IMCO), committed to reaching net zero portfolio emissions on behalf of OPB and IMCO’s other clients by the year 2050 or sooner. As part of that commitment, IMCO has now set an interim target to reduce its portfolio’s carbon emissions intensity by 50 per cent by 2030 from a 2019 baseline. In addition, IMCO has also set a target to invest 20 per cent of its portfolio in climate solutions by 2030. These targets are consistent with science-based net zero pathways aimed towards the 1.5°C temperature goal of the Paris Agreement and net zero emissions by 2050.

Setting these interim targets is an important milestone on our path to achieving net zero emissions and fighting climate change. OPB and IMCO remain committed to making meaningful progress towards mitigating climate change.

What is net zero?

When we talk about IMCO achieving net zero emissions in our investment portfolio, we are talking about them taking several steps, including changing which companies are held in the portfolio, as well as investing in companies that reduce their greenhouse gas emissions to as close to zero as possible, and then neutralize the impact of any residual emissions that cannot be eliminated by removing an equivalent amount of carbon from the atmosphere.

What are portfolio emissions?

Portfolio emissions refer to emissions that are emitted by the businesses or assets that we invest in through IMCO and are often referred to as financed emissions. As an institutional investor, they make up the majority of our and IMCO’s emissions impact (the balance would be emissions from IMCO and OPB operations).

IMCO’s net zero targets are based on reducing their portfolio’s carbon emissions. To determine their path to net zero, IMCO first had to go through a rigorous exercise to calculate the baseline carbon emissions for their portfolio. IMCO released their 2019, 2020 and 2021 emissions totals as part of their 2021 ESG report. IMCO follows the guidelines set out by the Partnership for Carbon Accounting Financials (PCAF) to measure emissions. This means that IMCO calculates its portfolio carbon emissions (i.e. total financed emissions) in proportion to its share of the total financing (equity and debt) of an investment or asset. IMCO’s net zero targets are based on reducing the emissions intensity of their portfolio.

More about IMCO’s interim targets

As we mentioned earlier, IMCO has set an interim target to reduce its emissions intensity by 50 percent by 2030 in comparison to their 2019 baseline of 75 metric tonnes of carbon dioxide equivalent (CO2e) per million dollars invested.

It is important to note that IMCO’s emissions intensity target covers investments in the asset classes where there is PCAF guidance and established best practices on how to calculate and disclose emissions. The asset classes included in the target represent about 70 percent of IMCO’s portfolio, including:

  • Public Equities,
  • Private Equity,
  • Global Credit,
  • Real Estate, and
  • Infrastructure.

Most of the remainder of the portfolio not covered comes from government bonds and public market alternatives where guidance is not currently available. As further guidance becomes available on how to measure emissions in other asset classes, IMCO will look at expanding its reporting.

What to expect going forward

The goal of reaching net zero emissions in our investment portfolio by 2050 or earlier is an important commitment that both OPB and IMCO understand will take time and diligence to reach. IMCO’s 2030 interim target is measured based on emissions intensity, which is calculated as emissions per million dollars of investment value. The nature of the intensity-based metric means that a change in the value of a company’s shares or the value of an asset such as a building can influence the emissions intensity measure because the emissions intensity is normalized per million dollars of investment. Therefore, it’s possible that emissions intensity measures could decrease in the future because market values increase even if there is no change in actual emission levels, and vice versa. In 2022, for example, given the volatility in the markets and asset values, many organizations are expecting increases to their portfolio’s emissions intensity because of the decrease in company values.

It’s important to understand that the path to reaching the interim emissions targets, and subsequently, the 2050 net zero targets, may not always be a straightforward decline with year-over-year, linear emission reductions. While IMCO will, of course, track annual performance, what will be critical to us meeting our target is looking at the trend over several years to ensure the general portfolio emission trajectory is tracking down.

Another measure that we expect IMCO will continue to report on to help us assess how we are tracking overall is the total financed emissions (i.e., absolute emissions).

Investing in climate solutions

In addition to the interim targets announced today, IMCO has also set a goal that 20 per cent of its total investment portfolio will be invested in climate solutions by the year 2030. The term climate solution refers to businesses whose primary objective is to solve climate-related challenges and, in turn, slow the advance of climate change. Climate solutions are critical to society’s successful transition to a low-carbon economy. These solutions exist across many different industries, such as energy (example: developing renewable energy sources and alternative fuels), infrastructure (low-carbon transportation), construction (as certified by green building standards such as LEED), and many others. IMCO’s definition of climate solutions is aligned to the categories set out by the International Capital Markets Association Green Bond Principles. By investing in these solutions, we expect our investment portfolio can be well positioned to assist in the transition ahead.

How OPB and IMCO continue work together on ESG

IMCO considers all material ESG factors when it manages OPB’s investments, including climate-related risks and opportunities. We expect IMCO to not only integrate ESG considerations in the investment process, but also to influence investee companies through engagement and shareholder voting to improve corporate practices and to avoid investments with problematic ESG issues.

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