OPB and IMCO’s commitment to ESG and Climate Risk

December 22, 2021
OPB and IMCO’s commitment to ESG and Climate Risk

December 22, 2021

We recently received a letter from five of our members who wanted to better understand how OPB and our investment manager, IMCO, are managing climate change risk. OPB and IMCO understand the importance and urgency of climate change, and that we need to make significant and meaningful progress in this area. We are committed to doing so.

We also understand that we need to improve our communication and transparency around how we’re addressing climate change and other important environmental, social and governance issues within our investments. So rather than just responding to the members who wrote us, we have published our joint response with IMCO below for all our members to read, as well as the original letter we received from them.

The response to our members is based on IMCO’s Responsible Investment Strategy and Climate Action Plan and OPB’s Policy for ESG Investment Issues (ESG Policy). Below are some key highlights from our letter.

Key points

  • OPB’s ESG Policy articulates how OPB addresses ESG issues, including climate risk. This Policy includes expectations around IMCO’s progress toward net-zero greenhouse gas emissions (GHG) and comprehensive reporting aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
  • OPB and IMCO are founding signatories of the Canadian Investor Statement on Climate Change.
  • IMCO has developed a robust Climate Strategy and Climate Action Plan to help it reach net-zero GHG emissions by 2050 or sooner.
  • On behalf of its clients, including OPB, IMCO is currently completing its emissions baseline, which it expects to publish by mid-2022.
  • IMCO has committed to implementing mandatory climate risk disclosure requirements aligned with the TCFD recommendations, ensuring comprehensive disclosures that are consistent, comparable, and decision-useful.
  • IMCO has signed onto the Paris Aligned Investment Initiative (PAII) and has committed to setting targets for reducing emissions and increasing investment in climate solutions, consistent with the 1.5°C temperature goal of the Paris Agreement.
  • OPB and IMCO believe that engagement with companies and policymakers is a more effective and longer-lasting strategy to drive value and, ultimately, real change.
  • IMCO, on behalf of its clients, including OPB, is committed to using its influence, scale, and strengths to engage with managers and partners to advocate for net-zero aligned investments, policies, and regulations.
  • OPB expects IMCO to consider divesting from investments where insufficient action is taken to address those issues.
  • OPB regularly monitors IMCO’s performance including its progress on ESG issues and activities.

Going forward, OPB is committed to enhancing our communications to members on our ESG Policy. We intend to provide additional content in our Annual Report and to update our members regularly on our ESG-related progress, including through our website. If you have suggestions on how we can better communicate on our ESG Policy and progress, please contact us at feedback@opb.ca and put ESG feedback in the subject line.

Re: Climate Risk in Relation to Investments of the Investment Management Corporation of Ontario

On behalf of the Ontario Pension Board (OPB) and the Investment Management Corporation of Ontario (IMCO), we are pleased to present our response to your letter of September 29, 2021. We welcome the opportunity to provide answers to the questions you posed relating to how OPB and IMCO assess, consider, and disclose climate risks as part of our investment strategy. We have also included an overview of IMCO’s climate strategy and action plan.

OPB and IMCO understand the significance and urgency of climate change, and that we need to make significant and meaningful progress in this area. We are committed to doing so and aspire to be considered an industry leader. To that end, IMCO has made many recent and major commitments to prioritize climate considerations across all investment activities, including tracking and reducing carbon emissions. Over the course of 2022 and beyond, IMCO, in collaboration with OPB, expects to set meaningful targets on managing the effects of climate change and has joined the growing list of asset owners who have committed to achieve net-zero alignment by 2050 or sooner.

We view this letter as part of our conversation on climate change with our members and other stakeholders. Our letter will attempt to provide you with a deeper understanding of the relationship between OPB and IMCO, and answers to the specific questions you posed in your letter. We have also outlined the steps OPB and IMCO are taking to address the effects of climate change on our portfolio, the transition to a low-carbon economy, and IMCO’s potential to be a market leader.

