The Montréal Carbon Pledge
Understanding climate-related risk as part of sustainable investing
Climate change can have a significant impact on financial markets and investment returns. The Co-operators seeks to manage the investment risks and opportunities associated with climate change and the transition to a low-carbon economy.
In 2014, The Co-operators became the first Canadian insurer to sign the United Nations-supported Principles for Responsible Investment (UN PRI)’s Montreal Carbon Pledge, a commitment to measure and publicly disclose the carbon footprints of investment portfolios.
Measuring and understanding carbon footprints and other climate-related risks aligns with the approach to active investing taken by our investment manager, Addenda Capital. (In 2015 Addenda became a signatory to the Montreal Carbon Pledge and was the first Canadian asset manager to disclose the carbon footprints of all its equity funds.)
We measure and monitor the carbon footprints of our investments using two metrics:
- Owned carbon emissions measures our share of the absolute greenhouse gas (GHG) emissions of each of our investments.
- Weighted average carbon intensity shows the average carbon intensity (emissions per revenue generated) of our investments, revealing our exposure to carbon-intensive companies.
We first disclosed the carbon footprint of our equity investments in 2015, and added the footprints of other asset classes in 2016.
Owned carbon emissions
In 2018, The Co-operators equity investments, corporate bond investments and preferred share investments ‘owned’ a total of 145,282 tonnes of CO2-equivalent greenhouse gases (emissions sources scopes 1 and 2 only) emitted by companies in our portfolio. Compared on a like-for-like basis to 2017, we noted a 16.2 per cent decrease in carbon emissions. This decrease is partly due to lower overall exposure to high-emitting companies, particularly among the corporate bond investments, where we eliminated a small number of very high-emitting companies. Our preferred share investments accounted for a large portion of the decrease in ‘owned’ emissions, most of which can be attributed to one high-emitting company in the portfolio. Our ownership of that company’s preferred shares did not change materially in 2018 but the emissions reported for that company by our third-party data provider declined from the previous year due to a change in their methodology.
Our investment carbon footprint far exceeds the emissions from our operations, which totaled 14,213 tonnes of CO2-equivalent emissions in 2018 (see Our Carbon Footprint). The Co-operators net emissions were reduced by 81 per cent in 2018, compared to 2010 emission levels, primarily through purchases of renewable energy certificates from Bullfrog Power. The fact that our owned emissions are more than 10 times the emissions from our operations reinforces the importance of our approach to sustainable investing, which emphasizes stewardship and advocacy, and encourages the companies we own to manage their climate risks and decrease their emissions.
Weighted average carbon intensity
The weighted average carbon intensities of some of the portfolios representative of The Co-operators investments are shown in the graph below. The Co-operators equities have lower emissions on average than benchmark companies. The carbon intensity of our Canadian REIT holdings and preferred shares are also below the benchmark. Since 2017, we have been using the S&P/TSX Preferred Shares Index as our preferred shares benchmark, which better aligns with the sector allocation of our portfolio. As with the ‘owned’ emissions calculation, the change in the carbon intensity of our preferred shares portfolio is largely due to a methodology change by our third-party data provider.
Methodology: How we calculate the carbon footprint of investments
The methodology for measuring carbon footprints of investments is evolving, and many data gaps exist. The following key points from our methodology ensure transparency in our approach.
- Data sources: 1) Reported and estimated greenhouse gas emissions data from MSCI ESG Research; 2) market and fundamental data from Bloomberg; 3) index data from MSCI and S&P. Greenhouse gas emissions data are from 2016 and cover scopes 1 and 2, as 2017 data are not yet available. Market values for investments were used with data from December 31, for each year.
- Asset classes covered: Our disclosure covers our Canadian, U.S., and international equities, as well as our REIT portfolio and preferred shares.
- Holdings analyzed: Representative investment portfolios for different asset classes were selected to calculate the weighted average carbon intensities, as the same investment strategies are often used across multiple accounts. The owned emissions calculation considered the invested assets of all companies across The Co-operators group of companies.
- Emissions allocations: For the owned emissions calculation, each company’s total emissions, as reported or estimated by MSCI ESG Research, were allocated to debt, equity and preferred equity based on the book values for debt and preferred equity and the market value for equity using total capital as the denominator.