CPP Investments Engages ERM to Boost Decarbonization Capabilities

 Today, CPP Investments announced its delivery partner to support its decarbonization capabilities:

Canada Pension Plan Investment Board (CPP Investments) has entered into an agreement with ERM as a delivery partner for its recently announced decarbonization investment approach. This will identify attractive investment opportunities in companies that are committed to creating value by lowering their GHG emissions over time, consistent with CPP Investments’ time horizon advantage.

Through the new engagement, ERM will help CPP Investments identify existing CPP Investments portfolio companies that can generate value from decarbonization and will work with them to establish and implement a roadmap.

“Decarbonization of competitively advantaged companies in strategic sectors that are essential, but high-emitting presents a significant investment opportunity and is aligned with our strategy to anticipate and proactively manage ESG risks and opportunities, including climate change-related ones, to drive long-term financial performance across existing and new investments,” said Deb Orida, Global Head of Real Assets & Chief Sustainability Officer. “We have selected ERM based on their significant and relevant knowledge of the high priority sectors as well as the required technical and commercial skills for complex transformation projects at scale and will explore pilots in the previously identified priority sectors, including power, real estate, and agriculture.”

Following the pilot transformations, CPP Investments and ERM will establish a clear methodology and blueprint for sector and company pathways, allowing similar existing and new portfolio companies to accelerate their decarbonization efforts. The playbook will leverage experience from the initial projects and deliver a competitive advantage to CPP Investments over time. It will set out a standardized road map and performance tracking process aligned with CPP Investments proposed Abatement Capacity Assessment Methodology (“The Future of Climate Change Transition Reporting” October 2021).

“ERM will support CPP Investments to turn board-level strategy into operational implementation, identifying and delivering value accretive decarbonization initiatives and enabling their investment teams to guide existing portfolio companies as well as new investments through transformation opportunities,” said Sabine Hoefnagel, Director of Services, Brand and Communications at ERM. “The finance sector has a significant opportunity to influence and drive the transition to a low-carbon economy and we are excited to bring our strategic and technical expertise to CPP Investments long-horizon capital, building capability that in time will help decarbonize the entire portfolio.”

“This engagement with ERM is an excellent complement to our existing, and growing, expertise in the area of sustainability, which includes our Sustainable Energies Group, our Sustainable Investing team, and most recently our appointment of Michael Hall, Managing Director, Sustainable Investing, who will work across our real assets portfolio to help companies develop broader and more ambitious ESG strategies and transition plans, benchmarked against public peers, all with a view to maximizing value,” added Orida.

Over the long-term, CPP Investments will work in partnership with like-minded companies, industry leaders, investors, and other interested parties to build out the investment approach to support current and future portfolio companies in their evolution.

For more information, the “Investing to enable an economy-wide evolution to a low-carbon future” perspective can be found on the CPP Investments website here. The “Future of climate change transition reporting” paper can be found here.

About CPP Investments

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that manages the Fund in the best interest of the more than 20 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments are made around the world in public equities, private equities, real estate, infrastructure and fixed income. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At September 30, 2021, the Fund totalled $541.5 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Facebook or Twitter.

About ERM

Founded in 1971, ERM is the largest global pure play sustainability consultancy. The firm employs more than 6,000 consultants across 160 offices in over 40 countries. It reported gross revenues of c. $1 billion in the 2021 financial year (ending March 2021). www.erm.com

Take the time to read the “Investing to enable an economy-wide evolution to a low-carbon future” perspective here and The “Future of climate change transition reporting” paper which can be found here.

CPP Investments' CEO John Graham discussed these new initiatives in his year-end letter to Canadians on the State of the Fund:

Embedding sustainability into our investment activities

The rapid and accelerating warming of our planet can be seen in our daily lives and is creating both risk and opportunity in markets. Climate change rivals COVID as a disruptor of our social and economic life.