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1. The Relationship between OPB and IMCO

OPB is the administrator of the Ontario Public Service Pension Plan (PSPP). As the administrator of the PSPP, OPB determines the Statement of Investment Policies and Procedures (SIP&P), and the Strategic Asset Allocation (SAA) for the investment of PSPP assets.

In terms of large Canadian independent institutional investors, IMCO is relatively new. IMCO was formed in 2017 as a means of allowing Ontario’s public and broader public sector pension plans and other funds to achieve the size and scale necessary in their investment platform to be a market leader. In turn, this ultimately improves investment returns and sustains pension and benefit security for Ontarians over the long term. Because of IMCO’s size and scale, IMCO has the potential to be a leader in climate change risk management and mitigation.

Since 2017, IMCO has provided investment management and advisory services to pension and non-pension organizations from Ontario's broader public sector. Each organization sets its investment philosophy and beliefs, investment policies, and asset allocation targets, and maintains its relationship with its stakeholder or stakeholders.

As OPB’s investment manager, IMCO invests the PSPP assets in accordance with OPB’s overarching investment policies, including OPB’s SIP&P, SAA and ESG Policy, which we discuss in section 3. OPB has an ongoing program to monitor IMCO’s investment performance and assess how well IMCO is meeting its responsibilities and obligations to OPB. The monitoring program helps to assure OPB management and Board members that IMCO is prudently managing PPSP assets and investment risk, including climate change, on behalf of OPB and its members, in accordance with all relevant investment strategies and policies.

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2. Responses to Your Questions

Question 1: What percentage of assets are currently allocated towards companies involved in fossil fuel exploration, extraction, transportation, refining and combustion?

Response: Each year, concurrent with the preparation of annual financial statements and annual reports, IMCO conducts a summary assessment of the investment portfolio’s exposure to different sectors of the economy. The assessment is applied across every asset class in the portfolio, specifically both publicly traded investments as well as those held privately. The definition we use is primarily based on the Global Industry Classification Standard (GICS), a global standard developed by Standard & Poor (S&P) and MSCI. The sector that aligns most closely with the definitions provided in your question is the Energy sector. The Energy sector is comprised of energy equipment and services and oil, gas & consumable fuels.

As of the most recent reporting period, i.e., December 31, 2020, OPB’s portfolio allocation to companies in the Energy sector was 3%.

Question 2: What percentage of assets are currently allocated towards zero-carbon holdings?

Response: Given the lack of an industry accepted, universal definition of zero-carbon and the lack of common standards and data sets on net-zero alignment, IMCO is in the process of developing a guideline to define investment opportunities aligned with the transition to a net-zero economy. In November 2021, IMCO became a signatory of the Paris Aligned Investment Initiative and has therefore committed to achieve net zero portfolio GHG emissions by 2050, or sooner. IMCO has committed to set a target for investment in climate solutions by the end of 2022.

Question 3: What is IMCO’s portfolio carbon footprint and what methodology is IMCO using to calculate its carbon footprint? Does the analysis include the full scope of transition risks for portfolio companies (e.g., considering Scope 3 emissions for fossil fuel companies)? If not, what is your timeline for assessing the full carbon footprint of the fund, including Scope 1, 2, and 3 emissions for all investments?

Response: IMCO is currently completing its emissions baseline, which we expect to publish by mid-2022. On behalf of its clients, including OPB, IMCO is currently calculating both its portfolio and operational carbon footprint. We are using emissions accounting industry standards such as the Partnership for Carbon Accounting Financials(opens in a new tab) and GHG Protocol(opens in a new tab) that take account of portfolio Scope 1 & 2 emissions and, to the extent possible, material portfolio Scope 3 emissions, where methodologies, guidance and market data are available.

Question 4: What is the pension fund’s plan to address the climate risks created by a portfolio company that does not respond to engagement over a reasonable period of time? Does it include a screening mechanism if engagement is not successful?

