Canadian pension funds face billions of dollars in financial risk through their investments in gas infrastructure companies that face terminal decline as the energy transition accelerates, a new report has revealed.
The report, compiled by the non-profit Shift: Action for Pension Wealth and Planet Health, finds that nine of Canada’s largest pension managers are co-owners of 22 private gas companies that operate nearly 350,000 kilometres of pipelines around the world.
Gas companies downplay their exposure to growing transition risk by talking up plans to repurpose their infrastructure to transport hydrogen, but these “flimsy” claims do not stand up to due diligence, the report argues. In spite of the hype, hydrogen faces intractable financial, physical, and technical barriers.
“We’ve come to expect the gas industry to protect its dead-end business model through greenwashing, lobbying, and public relations campaigns that pretend hydrogen is a silver bullet climate solution. That’s no surprise,” says Paul Martin, a chemical engineer and hydrogen expert who reviewed the report. “But we should expect our pension managers to be sophisticated enough to see through this false hydrogen hype. Sadly, that doesn’t seem to be the case.”
The recency of many of these gas investments makes Shift executive director Adam Scott question the rationale behind them.
“Are they betting against the transition?” he asks. “Did they buy these assets at bargain basement prices and are now looking for a greater fool on which to offload them? Have the valuations of these companies gone down and now they are focused only on cash flow? Are there no willing buyers?”
Part of the problem, he adds, is a lack of awareness over the role of gas in a net zero world, as the energy transition has moved so quicky that it has left “investment professionals behind the curve”.
One big misconception is that gas generation is a “transition fuel” that is good for energy security and necessary to balance renewable energy on a modern grid. Another is that green hydrogen will magically replace fossil gas in the future, even though science shows that it is prohibitively expensive to produce and not compatible with existing grid infrastructure. Nor will biomethane, which is often sourced from waste agricultural products, ever be produced in sufficient quantities to replace the fossil gas, Shift argues.
“I’m blown away by how many investors argue that Russia’s invasion of Ukraine has shown the importance of not backing away from fossil fuels for energy security reasons, when the opposite is true,” he says. “The energy shock has actually accelerated the transition quite dramatically. It’s a reason to limit investment in that sector, not an excuse for it.”
Next steps for pension funds
The first step for pension funds that own high-risk gas assets is to see through the misformation and have an “honest conversation” with the companies. While the demand for gas on the network doesn’t disappear over night in the transition to net zero, it does decline over time under all International Energy Agency scenarios, Scott says.
“It doesn’t help when companies like National Gas, the UK gas company that is 27.7% owned by BCI [British Columbia Investment Management Corporation], pretend that they’re completely aligned with net zero because they’ll convert their network to hydrogen,” he adds. “Even the company’s tiny pilot project for hydrogen appears stuck at the starting gates.”
Rather than make exaggerated claims about hydrogen in a cyncial bid to delay the transition, gas companies and their investors could look at cost-effective ways to decomission their high risk assets and re-invest their capital in infrastructure that does support the transition, like electricity grids.
As electrification technologies such as heat pumps for heating buildings, renewable energy for clean electricity generation and batteries for storage and flexibility have skyrocketed in recent years, utilities face the prospect of lower demand for gas transmission and distribution, creating a likely “gas utility death spiral,” the report claims. Under no circumstances should gas companies invest in expanding the gas network.
“Planning the phase out of fossil fuel infrastructure is a very complicated field and varies depending on the company,” Scott says. “That said, transparency, both in the way gas companies communicate with the public and investors, should underline all approaches.”
Shift’s report includes cases studies of the following gas assets owned by Canadian pension funds:
“I expect my pension managers and trustees to exercise due diligence and effectively manage climate-related transition risks when it comes to my hard-earned retirement savings,” says Lisa Jeffery, a high school science teacher in Leamington, Ontario and member of the OTPP. “I was shocked to learn how much my pension managers have bought into hydrogen propaganda spread by the gas industry and exposed my savings to gas assets that need to be decommissioned in order to protect my retirement security in a safe climate future.”
