In its 2023 Report on Sustainable Investing, the Canada Pension Plan Investment Board (CPP Investments) reaffirms its commitment to hastening the transition to a low carbon economy.

With $575 billion in assets under management, CPP ranks among the world's largest pension funds. This enormous financial clout enables it to strategically deploy capital toward sustainable investments as well as leverage its "active ownership" to accelerate decarbonization efforts across all sectors of the economy.

"Our active ownership model involves engagement with our portfolio companies where we believe it will create better long-term outcomes on sustainability-related matters and, in turn, generate more value for the CPP Fund," the report reads.

CPP Investments' sustainable portfolio

Released on Oct. 19, the report states CPP Investments has made demonstrable progress toward increasing the size of its sustainable portfolio, which as of March 31 had risen to $79 billion. This puts the fund on track to achieve its announced goal of investing at least $130 billion in green and transition assets by 2030, a target CPP is now "confident" it will meet.

Another important highlight of the report is that CPP Investments has achieved carbon neutrality for its internal operations across Scope 1, 2 and 3 emissions sources for fiscal 2023. 

"Investing sustainably drives value for CPP Investments and is an important factor at every stage of our investment process as we help create retirement security for generations of Canadians," John Graham, president and CEO of CPP Investments, said in a statement. 

"CPP Investments' approach to sustainable investing contributes to our ability to compete globally and creates long-term value in the best interests of the more than 21 million contributors and beneficiaries of the Canada Pension Plan."

CPP Investments broadens its decarbonization investment strategy

Asserting itself as a leader in the push toward a net-zero future, CPP Investments has extended its decarbonization investment strategy to over 10 asset classes. 

This initiative leads to the development of transition plans that serve the dual purpose of increasing value and scaling its efforts across its portfolio. By deploying its funds selectively and proactively, CPP is able to help companies reconfigure their operations as part of the overall mission of building a sustainable economy. 

"Our active investment programs consider sustainability-related factors across the investment lifecycle," Richard Manley, CPP Investments chief sustainability officer, said. 

In comments in the report, Manley also noted CPP Investments has observed "the value of companies integrating sustainability effectively into their strategy, operations and financial disclosures is increasing."

As a result, the fund is seeking "to integrate sustainability into the life cycle of our investment process to drive value creation."

Manley joined CPP in 2019 after 18 years at Goldman Sachs, where he was global head of thematic equity and ESG research, and co-head of EMEA equity research. 

CPP embraces active ownership rather than divestment

In an interview with Sustainable Biz Canada, Manley underscored it is imperative pension funds such as CPP embrace the challenge of pivoting companies toward carbon neutrality. 

"As it relates to climate change, active ownership is a crucial component of the transition to a low-carbon future, which is why we focus on reducing emissions in the operations of companies in which we invest, rather than simply divesting high-emitting companies and leaving their emissions for someone else to abate or reduce," Manley said. 

"This also includes investing in companies that are enabling the whole-economy transition through the advancement of technological innovations in reducing GHG (greenhouse gas) emissions," Manley added.

CPP believes blanket divestment policies pursued by some fund managers run the risk of "missing out on potential returns as these sectors transition in response to regulation, economic incentives, technological change and shareholder engagement," Manley said.

"A key component of this effort is our Decarbonization Investment Approach, which we introduced in December 2021 to identify, fund and support the decarbonization efforts of high-emitting companies and capture the value and opportunities (involved in) an economy-wide transition." 

"While we may choose not to invest in particular companies, on a case-by-case basis reflecting their fundamental investment case, we will not engage in blanket divestment that excludes investment in entire sectors of the economy."

Report has important implications for Canadian real estate sector

One of the report's key findings is that sustainable economy transition solutions are "increasingly affordable" and this sends a "clear price signal" to property owners and developers. One implication for Canada is a continuing rollout of advanced HVAC systems and similar measures designed to lower the carbon footprint of buildings.

"This momentum in the real estate sector, which is responsible for roughly 30 per cent of annual global CO2 emissions, is sure to have knock-on effects across industries (and that) this trend is expected to continue," the report reads.

Manley believes Canada is subject to the same risks and opportunities found in the global economy in transitioning to a low-carbon future. 

CPP Investments holds $52 billion in real estate assets as of March 31 and the report underscores this high-emitting sector is significantly exposed to climate change risks.

"The Canadian context highlights the importance of understanding that what is required is not just an energy transition, but a whole economy transition," Manley said. "This includes jobs in high- and low-carbon sectors, important opportunities in grey and green sectors, and requires the consideration and preservation of important environmental systems, among other things." 

Green pricing premium and 'grey discount'

The emergence of a green pricing premium has ramifications for the corporate sector because it demonstrates to companies there is a volume and price benefit to decarbonization. 

In comments made to Reuters last week, Manley explained the green premium ultimately gives way to what he termed the "grey discount."

"A premium for green alternatives today is likely to translate into a grey discount over time – a signal that should act as a warning bell for investors not yet integrating sustainability factors into their investment life cycle," Manley explained. "For companies unable or unwilling to decarbonize relative to their peers, we foresee the emergence of a grey discount to a greening benchmark."

He suggested there is a long-term risk that oil and gas producers which fail to invest in green energy production, "will see customers switch suppliers or demand a discount in order to meet their decarbonization requirements" and customers in energy markets "will start to discriminate in favour of lower-carbon alternatives."

Establishing reliable global standards

CPP Investments also supports establishing consistent global standards related to the disclosure and collection of accurate emissions and related data.

"Consistent, standardized global data and disclosures are important for investors to evaluate and assess the potential impacts of sustainability-related issues on a company’s performance," Manley said. "We are actively (pushing for) the development of high-quality data that helps support price discovery and capital formation and facilitates efficient capital markets.

"As long-term investors, we value consistent, standardized global data and disclosures to allow us to evaluate and assess the potential impacts of sustainability-related issues on companies’ performance. Importantly, we see equivalent value in directors having access to the same disclosures to support their oversight of management."

CPP supports adoption of ISSB standards 

CPP supports full alignment with the International Sustainability Standard Board's IFRS S1 and S2 disclosure standards that went into effect this June.  

The introduction of this global baseline standard will likely solve the problem of competing scopes that have long complicated corporate sustainability reporting and the accuracy of ESG data.

"ISSB alignment will ultimately provide issuers with the best access to global capital," Manley said. "While we view full alignment and full adoption as the desired end state, we recognize some regulators may decide to provide reliefs, rather than carve-outs, as they adopt these standards reflecting the realities of their own markets."

Sustainable investing a critical component of CPP Investments' strategy

Pursuant to CPP's mandate to maximize its return on investment while minimizing risk, the fund is obliged to consider a vast array of factors that impact its responsibility to effectively manage Canadian taxpayers' money and meet its financial obligations.

"In order for CPP Investments to deliver on our mandate within a macro environment that is quickly evolving with respect to sustainability, we need to be agile and evolve our approach when these factors change or accelerate," Manley said. 

"Our approach to sustainable investing and climate change is . . . focused on looking for opportunities to actively support the decarbonization of the whole economy, beyond just the energy sector. This effort also includes actively monitoring the factors that will play a role in achieving a low-carbon economy, namely, government commitments, corporate and consumer activity, market infrastructure and technology."