Response: IMCO and OPB believe that stewardship helps us better manage risk and contributes to long-term investment performance. We believe this because transitioning to a net-zero economy requires carbon emission reductions across all sectors. We will consider divestment, where there is a sustained risk to continuing the investment following unsuccessful engagement.

IMCO implements stewardship practices through engagement, collaboration with other investors and service providers, and proxy voting. IMCO’s Proxy Voting Guideline1 incorporates an explicit principle on climate change risks and outlines that IMCO will generally vote in favour of shareholder proposals that require: (1) information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments, or on how the company identifies, measures, and manage such risks; (2) adoption of greenhouse gas reduction targets; (3) development of climate scenario analysis including disclosure based on the framework proposed by the TCFD; and (4) disclosure of lobbying activities.

Question 5: Can you provide examples of how the Board’s approach to shareholder engagement has led to a fossil fuel company reducing absolute emissions (i.e., not its emissions intensity) and aligning its business model with the Paris Goals?

Response: As an active owner2 committed to the Principles of Responsible Investment, IMCO uses its ownership position to influence and engage on material ESG issues with entities in which it invests. IMCO incorporates extensive due diligence questions on climate change in all our external manager due diligence and engages with companies on carbon emission reduction and Paris alignment. For example, in 2021 IMCO engaged extensively with an energy company to develop a Paris-aligned business plan, targeting carbon neutrality by 2050 and a reduction in emissions of 50% by 2025 compared to a 2019 baseline. IMCO also voted in favour of the company procuring 100% of electricity from renewable sources, which was ultimately approved by the company.

In addition, IMCO used our ownership stake to transform Green Frog Power Ltd. into a clean energy platform. Our first action was to replace diesel fuel in current generators with bio diesel, to reduce GHG emissions and environmental harm.

Question 6: How is engagement with fossil fuel companies, rather than divestment, in the best long-term financial interests of beneficiaries?

Response: As some companies are transitioning faster than others, IMCO believes that engagement with companies and policymakers is a more effective and longer-lasting strategy to drive value and, ultimately, real change. Active ownership is generally regarded as one of the most effective mechanisms to reduce risks, maximize returns and have a positive impact on society and the environment. Divestment alone leaves investors with no voice and no potential to help drive responsible corporate practices.

To that end, IMCO recently joined Climate Engagement Canada, where we are working collaboratively with other investors to engage with the highest emitting companies to reduce emissions and align their business models with the Paris Agreement.

Question 7: Given the size and influence of IMCO in the Canadian and global economy, do you acknowledge that you have an obligation to beneficiaries to invest to avoid a 2°C, 3°C or 4°C warming scenario, which is expected to harm beneficiaries and the broader economic and financial system?

Response: IMCO on behalf of its clients, including OPB, is committed to using its influence, scale, and strengths to engage with managers and partners to advocate for net-zero aligned investments, policies, and regulations. IMCO has implemented a Proxy Voting Guideline(opens in a new tab) that outlines IMCO’s expectation and principles on climate change. We expect companies to:

  • Commit to disclose climate-related information in line with the recommendations of the TCFD and commit to report on progress to shareholders periodically;
  • Commit to a net-zero target by 2050 (or earlier); and
  • Set science-based reduction targets for the short, medium, and long-term, and report progress on targets

As a signatory of the Paris Aligned Investment Initiative, IMCO commits to setting targets for reducing emissions and increasing investment in climate solutions, consistent with the 1.5°C temperature goal of the Paris Agreement.

Question 8: How does the Board manage actual or potential conflicts of interest when determining how to manage climate risk for directors or executives who sit on the boards of fossil fuel companies that could be expected to be negatively impacted by the pension fund adopting measures to address climate risk?

