The people in charge of investing your money for the long term are in the throes of a wrenching internal conflict that is reshaping Canada and the world.
While new federal incentives for low-carbon investment as part of a COVID-19 recovery play a part, those in the know say the private sector is already embroiled in its own painful energy investment transition.
Part of the agony of the split in this country is that it inflames the long-term political fault line between those regions that depend on the oil and gas sector for their livelihood and those that don’t.
Sophisticated new analysis shows that the interests of the fossil fuel-based economy so important to places like Alberta no longer coincide with the well-being of the country’s centres of finance and industry, principally — but not only — in Ontario.
A changing mood in Ontario
As French energy giant Total adds its name to the list of companies expecting oil demand to peak in a decade as electricity use doubles, finance specialist Ryan Riordan sees a changing mood within the Ontario investment sector and within the Ontario government, which so recently fought an election against carbon pricing, low-carbon energy and the green transition.
“I think particularly the provincial government is at an inflection point,” Riordan, associate professor of finance at Queen’s University in Kingston, Ont., and author of a new research-based report for the Institute for Sustainable Finance, said in a phone interview last week.
Riordan’s research shows that it’s become increasingly clear that the success of Ontario’s financial and industrial sectors depends on a quick move toward a low-carbon transition.
What others have called “fossil-fuel entanglement” has meant the province and even Canada’s respected pension and banking sectors may have been acting against their own best interests by investing in a fossil-fuel sector that could see sharp losses.
Riordan said the institute’s research has shown that carefully targeted, a relatively modest $13 billion a year for 10 years from Ottawa is enough to accelerate a nationwide burst of private-sector low-carbon investment that is already underway.
“It’s just hard to ignore what’s gone on in the world in the last three or four years, and I think that’s also had an impact on people in Ontario,” he said.
While forest fires, storms and melting ice may be the apparent cause, Riordan — a longtime finance guy who began his career on the European trading desk of HSBC before getting into high-level financial modelling — observes that market trends have become increasingly obvious.
The Exxon Mobil signal
“The biggest one was Exxon Mobil leaving the Dow Jones index,” he said, noting that the company that had been on the exclusive list of top U.S. industrial giants for close to 100 years was kicked off last month after market capitalization fell from $340 billion US five years ago to $160 billion.
“I think that’s just the tip of the iceberg, and this is just not what’s on most institutional investors’ wish lists,” Riordan said, contrasting the oil giant’s decline with the soaring market cap of tech companies that don’t depend on carbon.
On Friday after our interview, the Financial Times reported that the clean energy group NextEra had become more valuable than Exxon.
Now, new developments — including expectations that Ford will build electric cars in Oakville — are forcing Ontario into the realization that its future economic advantage is more closely aligned with making the shift to a low-carbon economy based on an entirely different energy source.
“We have 80 per cent zero-emission electricity right now in Canada,” said Merran Smith, executive director of Clean Energy Canada, a research group at Simon Fraser University in Burnaby, B.C.
Canadian nickel miners are already producing low-carbon nickel, a crucial step for electric automakers committed to greening the production chain.
Smith points to the Borden mine near Chapleau, Ont., on its way to becoming the first all-electric underground mine in Canada. Many Ontario manufacturers can make similar boasts.
But some analysts fear that another keystone of the Ontario economy, the long-term investment sector — the smart money that manages insurance and pension money 20 or 30 years into the future — is still struggling to make the transition.
As former Bank of Canada and Bank of England governor Mark Carney has repeatedly warned, decarbonizing the global economy means that at some point in the coming decades, the value of fossil-fuel assets will fall toward zero.
‘Those assets will diminish in value’
Adam Scott, director of Shift, a group that monitors the way Canadian pension funds invest their money, worries that institutional investors, including the Canada Pension Plan, have not done enough to secure their assets against a precipitous decline.
In its annual report on sustainable investing, published last week, the CPP boasts that “investments in global renewable energy companies more than doubled to $6.6 billion.”
But Scott points out that a lot of that money is being invested in fossil-fuel companies like Enbridge in the expectation that they will complete the energy transition, even if such energy companies simply have no credible path to accomplish the change.
“There is a mindset that ‘we can’t abandon this sector; we have to somehow protect it,'” said Scott who observes that over a long period when the oil and gas sector was the motor of the Canadian economy, many investment leaders also spent time in the energy sector.
Scott said CPP and other finance giants are trying hard to find new investments to replace their enormous portfolios of oil and gas firms and are having many successes, but they are struggling to find enough of the enormous investments they need outside the traditional energy sector they know so well.
“We are already seeing a rapid repricing of [fossil energy] assets because of COVID, but that’s just a taste of what’s going to come from climate,” Scott said. “It’s inevitable that those assets will diminish in value.”
While inevitably the Alberta oil and gas economy will continue to suffer from the rush for the door, he said, the success of the Ontario-centred finance sector will depend on getting out of those positions before they lose their value.
Follow Don Pittis on Twitter: @don_pittis