With that in mind, I’m proud to report that CPP Investments is a leader in sustainable investing and ESG (environmental, social and governance issues) in general. Through our efforts to promote higher standards and better disclosure of ESG risks in financial reporting, we are encouraging all companies at home and abroad to ramp up their climate change policies and practices as a way to drive long-term value. We work closely with the companies we invest in to strengthen their climate change strategies and their efforts to improve equity, diversity, and inclusion in the workplace. We hold them accountable for their progress through our proxy voting activities and by working directly with their boards of directors. For more information on how we voted this year, I encourage you to review the “Sustainable Investing” section of this website (housed under the main page tab entitled “The Fund”), as well as our most recent Report on Sustainable Investing.

We know that the retirement security of 20 million Canadians, their children and their grandchildren will be impacted by how effectively we manage our investment portfolio amid the global economy’s transition to net zero. It is a challenge that is rooted in our mandate, and we embrace it.

To spearhead this work and underscore its primacy, we have appointed our first-ever Chief Sustainability Officer, Deb Orida, who is also Global Head of Real Assets. In her new role, she will work closely with Ed Cass, our Chief Investment Officer, and our teams across the organization to deliver a Sustainability Roadmap to guide us through the next several decades.

Investing in the path to net zero

CPP Investments is launching a new investment approach to identify and leverage the opportunities that will emerge from the economy-wide transition to a low-carbon future. This investment approach is premised on identifying, funding and supporting essential, but high-emitting companies that are committed to lowering their emissions in a way that will allow CPP Investments to drive strong investment returns. We believe that these companies will deliver value to patient investors where they can successfully navigate this transition. Read more about this in our latest perspective.

We’re focused on investments in innovative technologies that are shifting our economy toward low-carbon pathways, while providing attractive returns and long-term value.

This year we invested in Advanced Drainage Systems, Inc. (ADS), a world-class provider of water management infrastructure. They operate a global network of manufacturing plants and distributions centres and are the second largest plastic recycler in North America.

We also formed a strategic partnership with Conservation International, a leading environmental NGO with offices in 30 countries. This is a rare and unique partnership between a global asset manager and an environmental NGO. Together, we will invest in nature-based solutions within the voluntary carbon market, with initial projects in Brazil, Chile, Peru and Colombia. This investment capitalizes on increasing global demand for nature-based carbon credits and helps advance global decarbonization efforts.

To combat climate change, we also need to track its impact. In September, we invested in Planet Labs Inc., recognized for its data and insights on climate-based changes in the Earth’s forests and agricultural regions. The company designs and manages one of the world’s largest fleets of satellites, capturing over three million images a day.

I covered his letter here and stated this:

[...] I covered CPP Investments' US$1.1 billion joint venture with Bridge to develop industrial properties in several core markets across the United States and also mentioned CPP Investments posted an important comment on investing to enable an economy-wide evolution to a low-carbon future:

Most current initiatives to tackle the climate crisis do not address strategic sectors that are both essential and high emitting.

These strategic sectors include agriculture, chemicals, cement, conventional power, oil and gas, steel and heavy transportation.

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

CPP Investments sees an opportunity to create value and pursue new investments by applying a decarbonization investment approach, which seeks attractive returns by enabling an economy-wide evolution to a low-carbon future. This investment approach is premised on identifying, funding and supporting high-emitting companies that are committed to lowering their emissions in a way that will allow CPP Investments to capture attractive risk-adjusted returns. We believe that high-emitting companies that navigate this evolution successfully will preserve and surface embedded value for patient investors.

The climate challenge will require unprecedented collaboration and capital. We welcome dialogue and opportunities for partnership with like-minded companies, industry leaders, investors, and other interested parties as we build a dedicated investment approach to support current and future portfolio companies in their transition.

Please take the time to download and read this report here.  

John Graham understands that strategy without execution is useless; it's all about execution and I can assure all Canadians CPP Investments focuses on execution when it comes to all their activities, including this one.

What does it mean when John Graham tells me strategy without execution is doomed to fail?

It means exactly that. You can strategize and analyze all you want but if you fail on execution, you will fail to meet your objectives.

And when it comes to implementing a sustainable investing strategy for a half trillion dollar fund, you'd better have these elements:

• The right internal team
• The right external partners
• The right strategy
• The right execution to deliver on that strategy over the long run

Deb Orida, the Global Head of Real Assets, was appointed the first-ever Chief Sustainability Officer.

She is responsible for the Fund’s approach to environmental, social and governance matters and works closely with the Chief Investment Officer, Ed Cass.