Response: IMCO has a Conflicts of Interest Policy, as well as a Code of Conduct to manage conflicts. IMCO’s Board currently consists of nine individuals with a diverse mix of backgrounds and board appointments. The Boards of IMCO and OPB recognize the urgency of the climate crisis and the importance of making meaningful progress quickly; and stand fully behind IMCO’s ESG strategies, including the Climate Action Plan.

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3. Our Commitment to Addressing Climate Change Risk

OPB and IMCO believe that climate change is a material and systemic risk that has the potential to impact the global economy, markets, and society as a whole. In addition to climate change risk mitigation, OPB and IMCO both see significant opportunities in making climate-positive investments which are in the best interest of their respective members and decrease or mitigate the effects of climate change. Below is a description of the steps that OPB and IMCO are taking to discharge their duties.

a) OPB’s approach to managing climate risk

OPB and its Board recognize the urgent need to address climate change to support our mission to deliver sustainable pension security for all plan members. To ensure effective governance of plan assets, OPB has an ongoing program to monitor IMCO’s investment performance and assess how well IMCO is meeting its responsibilities and obligations to OPB. As part of the governance regime, OPB has an Environmental, Social & Governance (ESG) Policy which articulates how OPB addresses ESG issues, including climate. Given OPB’s recognition of the urgent need to address climate change, climate risk is a prominent part of the Policy. For example, the Policy includes expectations around IMCO’s progress and achievement towards net-zero greenhouse gas (GHG) emissions as well as progress towards comprehensive TCFD reporting.

In addition, to driving effective governance, OPB’s Board and Investment Committee regularly conducts education on ESG and climate risk, reviews progress on ESG issues and activities and meets with IMCO to review and discuss their performance.

b) IMCO’s Climate Action Strategy

IMCO has developed a robust climate action strategy, in part as a means of meeting the goals set by OPB and its other clients. IMCO’s climate change strategy is supported by four pillars, namely:

  1. Capital Deployment
  2. Asset Ownership
  3. Portfolio Management
  4. Climate Guardrails

i. Capital Deployment

IMCO committed to investing in climate positive and transition investment opportunities, with an emphasis on direct investments supportive of a lower-emissions portfolio.

IMCO has started investing in climate-positive and transition opportunities, including the acquisition of Green Frog Power Ltd. and participation in Brookfield’s Global Transition Fund.

IMCO’s capital deployment priorities include developing targets for investments in climate change solutions, investing in assets and funds that will support the transition to a low-carbon economy, and supporting companies on a path to climate leadership.

ii. Asset Ownership

IMCO will use its influence, scale, and strengths to engage with managers and partners to enable systemic change, advocating for net-zero aligned investments, policies, and regulations.

IMCO is a signatory member to a number of key initiatives (see below) including: the Paris Aligned Investment Initiative; Climate Engagement Canada; the Global Investor Statement to Governments on the Climate Change Crisis; and the Canadian Investor Statement on Climate Change. IMCO has implemented a proxy voting policy that includes climate change expectations. IMCO also engages with fund managers and management teams on their climate change strategies and advocates for robust climate action plans aligned to net zero.

IMCO’s asset ownership priorities include continuing to support joint industry action on climate change and developing an engagement strategy that establishes clear expectations and requirements when engaging on climate change with fund managers and management teams.

iii. Portfolio Management

IMCO is focused on sustaining returns for our clients by integrating climate-related risks and opportunities into investment decision-making processes.

IMCO includes climate risk and opportunity assessment in our investment due diligence processes. We have conducted scenario analysis on our portfolio and are establishing our portfolio and operational emissions baseline.

IMCO’s portfolio management priorities include establishing emission reduction targets, integrating additional climate data sets and tools into our climate risk and opportunities assessment.

iv. Climate Guardrails

IMCO will establish restrictions and limitations for high-emission sectors to minimize exposure to investments incompatible with a net-zero economy while also supporting assets committed to the transition with a viable transition path.

