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Transitioning from Climate Change Conversation to Climate Action September 25, 2018
Hugh O’Reilly, President and CEO, OPTrust

 

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Introduction

Thank you for having me speak today.

Climate change is one of the most significant risks we face today.  Its effects are complex and wide-ranging and will play out over decades.

Whether we act or not, climate change is already having profound impacts, and markets are responding accordingly.

Incidents of extreme weather are on the rise across the globe, creating new and greater challenges for governments, organizations, individuals and infrastructure.

In a world as inter-connected as ours, the need to understand and address the risks that climate change poses: socially, technologically and financially, has never been more important.

If governments and organizations don’t begin to look at what small actions they can take now to affect change and current practices are left unabated, many negative outcomes will undoubtedly result.

I want to make three different points today.

The first is that the time for action has arrived.

Second, there are real concrete steps, no matter how small they seem, that can be taken to address climate change.

And third, government cannot nor, should it be expected to act alone in setting regulations.  Market-based solutions do exist, and institutional investors can be leaders in driving change within an appropriate regulatory framework.

There are many open questions when it comes to climate change, so to seek answers, I think we can turn to a man of great wisdom — Elvis.

Time for Action

As Elvis noted, “A little less conversation, a little more action please.”

Climate change has been discussed and debated at length. These conversations, although important, have resulted in much more bark than bite.

The time for incremental action and adaptation is now.

The complexity of the challenge ahead of us requires new ways of thinking and an innovative mindset.

There’s no question we are all on a long, complicated journey so I would like to share with you some of the steps OPTrust has taken on its journey to climate change action.

In 2017, OPTrust changed the conversation on the need for investors to better measure, model and mitigate the risks that climate change presents. 

We released a whitepaper Climate Change: Delivering on Disclosure and committed to transparency regarding the fund’s portfolio exposure to the critical dimensions of climate change-related risk.

We undertook innovative research on climate change in partnership with Mercer, and in so doing, furthered our industry’s understanding of the need for investors to better manage the risks that climate change presents.

This study involved evaluating the resilience of OPTrust’s total portfolio to four potential climate change scenarios, including a 2° scenario which is the goal of the Paris Climate Agreement.

The paper was incredibly well received and to be honest, I was very surprised.  Because as innovative as it was, it didn’t really move things forward that much. 

This type of analysis is important for any organization to undertake, but in isolation, it is meaningless without real action on the part of governments and organizations.

As a pension management organization, OPTrust looks at investments over a long-time horizon. Funded status is our key measure of success — it is the measure that matters.

In order to preserve our funded status and fulfil our pension promise to our members, we endeavour to fully understand and price our risk exposure.  That includes climate risk.

Accurately pricing risk, however, in a world without commitments to proper climate-related disclosure from corporations is almost an impossible task.

That brings us back to the need for action.

Climate Change Action Plan

Earlier this year, OPTrust released a second paper on climate change — the Climate Change Action Plan.  It outlines our eight-point plan and I will briefly share the plan with you now.

First, we will drive for better disclosure of the information investors need to price carbon risk and champion the Task Force on Climate-related Financial Disclosure. 

And, we will partner with peers, regulators and companies to find solutions.

Third, we will continue build awareness around the sophisticated information used to evaluate climate change.

Next, we will define a clear baseline, a current state assessment of climate risks to our fund, measuring our exposure to various industries and geographies.

We will integrate climate risk into portfolio construction.  That means we will explore and develop climate change scenarios, integrate them into our portfolio construction framework and analyze the impact of climate on the entire portfolio.

Sixth, we will innovate in our processes and metrics, achieving greater disclosure within our portfolio companies and incorporate climate change-related metrics in the evaluation of new investments.

Seventh, we will drive for improved performance and use our influence across the market to drive ESG performance and regulatory certainty.

And finally, OPTrust will lead with transparency by committing to report our progress against the TCFD framework.  In fact, OPTrust was one of the first institutions to report under the task force’s guidelines.

Influence over Divestment

I am often asked about our choice of using our influence rather than divestment.  OPTrust takes a very active role in engaging with the companies that we partner with and in which we invest.

We strive to increase cooperation and work with likeminded institutions and investment partners to maximize the impact of our investment dollars in achieving positive outcomes.

