The people’s pension power

Unless you are swinging and missing at home plate, good things often come in threes.

So when I had three random interactions all pointing in the same direction, I decided to take a closer look. It led me down a path to a $2 trillion pot of gold.

The first interaction was with former Corporate Knights and current Sustainalytics research sage Doug Morrow. Over some pizza pies, Doug could barely contain his enthusiasm for a simple but powerful idea he had come upon while working on a paper (“ESG risk in default funds”) for the U.K.-based Pensions and Lifetime Savings Association (PLSA): Why not make the pension plan default option – used by nine out of every 10 members – one that invests in companies with advanced social and environmental practices? In the paper he reasons that low-cost sustainability index tracker funds can provide a hedge against a host of intensifying risks including climate change. As Luke Hildyard from the PLSA puts it: “We no longer understand [sustainable investing] as a niche product designed to enshroud investors in a warm glow of righteousness, but as a critical component of the wisest investment strategies.”

The second interaction happened at a Chemistry Industry Association of Canada conference focused on green economic opportunities. An audience member named Anne-Sophie Tétreault got up during the Q&A to ask why we were only talking about such opportunities for companies and not their pensions as well. She shared her experience as the lone voice at a 2004 general meeting of FÉRIQUE (the pension fund group for Quebec engineers), pointing out the first duty of an engineer: to respect their obligations towards humanity and take into account the consequences of the performance of their work on the environment and on the life, health and property of every person. Why, she asked, should her retirement fund be exempt from this? That led to FÉRIQUE inviting Anne-Sophie to sit on a committee working towards a better answer. Today, the group flexes its financial muscle and proxy power through the FÉRIQUE Funds to nudge companies toward more sustainable practices.

The third time was on Earth Day. I came across a tweet that Desjardins Group Pension Plan had invested $750 million of its $11 billion employee pension in a series of green energy installations. So I decided to do some of my own digging to get a better sense of what syncing the wealth of Canadian pensions with the health of the planet might mean.

According to Statistics Canada, 6.3 million Canadians have public or private sector pension plans with a total value of just over $2 trillion at the end of 2015. That works out to an average of $319,000 per plan member. Using a standard benchmark (MSCI World) with a carbon footprint of 160 tonnes per $1 million (U.S.) invested, that means each pension is generating 37 tonnes in carbon emissions, or almost double the 20 tonnes emitted by the average Canadian’s lifestyle. This doesn’t just apply to carbon. Whatever you do in your daily life, your pension investments could be generating double the impact for better or worse.

Aside from what pensions mean for planetary health, they matter a lot to plan members’ financial well-being, accounting for 36.7 per cent of their net worth. But there could be a problem on the horizon. Pension fund guru Keith Ambachtsheer has calculated that 3.6 per cent is now a reasonable long-term expectation for a broadly diversified stock portfolio. This compares poorly with the 1871-2014 realization of 6.7 per cent. Ambachtsheer suggests that a strong understanding of how a corporation creates sustainable value over time can go a long way to creating a sustainable alpha return for investors, making up the lost three per cent. To back this up, he points to pioneering research being done by George Serafeim out of the Harvard Business School demonstrating how companies with good performance on material sustainability issues for their industry significantly outperform companies with poor performance over a 20-year time period.

So why isn’t everybody doing this already? For the big plans, it’s mostly a function of status quo stickiness. A new non-profit named Shift, backed by a mix of eco-folk and Bay Street brass, has been formed to empower plan members to make pension wealth and planetary health the default offering for pension plan members. In the meantime, are there any early takers?

Will it be the Top 100 Pension Funds with combined assets pegged by Benefits Canada at $1.2 trillion? Or, maybe the Top 50 Defined Contribution Plans (with $34 billion in combined assets)? Or why not the Best 50 Corporate Citizens in Canada, 96 per cent of which have a defined benefit and/or contribution pension with combined assets of $180 billion?

It would not be a bad deal for employees: working for a company you can be proud of that lets you invest in a world worth retiring in.

All with some extra cash in the jeans.