CPPIB's Climate Change Program?

Responsible Investor reports that CPPIB is launching a climate investment strategy:

The Canada Pension Plan Investment Board (CPPIB) plans to launch an investment strategy to cash in on opportunities arising from consumer trends triggered by climate change, it has revealed.

The C$400bn (€274bn) public pension fund, which is accountable to Canada’s Parliament and federal ministers but governed independently, said in its annual sustainability report that it was “preparing to launch a new climate change investment strategy”. It didn’t provide any details on size, but Deborah Orida, Senior Managing Director & Global Head of Active Equities, confirmed to RI that the capital would come from “growth of our department” rather than reallocation from existing strategies.

“The portfolio will be fundamentally driven and contain a diverse set of companies with tangible exposures to climate change,” the report explained, with Orida adding that themes would include disruptive sectors such as producers of meat substitutes.
The strategy is still being developed and will need to be confirmed by CPPIB’s committee before investment can begin. An update will be provided in next year’s annual sustainability report.

This year’s report also revealed that one of CPPIB’s climate work streams is working “to develop energy scenarios and reference cases to guide portfolio allocation decisions”. In April, the fund introduced a “climate change security selection framework” which requires its investment teams to “include descriptions of relevant climate change-related risks and opportunities that impact investment decisions in their screening memos and final investment recommendations”.

Orida told RI that the move had prompted “a real change in behaviour” at investment level at CPPIB. “It’s not just a paragraph in a memo that says ‘we thought about climate change, and conceptually identified risks around sea levels or more severe storms’,” she said. “There is actually an incorporation of that thinking into our financial models – increasing the estimated capex for a company, for example, and looking at the impact that would have on returns in terms of basis points.”

Earlier this week, CPPIB announced it acquired Pattern Energy, the Nasdaq- and Toronto-listed renewable energy ‘yieldco’ with 4.4GW of capacity across North America and Japan. The all-cash deal values Pattern at $6.1bn, meaning Pattern Energy shareholders will receive a 14.8% premium on their shares.

The transaction is slated to close by the middle of next year, at which point CPPIB will partner with private equity house Riverstone Holdings to combine Pattern Energy with its sister company Pattern Development. Yieldcos like Pattern Energy only own operational assets – thus removing all construction and development risk – while Pattern Development sources and develops assets. Combining the two will create a traditional, integrated and unlisted renewables company.

Last week, I covered the buyout of Pattern Energy, one of the largest PIPE deals of the year.

Also last week, CPPIB issued a press release on its 2019 report on sustainable investing:

Toronto, ON, Canada (November 6, 2019) Canada Pension Plan Investment Board (CPPIB) today released its 2019 Reporton Sustainable Investing, an annual document that outlines the organization’s approach to environmental, social and governance (ESG) factors. The report outlines how CPPIB is managing challenging topics such as climate change and board diversity.

• Climate Change – As part of its climate change program, CPPIB launched a bottom-up evaluation framework requiring investment teams to specifically analyze the climate change risks and opportunities of each major investment they are considering. This year’s report also includes details on CPPIB’s climate change scenario analysis and expanded carbon footprint reporting, which includes public and private holdings. CPPIB has also developed an initial framework for using key indicators, or signposts, to monitor climate change and the global transition to lower-carbon energy sources.
• Investments in Power and Renewables – CPPIB’s investments in global renewable energy companies more than doubled to $3 billion in the year to June 30, 2019. This is up from just $30 million in 2016. For CPPIB, climate change is not merely about addressing risks, its disruptive impact is also creating opportunities. Our partners in this space include Alberta’ Enbridge Inc., India’s ReNew Power and Brazil’s Votorantim Energia.
• Board Diversity – CPPIB expanded its efforts to improve board diversity among our portfolio companies. We have long believed companies with diverse boards, including in terms of gender diversity, are more likely to achieve superior financial performance. As of December 2018, we began voting against the chair of the board committee responsible for director nominations if that board has no female directors and where no exception is warranted. Our new Global Board Gender Diversity Voting Practice resulted in CPPIB voting against the election of 626 directors globally during the 2019 proxy season.

“Over the past year, we advanced our goal to be a leader among asset owners in understanding the risks posed, and opportunities presented, by climate change,” says Mark Machin, President & CEO, CPPIB. “We’re mindful that fully understanding the implications of climate change – including physical, transition and adaptation risks – will be a continuous process.”

The Report on Sustainable Investing provides a comprehensive review of the actions CPPIB took over the previous year to manage ESG factors to enhance the long-term value of the CPP Fund. This year’s report also highlights CPPIB’s efforts to assess and engage with companies to seek improvements in business practices and disclosures, and collaboration with other investors.

“Our climate change work, investments in renewable energy, and actions to improve board diversity are just some of the activities we undertake to help encourage positive change and improve long-term investment returns for the Canadian workers and retirees we serve,” says Richard Manley, Managing Director, Head of Sustainable Investing, CPPIB.

To learn more about our approach to sustainable investing or read the 2019 Report on Sustainable Investing, click here and follow us at @CPPIB.

About Canada Pension Plan Investment Board


Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits in the best interests of 20 million contributors and beneficiaries. In order to build diversified portfolios of assets, CPPIB invests in public equities, private equities, real estate, infrastructure, and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At June 30, 2019, the CPP Fund totalled $400.6 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn, Facebook or Twitter.

Take the time to read CPPIB's 2019 Sustainable Investing Report which is available here.

I am going to let you read it but it's worth going over what Mark Machin wrote on climate change and board diversity:

These past 18 months saw major advances in our ongoing goal to be a leader among asset owners in understanding the risks posed, and opportunities presented, by climate change.

