The Canada Pension Plan Investment Board has dramatically increased its investments in renewable energy companies, from $30 million in 2016 to $3 billion as of June 2019, according to its annual sustainable investing report.
The substantial increase is part of the fund’s expanded climate change program. “We have a number of groups involved in efforts that will help our portfolio take advantage of not just the risks, but also the opportunities created by climate change,” says Deborah Orida, the CPPIB’s senior managing director and global head of active equities.
Another highlight in the report is that, as of April, the organization’s investment teams are required to conduct bottom-up analyses of climate change risks and opportunities for every major investment under consideration, with the results included in their screening memos and final investment recommendations.
The CPPIB is also looking at its portfolio design to determine how various climate change and energy transition scenarios could impact its targeted exposures to different countries, and is undergoing a climate change portfolio risk assessment and scenario analysis work.
“The work done by the total portfolio management group is looking at how will climate change transition risks impact growth expectations for different geographies, as well as how . . . the physical risk, may impact our expectations for different geographies,” says Orida. “And that ultimately feeds back into our portfolio design.”
In its 2019 annual report, the CPPIB highlighted plans to invest up one-third of the fund in emerging markets by 2025. While renewable energy projects may not make up the majority of these investments, the energy transition is an important theme for those geographies, she says.
“For China, for example, even though it’s not a democracy . . . maintaining the happiness of the people and sustaining the improvement in lifestyle that they have had is actually a big priority for the government. Therefore, we’ve seen quite a few interesting investment opportunities that are both aligned with the government policies, which will allow the companies to be successful, as well as good investment opportunities that are in line with the energy transition.”
As part of the climate change program, the fund also expanded its carbon footprint reporting to encompass its broader portfolio, including private holdings. When the reporting initiative was introduced in 2018, it applied only to the CPPIB’s public equities portfolio.
As of June 2019, the CPPIB’s long-term capital ownership assets had total carbon emissions of 25.7 million tonnes of carbon dioxide equivalent and its public equities portfolio had 43.1 million tonnes. The carbon footprint was 64 tonnes of carbon dioxide equivalent per million dollars invested for long-term capital ownership assets and 107 tonnes per million invested for public equities. The latter number represented a small decrease from last year, when public equities had a carbon footprint of 125 tonnes per million invested.
The CPPIB also expanded its board diversity advocacy in the past year, the report said. As of December 2018, it increased its practice of voting against the chair of the board committee that’s responsible for director nominations if that company’s board has no female directors and there are no extenuating circumstances to all the public companies it’s invested in worldwide. The practice started in 2017 and was first limited to Canadian companies.
In addition, the organization expanded its practice in Canada to vote against the chair of the board committee that’s responsible for director nominations if that company’s board only has one woman. The CPPIB hasn’t decided yet if it will take that change global, says Orida.
“We recognize that other parts of the world are at a different stage of evolution and so we’ll have to carefully consider . . . whether it makes sense to move from zero to one as we did in Canada.”