The UBC Board of Governors (BoG) appears to be ignoring the advice of its own lawyers on the need to assess the investment risks linked to climate change and the transition to low carbon energy systems. A December legal memo to the BoG from national law firm Koskie Minsky advises that “[a]t the security selection or investment decision-making level, all factors relevant to risk and return must be considered; if climate change is relevant to an investment and not too remote, it must be considered.” Koskie Minsky lawyers are experts on the issue and published a report on climate change and fiduciary duty last year. This report concludes that “in making investment decisions, climate change denial is not an option, climate change risks must be taken into account...”
BoG members should be assessing and managing climate-related investment risks to the endowment
The BoG is brimming with fossil fuel industry expertise, which should be brought to bear on their analysis of climate risks to the endowment. First, there is Chancellor Lindsay Gordon, former president and CEO of HSBC Bank Canada, who should be familiar with the legal parameters of the fiduciary duty of prudence. HSBC has written extensively on carbon asset risk, including a 2015 report analyzing “How investors can manage increasing fossil fuel risks.” The HSBC report provides details on how fossil fuel assets and related infrastructure investments may become stranded – rapidly lose value – as a result of three factors: climate change regulation, changing energy economics and energy innovation.
Then there is Martha Piper, the interim BoG president. Piper was formerly on the board at Transalta, a heavily coal-exposed Alberta power utility whose management team has been pushed by investors to provide a plan for transitioning its business model to focus on renewable energy. BoG member David Sidoo may be living a stranded assets nightmare – his CEO role with junior exploration company East West Petroleum and past work with American Oil and Gas means that he should have the pulse of the oil and gas sector and would therefore be aware of the risks to the endowment from overexposure to declining industries and high-cost fossil fuel producers.
The BoG members’ apparent decision to ignore material risks to carbon-exposed companies in their endowment investment strategy indicates that perhaps: (a) they know something giant global investors like Blackrock and Aviva do not; or (b) that they are not doing their jobs as fiduciaries.
BoG members’ primary fiduciary duties to endowment beneficiaries are twofold: they have a duty to act prudently and a duty of loyalty. The fiduciary duty of loyalty requires BoG members to act in the long-term interests of the fund, to disclose relevant information and to keep beneficiaries informed of emerging risks to fund assets. The question now is: have Mr. Gordon and the other BoG members met the legal standard of care required of them under BC law in relation to climate risk assessment at the endowment?
Fiduciary duty after Paris – wilful blindness is no longer an option for BoG members
As the BoG’s own lawyers stressed in their legal memo:
“…in British Columbia, the Trustee Act requires a trustee to exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments ... trustees are required to make decisions on an informed basis, after conducting appropriate due diligence including retaining specialized advice…” (emphasis added).
Under current circumstances with Lindsay Gordon’s own bank acknowledging that high-cost fossil fuels and coal companies in OECD economies are in terminal decline, a “prudent investor” would be able to clearly articulate a portfolio climate and carbon risk strategy to preserve scheme assets in the best interests of their beneficiaries. Many are already doing so.
Yet the BoG appears to have failed to undertake even basic due diligence on climate risk, in apparent breach of the duty of prudence.
In addition to the duties of loyalty and prudence, BoG members have a duty of impartiality. According to their lawyers:
“[At] a minimum, the duty of impartiality implies that short-term interests ought not to be privileged over long-term interests, requiring sufficient attention to systemic risks.”
In their apparent decision to ignore climate risks to the endowment fund, and to instead take short-term bets on carbon-exposed investments that will almost certainly lose value as 195 countries implement the Paris Agreement emissions reductions targets, the BoG members appear to be in breach of the duty of impartiality.
Hamish Stewart is a UBC alumnus and concerned donor.