IMCO is investing in assets positioned for climate leadership and will limit investing in thermal coal companies without a credible Paris-aligned transition plan.3

c) Implementation of IMCO’s Climate Action Plan

IMCO has taken several concrete steps towards implementing its climate action plan, including:

  1. In November 2021, IMCO became a signatory to the Paris Aligned Investment Initiative(opens in a new tab)4. Established in May 2019, the Paris Aligned Investment Initiative supports asset owners and managers globally to implement action in line with the Paris Agreement Goals5. As a signatory to this initiative, we commit to, among other things:
    1. Transitioning our investments to achieve net-zero portfolio GHG emissions by 2050, or sooner;
    2. Setting objectives and targets, including an interim target for 2030 or sooner for reducing Scope 1, 2 and 36 emissions associated with our portfolio and setting a target for increasing investment in climate solutions, consistent with a fair share of the 50% global reduction in CO2 identified as a requirement in the Intergovernmental Panel on Climate Change(opens in a new tab) special report on global warming of 1.5°C; and
    3. Ensure any direct and collective policy advocacy we undertake supports policy and regulation relevant for achieving global net zero emissions by 2050 or sooner.
  2. IMCO is a founding participant in Climate Engagement Canada(opens in a new tab), a finance-led initiative that aims to drive dialogue between the financial community and Canadian corporations to promote a just transition to a net-zero economy.
  3. IMCO is a signatory of the 2021 Global Investor Statement to Governments(opens in a new tab) on the Climate Change Crisis, a statement signed by 457 investors representing over USD $41 trillion in assets. As a signatory to this initiative, IMCO called on all governments in 2021 to, among other things:
    1. Strengthen their nationally determined contributions7 for 2030 before COP26, to align with limiting warming to 1.5-degrees Celsius and ensuring a planned transition to net-zero emissions by 2050 or sooner;
    2. Commit to a domestic mid-century, net-zero emissions target and outline a pathway with ambitious interim targets including clear decarbonization roadmaps for each carbon-intensive sector;
    3. Implement domestic policies to deliver these targets, incentivize private investments in zero-emissions solutions and ensure ambitious pre-2030 action;
    4. Ensure COVID-19 economic recovery plans support the transition to net-zero emissions and enhance resilience;
    5. Commit to implementing mandatory climate risk disclosure requirements aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, ensuring comprehensive disclosures that are consistent, comparable, and decision-useful.
  4. IMCO, along with OPB, are founding signatories of the Canadian Investor Statement on Climate Change(opens in a new tab), signed by 36 institutional investors managing more than CAD $5.5 trillion in assets. As signatories to this initiative, we commit to, among other things:
    1. Integrate climate-related risks and opportunities into our investment processes;
    2. Ensure that any climate-related policy advocacy we undertake supports a just transition and the ambition of achieving global net-zero emissions by 2050 or sooner, and engage with our industry associations to encourage climate advocacy efforts that are consistent with these goals; and
    3. Provide annual disclosures that align with the recommendations of the TCFD to report on our progress. This includes best-efforts reporting on our financed emissions.

Conclusion

On behalf of OPB and IMCO, we would like to thank you for your letter and questions. We also acknowledge the support you’ve received from SHIFT and Ecojustice and thank them for the quality and calibre of their input.

We agree that it is now more important than ever for institutions such as OPB and IMCO to take a proactive role in managing the risks and opportunities posed by climate change. Our Boards and management teams are committed to taking meaningful action to address climate change risks and opportunities. Dialogue on this evolving topic can only serve to improve our understanding and response to such risks. As noted at the outset, we view this exchange as the start of an open and productive conversation on this important issue and appreciate the opportunity to explain how we're addressing climate change.

