https://www.nationalobserver.com/2019/01/22/news/seniors-face-oil-and-gas-pension-time-bomb-reminiscent-those-nortel-and-sears
[links and images in online article]
Seniors face oil and gas pension time bomb 'reminiscent of those of
Nortel and Sears'
By Carl Meyer in News, Energy, Politics | January 22nd 2019
Ontario Premier Doug Ford's outrageous claim that the federal
government's price on pollution would create a "recession" that will
"hurt seniors" is precisely backwards, according to new research — it
might actually save Canada from one.
Canadian oil and gas public equity shares form a major part of
retirement savings for many Canadians, and equity and debt issued by
global fossil fuel firms also constitute a portion of Canadian pension
funds, says Winnipeg-based think tank, the International Institute for
Sustainable Development.
Thousands of employees at Canadian oil and gas companies also have
defined benefit pension obligations, adds the report. All of them would
suffer if the companies are all caught off guard in a world that has no
more room for planet-warming carbon emissions.
The author of the report, Céline Bak, has bluntly warned that a large
chunk of the fossil fuel reserves of Canadian oil, gas and coal
companies are at deep financial risk as countries dramatically slash
their consumption of dirty energy.
Addressing this risk will require orderly "transition strategies" to
help markets flow capital to assist oil and gas companies transition
away from high-carbon fuels.
This would help guard against an economic shock that could occur a few
years down the road if governments and industry wait until it's too late
to scale back their pollution.
A price on carbon would also improve the landscape for clean technology
firms in Canada, which are competing in an environment where the
pollution they are addressing is cheap.
But time is running out. The report concludes that the oilpatch may
actually be facing a period of less than 12 years to keep producing at
current rates and under current costs, before blowing through Canada's
carbon budget.
“Should any of these companies fail, Canada would be faced with pension
defaults reminiscent of those of Nortel and Sears Canada; this would
have a potentially devastating impact on pension beneficiaries, and
particularly on women, who by virtue of salary gaps are less able to
save privately for retirement,” wrote Bak.
“Once the implications of the Paris Agreement are fully priced into the
market, oil and gas asset valuations will shift. If this change is
sufficiently large, debt covenants may be triggered in companies. This
will in turn impact financial institutions, including banks, insurance
companies and pension funds. Debt downgrading could ensue, and bank
capitalization thresholds could be impacted."
Canadian capital markets include US$436 billion representing oil and gas
companies. But over a quarter of Canada’s 43 billion barrels of proven
and probable reserves of oil will have to be left in the ground, if the
planet is to limit global warming below 2 C this century, according to
the IISD.
Bak's report estimated that Canada has 43 billion barrels of proven and
probable reserves based on an evaluation of the 2016 financial
statements of 49 public companies with Canadian reserves.
It said known Canadian oil and gas reserves likely exceed the Paris
Agreement target of limiting global average temperature rise to well
below two degrees Celsius by between $120 and $270 billion.
Is Canada's central bank probing climate liabilities?
Bak, an IISD senior associate and president of consulting firm Analytica
Advisors, said Canada's financial "ecosystem" would be more transparent
if it were tweaked so climate risk disclosure is made mandatory.
“The intent of disclosure is it enables analysts, chief economists, bank
CEOs, pension CEOs, and savers like us (to) see the alignment of a given
company’s strategy with certain climate scenarios,” said Bak in an
interview.
“Over time, if all these pieces come together, we should be able to make
really easy decisions about how investments — whether they’re pipelines,
or investing in new (fossil fuel) exploration globally — are aligned
with the Paris Agreement. Because at the moment, we don’t have that
information.”
National Observer was the first to report that one of the institutions
targeted by IISD for change, the Toronto Stock Exchange, is in the
process of completing one of the group's recommendations: joining a
voluntary United Nations body that promotes greening financial markets
and environmental disclosure.
Once that happens, the largest stock exchange in the country will be
expected to engage with the companies it lists on issues related to
sustainable development. The owner of Toronto’s exchange says that,
along with its sister exchange in Calgary, it accounts for more oil and
gas firms than any other in the world.
Bak recommends several other changes to Canada's central bank, the Bank
of Canada, as well as federal business laws, and banking and securities
regulators.
In less than four months, the central bank will elaborate on the big
risks facing the country's economy as it moves closer into an election
campaign where climate change is expected to be among the top issues.
The Bank of Canada produces this biannual list of economic risks in a
report called the Financial System Review. Last June, it warned that
household debt, an imbalance in the housing market and cyber threats
were among the top economic risks in Canada.
