Exclusion of carbon-intensive assets is the easiest way of achieving a greener portfolio, but Canadian state-owned investor Alberta Investment Management Corporation (AIMCo) believes pension funds can do one better than simply divesting from fossil fuels to address climate change.
AIMCo CEO Evan Siddall said this week that the fund manager is looking to finance the transition to a low-carbon economy through reducing the emissions of oil and gas companies.
"The energy sector is the sector that’s investing in this area the most, and that has the most to lose. So we think that deserves our support and that’s where we will invest. And we think that’s where the returns are too,” he said in an interview at an event to mark the opening of AIMCo’s new office in Calgary, Alberta, which serves as a hub of Canada’s energy industry.
Siddall’s comments echo the fund’s responsible investment guidelines that state, “AIMCo champions a “voice over exit” approach, preferring to conduct meaningful engagement with the firm to effect positive change where possible, rather than divest so as not to reduce the investible universe. Engagement is intended to be both proactive and responsive, as deemed appropriate.”
Decarbonization efforts include carbon capture and storage as well as hydrogen generation, in which Canadian energy companies and other heavy industrial emitters are investing alongside growth in upstream production.
Yet, without targets and metrics, it will be impossible to judge the performance of portfolio companies against ambitious net zero targets. AIMCo has publicly supported both the Sustainable Accounting Standards Board (SASB) and the Taskforce on Climate-related Financial Disclosures (TCFD) as suitable models for issuers to employ for their ESG disclosure.
Norway’s US$1.2 trillion oil-backed sovereign wealth fund, Norges Bank (NBIM), also sought to encourage companies in its vast public equity portfolio to go greener. It announced this week that it will require that the approximately 9,000 companies it has invested in worldwide achieve zero net carbon emissions by 2050 – currently, only 10% of these companies have set a carbon neutrality objective.
Chief Governance and Compliance Officer Carine Smith Ihenacho said, “We will engage with the companies to reach this target by setting credible preliminary targets and creating plans to reduce their direct and indirect emissions of greenhouse gases.”
Divestment is a “last resort”, according to Ihenacho who said the fund will choose dialog and its voting rights before selling. The fund’s ethical rules state that it is prohibited from investing in companies responsible for serious environmental or climate damage and coal production but stop short of emissions targets.
NBIM’s 2025 climate action plan outlines its steps in aligning portfolio companies with Paris targets. It said, “We expect high emitters to set net zero 2050 targets as a matter of urgency, and all companies in our portfolio to have done so by 2040 at the very latest.”
Quantifying progress is key to determining portfolio companies’ transition and this creates hurdles in terms of disclosure and auditing. The lack of standardization and accuracy, along with the problem of “greenwashing”, are challenging funds like AIMCo and NBIM. But they are wise to the difficulties – and are tooling up to ensure reporting is robust.
In its report on responsible investing trends, issued in March, AIMCo notes, “Standardized frameworks and reporting, the convergence of data and metrics, an increasing requirement that the information be auditable, and a focus on impact not just inputs, will go a long way to address concerns of greenwashing.”
NBIM has outlined actions that it will implement at the market, portfolio and company levels. At a portfolio level, it aims “to have a comprehensive system in place for measuring our exposure to climate risks and opportunities and potential portfolio emission trajectories”, such as stress-testing the equity portfolio against a 1.5°C and other climate scenarios on an annual basis. At a company level, it is looking to actively invest in climate transition opportunities with “specific net zero engagement agendas if we take large positions in companies with significant transition risks.” Those that fail to engage risk exclusion. This is a significant development for a fund that has largely acted as a global index tracker in equities markets, barring its relatively narrow exclusion criteria.
Both AIMCo and NBIM see transition risk not simply an ESG aim in itself, but integral to their long-term goals for achieving yield. Indeed, as Global SWF research has found – including its investigation into NBIM’s portfolio – that the greener the portfolio, the stronger the returns. The success of these funds’ transition policies should be also felt in their returns.
