2022 GIC coverage: Should pension plans engage or divest from high-carbon assets?

In answering, all three panellists adopted a pragmatic approach, favouring the stewarding of high-carbon assets rather than their outright elimination from portfolios. Adam Goehner, senior manager of environmental, social and governance strategy and risk and investment strategy at the British Columbia Investment Management Corp., said the divesting approach may actually prevent plans from benefiting from the opportunity to grow an asset’s value.

Read: Head to head: Is carbon divestment becoming obligatory for pension plans?

“From our analysis, we found that this actually diminishes a lot of the upside potential that you have through the energy transition. Some of the highest carbon-emitting assets have the highest value-creation opportunities. They’re going to be transitioned and that’s going to require a consistent long-term philosophy.”

Serge Germain, general manager of the pension committee at the University of Sherbrooke, agreed with Goehner’s point. He also added one of his own — that by divesting, long-term institutional investors aren’t actually doing anything to reduce overall emissions.

“I’m a strong believer in the idea that money talks. If you have money invested, you have a lot of influence. And as pension fund managers manage a large amount of assets, they can be a part of that supportive transition.”

Chris Powell, director of infrastructure and timber investments at the Alberta Investment Management Corp., noted that, in the past two years, a dividing line has emerged between investors that believe hydrocarbons will remain part of the energy mix in the long term and those that believe it doesn’t.

Read: Debate about pension fund’s divesting due to ESG issues heats up in Oregon

“We much prefer voice over exit and think that engaging with portfolio companies with our investment strategies is preferential to just making divestments. Where do those funds go? What are the risk-adjusted returns of those investments? And then, divesting out of sectors means losing out if technologies change and potentially capture upsides.”

Marshall also asked the panellists for their views on whether interest in low-carbon emissions could lead to a “greenium” being paid for more environmentally responsible assets or a “brownium” reducing the price of high-carbon ones.

“I actually think that’s already making its way into the private investment space,” said Powell. “Because of some of these ESG factors and focuses, some that view assets that are more carbon-intensive as limiting this from their scope. We’re seeing less competition in that space. Conversely, with renewable projects, you often see very low returns when you forecast them out — though those are build on a lot of assumptions and we could see a ton of growth.”

Goehner adopted a similar view, adding it’s important for institutional investors to avoid looking at greener investments — or browner ones — with rose-tinted glasses. “Whether its renewables or a ton of investors chasing a small subset of some really high-quality deals, driving prices up, you get a disconnect with fundamentals.”

Read: OMERS committing to net zero, UPP facing divestment calls from university staff

While Germain agreed with both of the other panellists, he also pointed out that it’s easy to underestimate the scale of the costs — and opportunities — presented by the climate crisis.

“We should expect going back to 100 million barrels a day. Trying to figure out the area that could be covered by that just confuses me. And the expectation is that consumption will be sustained at that level until past 2030. So who says the transition is really underway?”

Read more coverage of the 2022 Global Investment Conference.