Canada Pension Plan to work with high emitters toward ‘low-carbon future'

The Canada Pension Plan Investment Board will embark on a new investment approach where it will seek to help companies in essential industries that generate high carbon emissions to reduce such emissions. CPPIB aims to keep these companies in its portfolio rather than divest.

As part of its commitment to guiding the global economy to a "low-carbon future," CPPIB said in a news release it will "identify, fund and support companies in their effort to decarbonize" over time.

In its report, "Investing to enable an economy-wide evolution to a low-carbon future," CPPIB stated that long-term investors need to focus such climate-conscious efforts on companies in "strategic sectors that are essential, high-emitting and hard-to-abate." Such sectors include agriculture, chemicals, cement, conventional power, oil and gas, steel and heavy transportation, CPPIB noted.

The decarbonization of these sectors, CPPIB stated, is "not only essential to meet wider net-zero ambitions, but also to sustain economic growth, stability and a responsible transition."

CPPIB plans to work in partnership with "like-minded companies, industry leaders, investors, and other interested parties" in this endeavor, it added in the report.

Frank Switzer, a spokesman for the C$541.5 billion ($425.4 billion) CPPIB, declined to identify the companies that the firm is engaging with to discuss the path to decarbonization.

Mr. Switzer also said by email that this endeavor "complements how we think about existing investments groups and strategies and fits within our existing capital allocation framework. An important dimension of portfolio construction is to enable capital deployment patiently aligned with multiple strategies to achieve optimal diversification. In the context of an exceptionally long (investment) horizon, setting aside specific pools of capital is unnecessary for this higher order goal."

Regarding why CPPIB is engaging with high-emission emitters rather than divesting them entirely from portfolios, Mr. Switzer said "we believe blunt-instrument interventions detached from investment considerations, like blanket divestment from fossil fuel companies, mean withdrawing institutional support and losing the ability to apply constructive pressure through engagement."

Mr. Switzer added that CPPIB requires the companies in which it invests in to have "viable transition strategies. We expect to see innovation come from the traditional energy sector as they work through the energy evolution, and we believe it is more constructive to engage and assist them in this evolution versus divesting."

CPPIB follows in the footsteps of another major Canadian institutional investor, the C$390 billion Caisse de Depot et Placement du Quebec, which in September created a C$10 billion set-aside to invest in high carbon-emitting companies around the world if they're willing to work with CDPQ to decarbonize their businesses.

"High-emitting companies that successfully navigate the economy-wide evolution to a low-carbon future will preserve and deliver embedded value for patient long-term investors like CPP Investments," stated Deborah Orida, global head of real assets and chief sustainability officer at CPP Investments, which manages the pension fund's assets, in the news release. "This new investment approach complements the fund's ongoing commitment to investing in companies that have the potential to develop innovative climate technologies around the world and furthers our existing capabilities in technologies that enable the energy evolution."

CPPIB cited that strategies for decarbonization include such measures as "moving to greener fuels … adopting new business models; adding capabilities for transformation and repurposing assets; and enabling the responsible decommission/retirement of obsolete high-emitting assets."

For the oil and gas industry, in particular, the CPPIB report suggested that potential paths to decarbonization include measures such as increased use of biofuels, synfuels, and carbon capture, utilization and storage.

The cost to decarbonize the global oil and gas industry could total up to $150 trillion over the next three decades, CPPIB noted in its report, citing data from Global Financial Markets Association and Boston Consulting Group.

CPPIB's exposure to renewable energy producers totaled about C$7.7 billion as of March 31.