Also, as the new Chief Sustainability Officer, she will lead the further refinement and execution of a roadmap for CPP Investments to prudently navigate the Fund as the world economy transitions to address climate change, ensuring they maintain a global, cross-enterprise approach to sustainability as they pursue their mandate on behalf of 20 million Canadians.

I spoke with Deb in mid-December (see my comment here) going over five Climate Change Principles outlined in the Policy on Sustainable Investing that informs their decision-making:

•  Principle 1: Invest for a whole economy transition required by climate change. As a longterm investor with an investment horizon that spans multiple decades, our portfolio design and security selection must anticipate both the opportunities and risks presented by the whole economy transition required by climate change; not doing so would be imprudent. 
• Principle 2: Evolve our strategy as transition pathways emerge and global standards for decarbonization materialize. We will seek to invest in the optimal transition. This pathway is not yet defined, but will be influenced by government policy, consumer preferences, financial markets and technology innovation. Our legislative objectives will guide our actions as the full picture emerges. 
• Principle 3: Exert influence to create value and mitigate risk. We will leverage our comparative advantages as an engaged and constructive provider of long-term capital to seek to ensure our portfolio companies have developed robust transition strategies that support value creation, reduction of greenhouse gas (GHG) emissions and mitigation of climate risks. 
• Principle 4: Support a responsible transition based on our investment beliefs and expertise. As we seek attractive risk adjusted returns, we will make investments in green assets and transition solutions, but we also stand ready to make investments in industries where supporting these businesses to transition generates superior returns. Accelerating the global energy transition requires a sophisticated, long-term approach rather than a blanket divestment. We are in a position to provide capital that advances decarbonization of the economy to support responsible transition. This includes the sectors and companies at the core of our economy. 
• Principle 5: Report on our actions, their impacts and our portfolio emissions. We commit to disclose the actions we take to deliver upon these principles including the investments we make, the meaningful engagement we undertake and the evolution of our portfolio emissions. The global economy transition will be dynamic and not linear. We will provide reporting of GHG emissions from our portfolio and commit to evolving this reporting as relevant new metrics emerge.

In our discussion, Deb spoke highly about Richard Manley, Managing Director, Head of Sustainable Investing, stating he is playing an instrumental role in setting and executing CPP Investments' responsible investing roadmap.

Apart from Richard Manley, the Sustainable Energies Group headed up by Bruce Hogg also reports to her and that too is source of valuable information.

So, the internal team is set up right, they are extremely competent and now they just engaged ERM to help them bolster and execute their responsible investing roadmap.

Who is ERM? Recall, last May, I discussed a mega deal where AIMCo and OMERS sold their majority stake in sustainability consultancy ERM Group Inc.to KKR for roughly US$2.7 billion.

Here is what I wrote about ERM at the time:

What does ERM do? From its website:

As the largest global pure play sustainability consultancy, we partner with the world’s leading organizations, creating innovative solutions to sustainability challenges and unlocking commercial opportunities that meet the needs of today while preserving opportunity for future generations.

Our diverse team of world-class experts supports clients across the breadth of their organizations to operationalize sustainability, underpinned by our deep technical expertise in addressing their environmental, health, safety, risk and social issues. We call this capability our “boots to boardroom” approach for its comprehensive service model that allows ERM to develop strategic and technical solutions that advance objectives on the ground or at the executive level.

Why did AIMCo and OMERS decide to sell ERM? Because they bought it back in 2015 for US$1.7 billion, including debt, from Charterhouse Capital Partners, they added value to the company growing it organically and through mergers and acquisitions, and now it's time to "realize" on this investment.

And as Bloomberg reports above, they're both making a nice return on this investment:

Financial details were not disclosed. The deal values ERM at about US$2.7 billion, including debt, people familiar with the matter said, asking not to be identified discussing confidential information.

Also, selling it to KKR now is strategic because the private equity giant can learn a lot from ERM's leadership in sustainability as it helps it grow its scale and operations all over the world.

KKR takes responsible investing and impact investing very seriously, it's part of its fiduciary duty.

