Young claimants take CPP to court over climate risks

A first-of-its-kind lawsuit targeting Canada’s largest pension fund manager could help set a precedent for how investment funds handle climate change, legal experts say.

Earlier this week, the four young people filed a lawsuit in Ontario Superior Court, alleging that the Canada Pension Plan Investment Board (CPP Investments) is breaching its legal duty by exposing CPP contributions to an undue risk of loss due to climate change.

“It is really about financial risks of climate change,” says Karine Peloffy, a lawyer at Ecojustice, which is co-counsel on the case, along with Goldblatt Partners LLP. 

“It’s not about being nice, it’s not about politics, it's not about appearances. It’s about the actual legal obligation to manage the material risks of climate change.”

By underestimating and failing to disclose dangerous climate impacts, the lawsuit alleges, CPP Investments is putting the retirement prospects of young contributors at risk. This includes the four young people in the lawsuit, who don’t plan to retire until 2050. That’s the same year that many entities have set for achieving net zero — though not CPP Investments, which withdrew its 2050 net-zero target last May. 

It marks the first time a Canadian investor has been sued for mismanaging climate risks. Globally, it’s also the first climate case against a pension fund investment manager anchored in the duty of impartiality and even-handedness in a multi-generational context.

According to the lawsuit, CPP Investments is failing to consider risk on two fronts: physical risk to the portfolio and climate risk. At issue is the climate modelling being utilized.

In its latest annual report, the Board relied on a tool for estimating climate-related risk, known as the MSCI Climate Value-at-Risk model. According to the report, the model estimated a potential negative impact of up to four per cent on the fund’s market value under a ‘hothouse world’ scenario (with three degrees or more of warming). 

The model has been criticized in other contexts for underestimating the risks to investment portfolios and pension fund holdings. Peloffy says the tool doesn’t include tipping points, second-order impacts, and other types of risk.  

“When CPP relied on this tool, in our opinion, it did not exercise proper judgment.”

Regarding climate risk, the lawsuit alleges that continued investment in companies planning to expand fossil fuel production contributes to the likelihood of catastrophic climate change, which constitutes a risk to the portfolio. 

“Therefore, CPP Investments is statutorily prohibited from contributing to catastrophic climate change, because of undue risk of loss, [we allege],” says Peloffy. 

An economy aligned with a habitable planet

Murray Gold, a senior partner in the pension and benefits practice at Koskie Minsky LLP, says conditions have been right for a case like this to emerge, as pressure increases to create an economy aligned with a habitable planet.  

One of the core investment-related duties of a trustee is the duty of prudence, he says, which means balancing identified risks against potential reward. Climate risks, which can include physical risks, as well as risks from the human response, including policies to support decarbonization or technological advancements, are “just part of that package.”

Pension trustees also have an obligation to act in the best interest of all contributors and beneficiaries. Given that they have decades before retirement — years in which climate risks will increase — Gold says young contributors are in a position to ask the CPP to adopt a long time horizon in its investments.  

Just as the lawsuit alleges a deficiency in CPP’s use of models, he says there is growing concern that pension funds in general are too reliant on models that do not consider the full spectrum of consequences for warming.  

“You cannot rely on them to understand the consequences of climate change in a continual emission, business-as-usual framework. It's simply wrong to do that. They're inaccurate.”

Typically, pension funds rely on historic data to assess risk, Gold says. This doesn’t work for climate, however, as there is no model to capture the world in which we currently live, where there are more greenhouse gases in the atmosphere than at any point in human history. 

An emerging school of thought suggests that judgments about investments should not be made based on models, but on a more cautious view of the future. 

“When you're in a world where you don't know what all the consequences of your actions are, but you know that they may be extraordinary, then you're cautious,” he says.

No secure retirement on an unstable planet

Carol Liao, chair of the Canadian Climate Law Initiative and co-director of UBC’s Centre for Climate Justice, says the case shows that climate change isn’t a distant ethical issue. 

“Investing in a stable climate isn't just compatible with fiduciary duties. It's essential to fulfilling it. There's no secure retirement on a non-stable planet.”

She says it’s reasonable for young people — who, like other CPP contributors, do not have a choice about whether to contribute — to expect their pension contributions to be invested responsibly.  

“I think it's unconscionable to ask young Canadians to fund their own insecurity through investments that undermine their future.”

The applications of the case extend far beyond CPP investments. Liao says every major investment portfolio faces the same legal and moral imperative to ensure capital isn’t eroding the conditions for human and economic stability. 

“Any investor using flawed models or downplaying systemic climate risks could face similar allegations of mismanagement.”

The lawsuit isn’t seeking monetary damages; instead, Peloffy says they want the court to rule that CPP Investment is breaching its legal duties by failing to identify and manage climate risk. 

“That is the first step towards protecting the Canada Pension Plan funds for all Canadians.”

In a statement posted on its website, CPP Investments said that climate change presents financial risks as well as opportunities. 

“We integrate material climate-related considerations into investment and risk processes across asset classes and regions, where material, engage with companies to protect and grow value, and invest where transition and resilience can create long-term returns.”  

It also said that a lawsuit against CPP Investment is an action against the retirement security of 22 million Canadians.

“We intend to do whatever is needed to uphold their interests.”

However, advocates say the lawsuit could safeguard the future. They point out that other pension funds, including La Caisse, the next-largest pension fund manager in Canada after CPP Investments, have found ways to move towards more climate-friendly investments. 

“Other financial institutions are doing better,” Peloffy says. 

“So doing better is possible.”