Putting pressure on fossil fuel producers to engage in sector best practices and be environmentally sensible is one example of this important work.

From my perspective, simply divesting from oil and gas companies does not save us from what is a macroeconomic risk.  The fact is that fossil fuels will be part of our economy for decades to come.  So, the removal of related companies from an investment portfolio only pokes the carbon bubble — it does not remove the embedded carbon risk.

It also ignores important differences between corporate practices within industries. For example, some fossil fuel companies are better positioned for climate change than others for a few different reasons: 
Carbon offsets, renewable power projects, investments in carbon sequestration, and more favourable locations and extraction rates for their deposits.

It is our duty as long-term investors to have a nuanced understanding and approach to the realities of climate change and so, OPTrust focuses on engagement rather than divestment.  With a seat at the table and a vote at an annual general meeting, we can engage companies on how they are managing climate risk and how they are disclosing this information to investors.

Government and Market-Based Solutions

There’s a term used in analytic geometry — asymptote. 

It comes from ancient Greek and means “not falling together.”  It describes a line that gets closer and closer to a curve but never actually hits or intersects the curve as they both approach infinity. 

This feels exactly like the where we are with meaningful climate change action — where good public policy is the line, trying desperately to intersect with the curve of good politics but the curve just keeps on bending away into infinity.

The very nature of democratic government forces administrations to balance loud and demanding voices and differing opinions, with politics and worrying about being re-elected.

Doing what is right from a long-term public policy perspective, is not always something that is easy or perceived as the popular thing to do — especially in a world with four-year election cycles that limit any government’s timeframe to act.

It is for this reason that OPTrust advocates for market-based solutions and real adaptation for organizations, enabling them to take action on climate change.

So, if we advocate for market-based solutions, what role is left for government?  We believe that governments can work with organizations to put in place regulatory “safe zones.”

For example, government can direct and work with securities regulators to create one such safe zone in public markets, where companies can disclose matters related to environmental, social and governance issues without fear of facing liabilities for failing to meet targets.

This is a quick, reliable way for governments to set the stage for action and start gathering the critical data that we need for proper benchmarking and targets.

Revenue and expenses are often the sole drivers in corporate decision making, but climate change absolutely needs to be a factor.

Climate change adaptation is a fundamental step that some regions of the world are currently doing better than others.  We need to work as a society to look at the big challenges we face from an environmental perspective and implement solutions that help us not only address them but to reverse the effects of climate change.

We need to look at ideas like burying power lines to make them less susceptible to damage from severe weather events. 

All buildings — both public and private sector — should be made more energy efficient.

And incentives should be attached to residential renovations in order to lower the environmental footprint of our homes and communities.

Actions like these have a multi-pronged effect and are examples of relatively simple actions that create opportunities for good public policy to intersect with good politic because they not only help the environment, but also create good jobs as we transition to a carbon-neutral economy.

We are facing another risk associated with climate change — and that is that while we talk and talk about it, we create the potential to turn the issue into something that becomes identified as problem for “the elite.”

This will be the outcome if all we do is talk and don’t follow up with action.

Likewise for adaptation, without being coupled with a concerted effort to increase societal understanding of the causes and effects of climate change.

If we truly want to begin to address the effects of climate change, the issue needs to be squarely on the minds of all individuals.  It needs to be talked about in family rooms, at kitchen tables and places people gather.

Climate change should not be something to which lip-service is paid, but something that is taken as a real societal threat to be addressed collectively.

If the world is going to avoid the most catastrophic impacts of climate change, it will have to move towards carbon neutrality over the coming decades. We need to imagine what that world will look like tomorrow and what that means for how we invest today.

Conclusion

OPTrust considers the integration of climate-related risks into our portfolio analysis as not only necessary but in the best interests of all our Plan members, both today and over the long term.

While the work that OPTrust has conducted thus far has been useful we recognize that we are only at the beginning of this journey. We will continue to work collaboratively to improve our understanding of these impacts and seek new solutions.

There is no question this issue is incredibly complex and unpredictable. Nevertheless, we believe human ingenuity will triumph.  As we move from conversation to action and more people and organizations look for ways to address the challenges facing us on climate change, the more progress we will make together.

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