CDPQ runs toward carbon emitters to help in transforming companies

In an industry facing growing pressure to align portfolios with a net-zero emissions future, Caisse de Depot et Placement du Quebec, the C$390 billion ($310.6 billion) Canadian asset owner, is opting to pursue a relatively challenging — and potentially more meaningful — path forward.

CDPQ, in a Sept. 28 update of the pension manager's climate strategy, announced the creation of a C$10 billion set-aside to invest in high carbon-emitting companies around the world, provided they're open to working with CDPQ to decarbonize their businesses.

Philippe Batani, a Quebec-based vice president with CDPQ, said in an email that rather than avoid companies at the epicenter of the global warming challenge, CDPQ will run toward them, "targeting the heaviest carbon-emitting ones such as raw materials (steel, copper, lithium, structural plastics), transportation ... and agriculture (fertilizers, methane reduction)."

The move is CDPQ's answer to a question asset owners and money managers are grappling with now regarding the proper balance to strike between achieving carbon reduction targets for their portfolios and the more crucial goal of reducing global greenhouse gas emissions.

What asset owners and money managers decide in that regard will speak at a high level to their priorities, said Jenn-Hui Tan, Singapore-based global head of stewardship and sustainable investing with Fidelity International Ltd. "Are you trying to achieve a clean portfolio? Or are you trying to achieve an impact on real world emissions?" he asked.

Noted Alexis Cheang, Sydney-based partner, responsible investment, with Mercer Investments: "If you're not monitoring both — your portfolio contribution to climate as well as the absolute emissions in the atmosphere — then you're missing half the story."

There's "a real tension between investors wanting to say I'm integrating climate change within my decision-making, I'm setting a net-zero commitment to reduce emissions. But if all of the action is only focused on the portfolio, without thinking about what that means for greenhouse gas emissions into the atmosphere, then we will be creating a sense of false peace," Ms. Cheang said.

On a panel discussion at the Milken Institute's Asia Summit in Singapore on Nov. 15, Cyril Cabanes, CDPQ's managing director, infrastructure, Asia-Pacific, said the new C$10 billion sleeve reflects his fund's determination to be "an active participant in the energy transition," as opposed to just focusing on reducing the carbon footprint of its portfolio.

Rather than invest in low-carbon assets, "we will invest in carbon-intensive assets or businesses, with a view to have them commit to a zero-carbon trajectory," Mr. Cabanes said.

For CDPQ, it won't be the fund's first experience doing this, Mr. Cabanes noted. He pointed to its joint venture with Arlington, Va.-based power generation and utility company AES Corp., which saw half of its Indiana utility's coal-fired generation base decommissioned over the past seven years and the rest due to be replaced by cleaner energy sources over the next few years, as a template for its new C$10 billion pool. "So, it's not a novelty but we've put a framework around it, to try to have greater structure and greater impetus," he said.

The CDPQ approach "is really novel and it's really honest about the challenge and the solution to the climate crisis," Mercer's Ms. Cheang said. What the Canadian pension manager is saying is "it's not enough for me to get to portfolio net-zero if these same industries continue to pump out greenhouse gases. We actually need to lean into those companies and help them to decarbonize for the sake of the environment," she said.

By contrast, the growing number of money managers and asset owners pledging to achieve a 50% reduction in portfolio carbon emissions by 2030 and net-zero emissions by 2050 could be giving themselves incentives to avoid taking on similar challenges.

"There are different ways to decarbonize a portfolio … You can sell a steelmaker and buy a tech company," but that would be more a matter of looking good than doing good from a global carbon reduction point of view, said Mitch Reznick, London-based head of research and sustainable fixed income with the international business of Federated Hermes Inc.

Paul Milon, Hong Kong-based head of stewardship, Asia-Pacific, with BNP Paribas Asset Management, agreed. "If you have a fund … completely out of power generation, cement, materials and mining … you may look like you're doing good but your actual impact is nothing."

The industry now is effectively rewarding fund managers taking the easy way out — adding decarbonization leaders to their portfolios while simply dropping heavy carbon emitters, rather than doing the kind of hard engagement work that could have "a material impact on the climate crisis," Mr. Reznick said.

"You get this sort of false sense of doing well by the world because you're investing in these companies that are already leaders," he said.

CDPQ's Mr. Cabanes, at the Milken Summit, acknowledged as much, noting that taking on heavy emitters lifts the carbon intensity of the fund's portfolio, taking "us further away from our targets." That, in turn, would effectively penalize CDPQ "up front" for proactively working to decarbonize those sectors, he said.

Still, he said, putting in place "the right framework" will allow CDPQ to sidestep that conundrum, Mr. Cabanes said. In this case, the CDPQ will be working with an external player, the Science Based Targets initiative, to guarantee that assets will be decarbonized within a certain time frame.

CDPQ's Mr. Batani said in an email that the C$10 billion "transition envelop" will be accounted for separately, as it's not representative of the total portfolio, for which CDPQ is targeting a 60% reduction in carbon intensity by 2030 from the base year of 2017. At the end of 2020, CDPQ had already succeeded in slashing its portfolio's carbon intensity by 38%, he noted.

Engagement, meanwhile, remains the bridge to ensuring that progress in portfolio-level carbon reductions translates to lower greenhouse gas emissions, analysts say.

The "main way we think we'll achieve that reduction in real world emissions is through engagement and our stewardship," using Fidelity's influence as a large institutional investor to promote a decarbonization pathway for companies in its portfolios, Mr. Tan said.

Stewardship activities, built around voting policies, escalation policies and engagement programs, are the real key to driving change in the economy, agreed Karen Wong, San Francisco-based global head of ESG and sustainable investing with State Street Global Advisors.

And the momentum now behind the growing consensus globally on the need to address the climate crisis is making engagement increasingly effective, noted BNP Paribas' Mr. Milon.

"Look at the trend we are seeing compared to one or two years ago," he said.

"Now we are at $130 trillion … committed to transitioning to net-zero" and the banks, asset managers and other financial companies making those commitments will increasingly look to work with companies that are on the same journey, Mr. Milon said. Companies that have yet to get on the net-zero bandwagon will likely find their access to financing, investment and underwriting becoming more and more constrained, he said.

Meanwhile, analysts contend that the engagement process can be a wellspring of financial returns for institutional investors as the global economy transitions to a net-zero world.

"A strong stewardship program can help unlock the economic value" of that transition and while green companies may dominate the news now, investors shouldn't lose sight of the significant potential gains to be had from transitioning a carbon-intensive business to cleaner energy sources, SSGA's Ms. Wong said.

CDPQ is a really interesting story to pick up on now because "the low-hanging fruit is just to sell carbon intensity," with the risk of failing to distinguish between high carbon emitters capable of transitioning to a net-zero world and laggards without that capacity — which will lead to capital being misallocated, said Mr. Reznick of Federated Hermes.

CDPQ's Mr. Cabanes predicted his fund's C$10 billion gambit should prove rewarding.

"Fundamentally, at the end of the day, we're also there to produce returns (and) I think it's going to be a great investment proposition, partially because a lot of people are exiting it and therefore returns are going up so … I think it's a great sort of convergence of objectives, he said.