Sincerely,

Mark J. Fuller
President & CEO
Ontario Pension Board

Bert Clark
President & CEO
Investment Management Corporation of Ontario

1 https://www.imcoinvest.com/investments/responsible-investing/proxy-voting/

2 https://www.unpri.org/pri/what-are-the-principles-for-responsible-investment

3 The term “Paris alignment” refers to the alignment of public and private financial flows with the objectives of the Paris Agreement on climate change. Article 2.1(c) of the Paris Agreement defines this alignment as “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”

4 By joining the Paris Aligned Investment Initiative, IMCO also became part of the U.N. Race to Zero and the Glasgow Financial Alliance for Net Zero.

5 The Paris Agreement's central goal is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.

6 Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company.

7 Nationally determined contributions (NDCs) are at the core of the Paris Agreement and the achievement of these long-term goals. NDCs embody efforts by each country to reduce national emissions and adapt to the impacts of climate change.

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Original Letter to OPB and IMCO

Brian Gibson, Chair of the Board, Investment Management Corporation of Ontario

Dear Mr. Gibson, 

We are writing to you in your position as Chair of the Board of the Investment Management Corporation of Ontario (“the Board”). We are members of the Ontario Public Service Pension Plan and we write to raise concerns and seek more information about the Investment Management Corporation of Ontario’s (“IMCO”) policies and procedures for the assessment and consideration of the financial risks of climate change when investing pension funds.

We, and other public sector pension plan beneficiaries, are writing to the ten largest public pension administrators and investment managers in Canada (including IMCO) seeking the same information so that we can understand and compare the policies and procedures of the pension funds and investment managers in order to determine whether we believe that our pension funds are resilient to climate-related risk and aligned with the Paris Agreement.

We understand that as a public pension investment manager, you have statutory and fiduciary obligations to member pension plans, and likely plan members, when making decisions about the investment of our pension funds.Of course the Ontario Pension Board (“OPB”) as pension administrator for our pension fund also has statutory and fiduciary obligations towards pension members in setting the investment strategy, which is then executed by IMCO.

We note that IMCO has acknowledged that climate change presents both a systemic risk and opportunity, and that it should consider the potential impacts of the transition to a low-carbon economy and the physical impacts of different climate outcomes.2 In acknowledging this risk and opportunity, the Board must respond prudently and manage this risk in the best interests of beneficiaries. Failures to meet these obligations specifically with respect to climate change have resulted in litigation elsewhere in the world.

Financial Risks from Climate Change

Climate change is a defining issue of our time. The Supreme Court of Canada recently described climate change as an “existential challenge” and “threat of the highest order to the country, and indeed to the world.”The UN Secretary-General just described the most recent report on climate change science as a “code red for humanity”.

In order to prevent catastrophic economic and social consequences from climate change, nearly 200 governments, including Canada, signed on to the Paris Agreement and committed to holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C (the “Paris Goals”). In order to meet this 1.5°C target, global carbon dioxide emissions must decline by at least 45% from 2010 levels by 2030 and reach net zero by 2050.

Meeting these targets requires a significant and urgent financial shift by public and private actors around the world. A recent analysis by the International Energy Agency has modelled what is required to meet the Paris Goals and has concluded that, in order to align with a pathway to net zero emissions by 2050, there is no need for investment in new fossil fuel supply projects, as no new oil and gas fields, coal mines, or coal mine extensions are required as of 2021. The UN Secretary General has said that meeting the Paris Goals now requires deep carbon pollution cuts which “must sound a death knell for coal and fossil fuels”.

As you have acknowledged, climate change creates material financial risks that can affect investment returns. As put by Mark Carney, former governor of the Bank of Canada and Bank of England:

Changes in climate policies, technologies and physical risks in the transition to a net zero world will prompt reassessments of the value of virtually every asset. The financial system will reward companies that adjust and punish those who don’t.

These risks cannot be ignored until 2030 or 2050, they must be acted on now. Market shifts and re-pricing to align with the Paris Goals can happen suddenly and have already begun to occur. These shifts can create risks of fossil fuel reserves becoming “stranded assets”, meaning the reserves are rendered unusable if the world meets the Paris Goals. An analysis in the Financial Times estimated that around $900 billion, or one-third of the current value of oil and gas majors, would evaporate if the 1.5°C Paris Goal is met. A rapid energy transition can also create risks for companies and infrastructure involved in extracting, producing, transporting, and refining fossil fuels.