Foremost among these was an acceleration of our Climate Change Program. It elevated the ways our teams incorporate climate change considerations into our investment processes and evolved the organization from theoretical understanding to practical implementation. (See pages 14-16).

Our Climate Change Steering Committee oversees this program. We enhanced this Committee last year, adding more members of our Senior Management Team to facilitate agile, enterprise-level decision-making; so that challenges could be readily addressed.

Among its early achievements was the launch in April of an evaluation framework requiring investment teams to perform bottom-up analyses of climate change risks and opportunities on material investments. The goal is to better understand the risks we are taking on, and to make sure we are getting paid for them.

Such progress is encouraging. Yet we’re mindful that fully understanding the implications of climate change – including physical, transition and adaptation risks – will be a continuous process.

For CPPIB, climate change is not merely about addressing risks. Its disruptive impact is also creating opportunities. This includes investments in renewable energy, where our size, expertise and long-term investment horizon make us an ideal partner.

We were the first pension fund to issue a green bond in June 2018, and followed in January 2019 with the first euro-denominated green bond issued by a pension fund. Both issues met with robust demand. (See pages 31- 3 3).

While CPPIB’s renewable energy investments have been led by our Power & Renewables team (see pages 23-26), our pursuit of opportunities is not confined to a single investment program. Both our Energy & Resources and Thematic Investing teams seek climate change-related opportunities and collaborated on our investment in one of the world’s leading electric vehicle charging networks. (Details on pages 21-23).

Finally, some of our broadly based investment programs are exposed to hundreds of companies that are leading the charge to displace traditional energy with more sustainable technologies.

BOARD DIVERSITY

This year we expanded our efforts to improve board diversity among our portfolio companies.

Based on our research, we have long believed companies with diverse boards, including with respect to gender, are more likely to achieve superior financial performance. This is why we increasingly use our voting power to encourage companies to appoint more women to their boards.

We began this practice within Canada in 2017, by voting against the election of nominating committee chairs at companies where boards had no female directors and no extenuating circumstances warranting an exception. If no progress was made by the following year, we voted against all of the company’s nominating committee members.

We also engaged directly with company directors prior to casting proxy votes; letting them know our concerns about the lack of female representation on their boards and clarifying our intentions to vote against their nominations.

We witnessed firsthand how this encouraged companies to prioritize the issue and add women to their upcoming nomination slates.

That success led us to take the practice global. As of December 2018, we now vote against the chair of the board committee responsible for director nominations at any investee public company if that board has no women directors and no exception is warranted.

At the end of fiscal 2019, we held shares in more than 3,400 companies outside of Canada. So these efforts mark a significant undertaking to improve board gender diversity across our global public portfolio. We will continue to be active in advancing this important matter.

Board diversity is just one of many issues about which we engage with companies, and success to date reinforces our firm belief in the importance of engagement.

Whether urging managers to more fulsomely consider the impacts of climate change, or to structure their boards for long-term success, engagement creates a path through which asset owners can become powerful, positive influences.

CONCLUSION

Our climate change work, investments in renewable energy and actions to improve board diversity are just some of what we do to help spark positive change and improve long-term investment returns for the Canadian workers and retirees we serve.

This year’s report shows the many ways our approach has evolved over 20 years. I hope by its conclusion you will share my optimism about what can be accomplished in the decades to come.

It is also worth reading the interview on page 18 with Deborah Orida, CPPIB's Senior Managing Director & Global Head of Active Equities (click on image):

Here is the critical part that got my attention:

The Climate Change Program is a cross-functional effort that involves people from Total Portfolio Management (TPM), Finance, Analytics & Risk (FAR), our investment departments, Human Resources, Technology & Data, and Public Affairs and Communications. It’s a cross-divisional, cross-departmental effort because our strategy on climate change affects all of CPPIB – and we need to work together to make sure we’re identifying all the risks and opportunities that could impact investment decisions.

The new Program has three design work streams. The first is a top-down effort led by TPM focusing on portfolio design; and how climate change and energy transition scenarios are going to impact our target exposures in different countries. Second, we have a portfolio risk assessment and scenario analysis work stream led by our folks in FAR.

Finally, a bottom-up security selection work stream led by two investment teams – Active Equities and Real Assets – focuses on incorporating the impacts of climate change in our material investment decisions.

All this work may sound a bit theoretical. You might ask, ‘How is it affecting our day-to-day investment decisions?’

One way this work is really starting to come through is in the climate change security selection framework we launched in April. Investment teams must now include descriptions of relevant climate change-related risks and opportunities that impact investment decisions in their screening memos and final investment recommendations.

As you can read, CPPIB's Climate Change Program is very well thought out, it covers all investment and non-investment departments and is a cross-functional effort that involves people from al these departments.

When you're the size of CPPIB, trying to tackle the risks and opportunities of climate change isn't easy, you need a strong steering committee made up of senior people from all departments.

Anyway, take the time to read CPPIB's 2019 Sustainable Investing Report here. It's excellent and provides a lot of great insights for asset owners.

In other news, CPPIB ended its second quarter of fiscal 2020 on September 30, 2019, with net assets of $409.5 billion, compared to $400.6 billion at the end of the previous quarter. You can read the details here.

Below, Mark Machin, president and CEO of the Canada Pension Plan Investment Board, talks about investment opportunities and risks the fund sees globally. He says he expects more depressed returns in financial assets over the next few years. Click here if it doesn't load below.

I also embedded a Bloomberg interview from Davos earlier this year where Mark Machin discussed where he thinks the institutional investor belongs in the Davos conversation, company sustainability, investment themes and his investment strategy. He speaks at the World Economic Forum's annual meeting in Davos, Switzerland, on "Bloomberg Markets: European Open." Click here if it doesn't load below.