But the central bank isn't yet ready to say whether its next review,
scheduled to be released on May 16, will include a warning about the
staggering losses looming over many Canadian businesses, due to a lack
of transparency about the risks they face from global efforts to crack
down on carbon pollution and the impacts of climate change.
"We are in the process of planning our 2019 Financial System Review and
cannot say at this point whether it will address disclosure of climate
related risks," said Bank of Canada media relations consultant Alex
Paterson.
He said because the central bank is not directly responsible for the
regulation and supervision of banks and insurers, as many central banks
are, its involvement with climate risk "stems from its overall
responsibility for assessing risks to the stability of the Canadian
financial system."
It is also related to its international engagement, he said, in
particular as a member of the Financial Stability Board (FSB) and
through its participation in the G20 Green Finance Study Group.
The FSB's Task Force on Climate-related Financial Disclosures has put
forward recommendations for how firms can more consistently disclose
climate financial risks.
Bank of England governor Mark Carney, who chaired the FSB from 2011 to
2018, told G7 officials in Halifax in September that “the more action
there is on climate policy, the more the market is going to be
anticipating this direction, the more it’s going to shift to those
opportunities."
The IISD wants to see the Bank of Canada clarify the degree to which
disclosure of climate-related risks and opportunities, including through
the task force's recommendations, is relevant to its financial system
review.
Voluntary disclosure problematic, says author
In Canada, the Office of the Superintendent of Financial Institutions
(OSFI) is the bank and insurer regulator.
OSFI public affairs manager Sylviane Desparois said in a statement that
"OSFI expects all financial institutions to quantify their climate risk
exposures and develop strategic approaches to managing the transition to
fewer carbon-linked assets."
The agency, established in 1987 to supervise federally registered banks
and insurers, trust and loan firms, and private pension plans subject to
federal oversight, doesn't enforce mandatory requirements to be more
transparent about climate risk, making this a voluntary system.
The problem with voluntary disclosure is that companies reasonably focus
on complying with the law, not with guidance, according to Bak.
“In fact, one could argue that certain laws in Canada make it very
difficult to disclose climate related risk, because certain lawyers may
interpret that kind of disclosure as speculative,” she said.
Her report also calls for an independent body within the OSFI, called
the Chief Actuary, to report on the risk of climate adaptation to the
fully funded status of the Canada Pension Plan Investment Board, which
manages $366 billion in pension funds.
The Office of the Chief Actuary said in a statement sent through
Desparois that it uses economic forecasts that "may" factor in climate
impacts, when it develops the assumptions underlying its reports on the
Canada Pension Plan.
IISD also recommends that Canadian securities regulators review members’
supervisory practices for climate-related financial disclosures. The
Canadian Securities Administrators (CSA), which represent provincial and
territorial regulators, said last year that nearly half of firms it
probed for such data were only disclosing "boilerplate" information or
nothing at all.
Canadian securities law also doesn't require firms to disclose reserves
that have been linked with jointly held assets, such as Syncrude’s
proven reserves, the IISD report stated.
Amendments to business law address diversity
In addition to institutional changes, the IISD report says the Canadian
Business Corporations Act should be amended to require firms to include
certain climate and environmental disclosures. It also suggests two new
pieces of legislation, requiring regular reports on assessing climate
risks for federal organizations and for natural resources firms.
In 2018, the Liberal government passed Bill C-25, which amended the
Canada Business Corporations Act, providing for greater disclosure
related to diversity, among other changes.
But the bill does not mention the term climate change specifically. Hans
Parmar, media relations for Innovation, Science and Economic Development
Canada, said a statutory review of the act in 2014 did include a
discussion on corporate reporting on environmental matters.
"The government will continue to review the issue, including new
evidence such as the IISD report, as it considers future actions and
improvements to this law," said Parmar.
Both the offices of Environment and Climate Change Minister Catherine
McKenna and Natural Resources Minister Amarjeet Sohi declined to say
whether the ministers planned to introduce new green transparency rules
or laws before the 2019 federal election.
Both pointed instead to Canada’s Expert Panel on Sustainable Finance,
which delivered an interim report this fall and is expected to release
full recommendations in the spring. It stated how climate disclosure is
“critical” for informed decision-making.
“There is a common view that Canada’s system of professional services is
strong and well developed. However, expertise concerning climate-related
issues remains nascent and requires further capacity building,” the
interim report stated.