Some companies are starting to recognize their stranded assets: in February 2021, Imperial Oil confirmed a loss of $1.1 billion because it is no longer planning to develop “a significant portion” of its unconventional assets in Alberta. Similarly ExxonMobil, Total, British Petroleum (BP) and Shell have also written off the value of some of their assets in the last year.

Your Legal Duties to Assess and Manage Climate Risk

As a public pension investment manager, you have legal duties to assess and manage the financial risks from climate change. We attach a legal backgrounder from Ecojustice – an organization of environmental lawyers - commissioned by Shift: Action for Planet Health and Pension Wealth (“Shift”), a project of MakeWay, and Environmental Defence, which builds on the opinions of prominent corporate, trust and pensions lawyers, to further describe key aspects of your prudential and fiduciary duties regarding climate risk. Those are: 1) to inform yourself of climate risk; 2) to prudently respond and manage climate risks; 3) to disclose material risks to the fund to client plans and plan members and 4) to avoid and properly manage conflicts of interest when considering responses to climate risks.

IMCO’s Continued Exposure to Climate Risk

We have reviewed IMCO’s policies as well as the limited public information we have regarding your current investments and set out what further steps we expect you to take in order to act in the best interests of IMCO client plans and plan members below. We have attached to this letter a summary from Shift of IMCO’s exposure to fossil fuel companies, its investments in renewable energy, and its approach to assessing and managing climate risk (see Appendix I).

This summary notes that it is not clear how much of IMCO’s portfolio is invested in oil, gas, coal and industries related to fossil fuels. This lack of disclosure and transparency to plan members is problematic as it prevents us from understanding the extent to which climate risks pose a risk to the security of our pension funds.

We welcome the actions the Board has already taken in addressing climate risk including recognizing climate change in your investment beliefs, starting to evaluate the portfolio’s climate risk exposure to climate risk through scenario analysis, stress testing and carbon footprint evaluation, and supporting climate risk disclosure shareholder resolutions.

However, we are still concerned that the Board is not acting in the best interests of plan members by continuing to invest in fossil fuel companies and not having a clear plan to transition out of fossil fuel companies and related carbon-intensive investments. Given IMCO’s continued investment in fossil fuel companies and the increasing financial risks related to these investments, we remain concerned that the pension fund is overexposed to these climate-related financial risks. We have not seen anything to show that the fossil fuel companies we are invested in are ready or willing to transition their business plans to align with the Paris Goals. In our view the failure to implement a clear transition strategy is not in the best financial interests of IMCO client plans or plan members.

When you choose to engage with companies rather than divest, or when you choose to take modest or slow action on climate change, you must do so with our best interests in mind. As contributors and beneficiaries, it is not in our best interests to continue to invest in companies that are not prepared for decarbonisation.

If you do continue to engage with companies to address climate risks, we expect you to disclose all engagement efforts with beneficiaries, demonstrate how engagement has been effective, and adopt a prudent, time-bound policy of engagement that addresses climate risk by requiring 4 companies to adopt certain minimum standards, failing which the fund will act to reduce its climate risks by divesting. This escalation approach has been taken by several funds internationally, including the New York State Common Retirement Fund and the Brunel Pension Partnership in the United Kingdom.

We also believe that the Board should be making investment decisions on the basis that a zero-carbon future is in the best long-term interests of plan members. The Board should be divesting from high-carbon investments and reinvesting to support the transition to a low-carbon future. Climate change creates a systemic risk to the economic and ecological systems underpinning human societies. As a large pension fund, IMCO’s investments are not only vulnerable to climate change, but can also impact emissions directly by either providing capital to high-emitting companies or redirecting funds to low-carbon initiatives and a just transition.

