CPPIB urged to plan now for net-zero reality

Despite Canada's economic reliance on its oil and gas industry, finance experts and sustainability advocates are urging large public investors like the C$434.4 billion ($326.3 billion) Canada Pension Plan Investment Board to implement long-term investment strategies that better align with the federal government's pledge to achieve net-zero carbon emissions by 2050.

Multiple sources agree that Toronto-based CPPIB, Canada's largest pension fund, should support the country's transition to a low-carbon economy, enhance its disclosure of fossil-fuel investments and set a long-term plan for winding down such assets.

Adam Scott, director of Shift Action for Pension Wealth and Planet Health, a Toronto-based non-profit that aims to bring beneficiaries and their pension funds together to engage on climate change issues, said the organization gives CPPIB "credit for ramping up the scale of their investments into clean energy" even though the pension fund's C$11.6 billion fossil-fuel portfolio is still more than twice as large as its renewable energy portfolio.

Additionally, from his perspective, the pension fund is "not showing any signs of winding down their fossil-fuel portfolio," Mr. Scott added.

"They don't have any measurable pathway or plan about climate change, like goals to align the emissions reduction in the portfolio" with existing sustainability initiatives like the Paris Agreement, which targets net-zero emissions by 2050, Mr. Scott said.

CPPIB's investments in fossil fuels accounted for 2.8%, or C$11.6 billion, of its total portfolio as of March 31, according to data the pension fund provided. The plan's exposure to fossil fuels is defined as investments in oil, gas and coal producers, oil-field services providers and pipelines, and includes debt, equity, and public and private holdings.

The 2.8% exposure to fossil fuels in CPPIB's total portfolio is down from 4.6%, or C$14.5 billion, as of March 31, 2017.

In comparison, the pension fund's equity and debt exposure to renewable energy companies was C$6.6 billion, or 1.5% of its total assets as of June 30, up from C$67 million three years earlier.

Richard Manley, managing director and head of sustainable investing at CPPIB, said the fund has done a lot more due diligence on its investments in the past 12 months and "applied our climate change security selection due diligence process to around 100 transactions," in that time frame.

"The big step change in the year ahead will be taking all of those learnings and applying them to the portfolio," Mr. Manley added.

He confirmed that CPPIB does not set targets for its exposure to fossil fuels over time. Over the next 10 years, however, Mr. Manley expects to see the oil and gas industry "lean in very aggressively" and transition to being "integrated energy companies" with reduced carbon emissions.

CPPIB's annual report on sustainable investing, published last month, notes that as a long-term investor, the pension fund prefers to "actively engage with, and attempt to influence, companies when we disagree with a position taken by management or a board of directors of our active holdings," rather than simply divesting.

"Selling our shares and walking away is easy, yet achieves very little. We can be a patient provider of capital and work with companies to bring about change," the report said.

Matt Orsagh, the Charlottesville, Va.-based senior director of capital markets policy at the CFA Institute, said divestment is typically a "last option" for an institutional investor if the asset owner can instead engage with a company.

He believes, however, that "slowly enough, the world and Canada will move away from fossil fuels," and there should be transparency by both oil and gas companies as well as public investors about their transition plans.

"(There should be) transparency on carbon emissions from a corporate point of view for investors to better analyze these companies … and it's best practice as a steward to be transparent about what your plans are, (including) climate goals," Mr. Orsagh said.

Nick Silver, a London-based managing director at Callund Consulting Ltd., said CPPIB and other Canadian pension funds ultimately need a long-term strategy that puts them "on the path toward divestment" from fossil fuels.

Mr. Silver is also an actuary and economist specializing in public-sector pensions, social insurance and climate change finance at Callund.

Canadian pension funds, in particular, are essentially "doubling down on their risk" when investing in fossil fuels, due to the risk of investment losses as the demand for oil peaks and gradually declines, Mr. Silver said. Additionally, the Canadian economy also faces transition risks as it moves to a low-carbon economy due to its reliance on the sector.

"You (as a pension fund) are relying on your economy paying into your future because the pension fund needs workers paying into its fund," he said. If the energy sector, and its workforce, were to take a hit, public pension funds may see lower contributions from workers, Mr. Silver added. Canada's oil and gas industry accounted for 7.7%, or C$160 billion, of the country's nominal GDP in 2018, according to data from Natural Resources Canada.

The Canada Climate Law Initiative, a cross-disciplinary research initiative of Vancouver-based University of British Columbia and Toronto-based York University, recently published research that highlighted CPPIB's risky public and private investments in the oil and gas sectors.

The report also noted the pension fund's private investments have funded companies that engage in hydraulic fracking in the U.S. and expanded oil sands extraction in Alberta and Saskatchewan, among other activities.

A spokesman at CPPIB said in response to the research paper that the pension fund agrees "climate change is real, is here and is serious," but the fund does not take the position of simply divesting from fossil-fuel investments.

"There are groups whose perspective is we should be divesting. We buy and sell assets every day. It's the consideration in how we make those decisions that's fundamentally important (to us)," the spokesman said, adding that the plan's overall exposure to fossil fuels is "relatively underweight and small."

Sebastien Betermier, an associate professor of finance at Montreal-based McGill University's Desautels Faculty of Management, said a "big fund like CPP should have the ability to transact" without facing public pressures to exit an investment in a certain window and potentially sell at a discount.

"(CPPIB) needs bandwidth to operate and not destroy value for its pensioners. But that said, setting long-term goals with five-year milestones should be feasible," Mr. Betermier said.

"I actually think it's a good thing CPP has a long-term view on investments and a set of ESG standards," he continued. "Having a fund that is monitored carefully by the public, that has to report to the public on a regular basis, may (put the fund) in better shape to lead the transition of these (fossil-fuel) firms than if they were held by private owners who may not have the same need to report to the community."

"I think what's important is not so much the level of investment in fossil fuels they have right now, but rather how they are planning to transition to a zero-carbon economy within the next 20 years, and what are they planning to do with the fossil-fuel stocks that they hold," Mr. Betermier said.