Canadian pension fund to eschew “blanket divestment”, emphasising role as “active investor and influencer”.
The Canada Pension Plan Investment Board (CPP Investments) will pursue carbon neutrality by 2050 via a strategy of active engagement to drive real-economy decarbonisation, according to Deb Orida, Chief Sustainability Officer and Head of Real Assets.
CPP Investments, which manages C$550 billion (US$432 billion) AUM for more than 20 million beneficiaries, committed last week to targeting net zero greenhouse gas (GHG) emissions from its operations and investments across all scopes by 2050.
The Canada Pension Plan is a federally administered pension fund providing monthly retirement income to all employed Canadians, apart from those in Quebec, which operates a separate scheme.
“Blanket divestment is not the best way to maximise returns without undue risk of loss. Divestment decisions should be made with investment considerations which get made security by security,” said Orida, appointed last November to a newly created role at CPP Investments.
“The approach that we’re taking, as an active investor and influencer in the transition rather than taking a blanket divestment approach, is the better approach. Blanket divestment doesn’t necessarily help the real economy to decarbonise because the assets end up potentially in less responsible investors’ hands. And it isn’t the way that we as active investors have maximised our returns over time.”
Last week, The Economist reported that £60 billion of oil and gas assets had been acquired by private equity firms over the past two years, many offloaded by fossil fuel majors.
Whole economy transition
Under its net zero 2050 commitment, CPP Investments intends to double its current investments in “green and transition assets” from C$67 billion to at least C$130 billion by 2030. The firm said it would support whole economy transition to carbon neutrality through active engagement, building on its ‘decarbonisation investment approach’, which seeks to achieve returns by working with firms in high-emitting sectors to reduce their emissions and transition their business models.
Orida said that CPP Investments is often in a strong position to influence strategy in listed firms due to the size of its stake. “Because we are one of the few top shareholders that has an active fundamental approach to investing, as opposed to being the representative of a passive strategy, we find that we have really good engagement with companies,” she added.
CPPI Investments defines transition assets as those under the control of an entity which has committed to net zero with a “credible target” and is making “meaningful contributions to global emissions reduction”. It considers an asset to be green if at least 95% of its revenue is derived from green activities, as classified by the International Capital Markets Association.
The fund has not yet provided interim targets on the reductions in carbon intensity it hopes to achieve on its path to net zero by 2050. “It’s something we will continue to look at. We wanted to take a total fund approach, whereas others have sometimes set those intensity reduction targets by taking a smaller piece of their broader portfolio. We wanted to have our net zero commitment come out as a ‘one fund’ approach focused on investing in influencing the transition,” she said.
Commitment to transparency
CPPI Investments’ overall weighted average carbon intensity and carbon footprint were estimated to be 148 tonnes/C$M revenue and 51 tonnes/C$M invested respectively, as at June 30, 2021, based on Scope 1 and 2 emissions in line with the recommendations of the Task Force on Climate-related Financial Disclosures.
Orida conceded that, for some transition investments, emissions may rise before they fall, but said that the fund’s commitment to transparency meant it would explain the reasons for changes in its carbon-intensity metrics. “Our plan is to provide commentary around the disclosure so people can understand what’s happening in our carbon metrics,” she said.
Orida said that accessing data on publicly listed firms’ emissions levels continued to be a challenge ahead of regulatory mandates on climate disclosures, but said that the fund was sometimes able to access more granular data in the private markets, especially where it had a larger ownership and control stake.
The fund’s approach to fulfilling its net zero commitments will be informed by its climate change principles, which emphasise evolution it its investment strategy in line with emerging standards and use of its influence to create value and mitigate risk.
As well as its decarbonisation investment approach, CPP Investments also launched last quarter a proposed framework to measure the capacity of organisations to abate their GHG emissions. According to Orida, one area the initiative will explore is economic emissions abatement rates at different carbon price levels.
CPP Investments said its commitments were predicated on the success of global efforts toward carbon neutrality by 2050, including “the acceleration and fulfilment” of government commitments. “Our view recognises advancements in technology, such as carbon capture, utilization and storage, as well as the opportunity for consumer behaviour and regulation and reporting to evolve,” added Orida.
Tougher stance on high-emitting firms
Historically, CPP Investments has robustly defended continued investment in the fossil fuels sector, with Global Head of Public Affairs Michel Leduc citing “attractive opportunities” for investors in 2020 and referring to divestment as “harmful and counterproductive”.
Under current CEO John Graham, appointed last February, the fund’s position has evolved, with its recent Policy on Sustainable Investing highlighting that CPP Investments would avoid or withdraw from firms if “management’s strategy or lack of engagement with ESG issues undermines the long-term sustainability of the business”.
CPPI Investments introduced a climate change voting policy in March 2021. The fund warned firms that it would vote against the reappointment of the chair of the committee responsible for oversight of climate change at high-emitting firms where boards “have failed to demonstrate adequate consideration of physical and transition-related impacts from climate change”.
As of end-June 2021, CPP Investments had voted against the reappointment of the risk committee on 42 occasions, resulting in 53 votes against directors and 17 instances of engagement leading to “material commitments and improvements” in climate-related disclosures and practices.
Need for credible transition pathways
The Ontario Teachers’ Pension Plan (OTPP) Board, which manages approximately C$200 billion, committed to achieving net-zero GHG emissions from its investment activities by 2050 in January 2021. In September, OTPP outlined further plans to decarbonise its portfolios, including an intention to “reduce portfolio carbon emissions intensity” by 45% by 2025 and 67% by 2030 against 2019 levels. Caisse de dépôt et placement du Québec has also committed to net-zero emissions by 2050 and published interim targets.
Shift Action for Pension Wealth & Planet Health, a Canadian charity focused on the impact of climate risks on pension beneficiaries, said the new commitment was “an important step”, but said CPPI Investments had not yet outlined a detailed “credible plan” for achieving carbon neutrality, criticising the asset owner’s strategy of engagement with carbon-intensive sectors.
In a briefing note, Shift highlighted the risks of investors continuing to engage with firms involved in fossil fuel production and transportation which do not have “viable or profitable pathways”, calling on investors including CPP Investments to be prepared to divest from companies which are unresponsive to engagement. Shift cited examples of the fund’s investments in firms or projects in the oil and gas with mixed records and prospects in reducing emissions and also asked CPPI Investments to clarify its definition of transition assets.