Therefore, we believe the Board’s current climate risk management tools and processes are inadequate. In order to maximize returns and minimize risks, long-term investors should be attempting to avoid 2°C, 3°C and 4°C scenarios in favour of a 1.5°C scenario. We do not currently understand whether the Board is investing in a way that actually avoids a 2°C, 3°C and 4°C scenario.

Our Expectations Regarding How IMCO Will Assess and Manage Climate Risk

Specifically, in order to act as a prudent investor and in the best interests of IMCO client plans and plan members, we expect IMCO to:

● Assess the physical and transition climate risks of all assets under management, including Scope 3 emissions to assess the transition risk from fossil fuel holdings. A prudent assessment of climate risk cannot exclude a significant proportion of assets or a significant portion of the risks arising from climate change.

● Release a credible plan for aligning IMCO’s portfolio with the goals of the Paris Agreement, which must consider Scope 3 emissions from fossil fuel companies, and which does not rely on unrealistic assumptions about carbon capture and sequestration or offsetting. Such a plan should clearly state all assumptions employed.

● Conduct scenario analysis that considers the broader negative financial impacts on the IMCO portfolio and client plan members for four scenarios, being a 1.5, 2, 3, and 4°C warming trajectory over the next 75 years. These scenarios should be identified with steps the Board will take to protect the portfolio in the event of each scenario.

● Implement an active stewardship and engagement strategy for all investments, which is time-bound and consistent with the goals of the Paris Agreement, and communicate this strategy to client plan and plan members. This strategy should include a proxy voting policy and a clear escalation policy where engagement is unsuccessful or slow.

● Establish clear consequences through an escalation policy if portfolio companies fail to meet those timelines to respond to engagement. These consequences should include divestment from companies which do not show that they have a credible climate transition plan to align with meeting the goals of the Paris Agreement.

● Disclose to all beneficiaries the following information as part of your duty to inform beneficiaries of significant material risks to the long-term security of our pension funds:

  1. What percentage of assets are currently allocated towards companies involved in fossil fuel exploration, extraction, transportation, refining and combustion?23 Please disclose these holdings.
  2. What percentage of assets are currently allocated towards zero-carbon holdings?24 Please disclose these holdings.
  3. What is IMCO’s portfolio carbon footprint and what methodology is IMCO using to calculate its carbon footprint?
    • Does the analysis include the full scope of transition risks for portfolio companies (e.g., considering Scope 3 emissions for fossil fuel companies)?
    • If not, what is your timeline for assessing the full carbon footprint of the fund, including Scope 1, 2, and 3 emissions for all investments?
  4. What is the pension fund’s plan to address the climate risks created by a portfolio company that does not respond to engagement over a reasonable period of time? Does it include a screening mechanism if engagement is not successful?
  5. Can you provide examples of how the Board’s approach to shareholder engagement has led to a fossil fuel company reducing absolute emissions (i.e., not its emissions intensity) and aligning its business model with the Paris Goals?
  6. How is engagement with fossil fuel companies, rather than divestment, in the best long-term financial interests of beneficiaries?
  7. Given the size and influence of IMCO in the Canadian and global economy, do you acknowledge that you have an obligation to beneficiaries to invest to avoid a 2°C, 3°C or 4°C warming scenario, which is expected to harm beneficiaries and the broader economic and financial system?
  8. How does the Board manage actual or potential conflicts of interest when determining how to manage climate risk for directors or executives who sit on the boards of fossil fuel companies that could be expected to be negatively impacted by the pension fund adopting measures to address climate risk?

Given the escalating risks from climate change to the fund, we would appreciate a detailed response as soon as possible. We are seeking your response by December 31, 2021 so that contributors and beneficiaries can understand that the fund is prepared for the acceleration of the transformation of the financial system following the UN Conference of the Parties to be held in Glasgow in November 2021. We would also appreciate a meeting to discuss your approach to climate risk further.