Moreover, leveraging more than 40 years of experience, KKR Global Impact launched in 2018 to invest in solutions-oriented businesses:

Our strategy builds on KKR’s established history of investing in solutions and creating value...

• $7.2+ billion invested over the past decade in companies with core business models that advance solutions to global, environmental, educational and workforce development, responsible consumption and production, worker safety, and societal challenges¹
• We developed an effective approach that integrates Environmental, Social and Governance (“ESG”) considerations into our investment process by identifying potential risks and opportunities and managing critical issues – we believe responsibly governing a business is a part of achieving favorable investment outcomes

…Focuses on addressing global challenges…

• Global Impact identifies promising companies that measurably contribute to solutions addressing critical global challenges identified by the UN Sustainable Development Goals (UN SDGs)
• Seeks to invest in opportunities where financial performance and societal impact are intrinsically aligned. We believe opportunities exist where investors can achieve financial outcomes by helping to solve critical challenges

You can start to understand why KKR jumped on the opportunity to buy ERM from AIMCo and OMERS, there are a lot of synergies in this deal to help its own sustainable investing approach. 

And, I have no doubt that down the road KKR will sell ERM for a nice profit after they achieve the growth they are looking for or maybe they will take it public and realize via that route.

Interestingly, today ERM put out a press release stating it played a critical role in the successful completion of the first commercial-scale offshore wind energy project in the US.

ERM also recently announced it is supporting JPMorgan Chase & Co. in the development of its new Carbon Compass methodology, which describes how they will align financing activities with the climate goals of the Paris Agreement.

It's really important to understand that ERM helped AIMCo and OMERS with their responsible investing roadmaps and now the firm will help CPP Investments on refining and executing its strategy.

I don't think you could find a better world-class partner for this important undertaking.

In fact, ERM was recently named as a leading ESG & Sustainability Consultancy in new independent research:

ERM, the world’s largest pure play sustainability consultancy, has been named as a leader in the ESG & Sustainability Consultancy industry, according to new independent research.

The Verdantix Green Quadrant: ESG & Sustainability Consulting 2022 report is based on a comprehensive assessment of ERM’s services, extensive briefings with ERM experts and in-depth customer interviews conducted by Verdantix analysts. It benchmarks leading industry firms according to 15 different capability criteria.

In terms of headline strengths, ERM scored highest in the sustainability-led operational resource transformations category, with the report calling out ERM’s ‘depth in industry and service expertise’ - underlining the firm’s boots to boardroom value proposition of strategic insight combined with technical excellence.

Mergers and acquisitions (M&A) ESG due diligence was also identified as a market leading strength with extensive capabilities across the M&A lifecycle. Furthermore, ERM ranks in the top 3 for the environment and resource management category, with Verdantix highlighting ERM’s ‘in-house capabilities to calculate resource consumption and provide actionable management advice for improvement’ across energy, waste and water.

The report also identifies specific strengths in digital innovation, highlighting the recent launch of new product ERM ESG Fusion, which outlines ESG risks in private market investment decision making processes. Earlier in December 2021, ERM also announced the acquisition of AI and data science specialist Opex, which utilizes analytics to help carbon-intensive industries reduce their emissions, signalling the continued growth of the company’s digital services.

Welcoming the report, Sabine Hoefnagel, Global Director of Services, Brand and Communications at ERM, said “The Verdantix Green Quadrant Study confirms ERM’s position as a market leader and the partner of choice for organizations looking to operationalize sustainability through deep ESG and digital expertise. We’re delighted to have performed so strongly and look forward to continuing our growth as we deliver on our purpose to shape a sustainable future with the world’s leading organizations.”

Indeed, it seems like ERM is a market leader and the partner of choice for organizations looking to operationalize sustainability through deep ESG and digital expertise.

All this to say, CPP Investments couldn't have picked a better partner to support its decarbonization capabilities across its massive public and private market portfolios. 

And just like Carlyle and CalPERS launched the ESG Data Convergence Project, an attempt to measure environmental, social, and governance (ESG) milestones within private equity, attracting other LPs and GPs, I expect this new partnership with ERM will also bring about important initiatives which will benefit the pension industry at large.

That's just my hunch, don't quote me on that.  

Below, Richard Manley, Managing Director, Head of Sustainable Investing at CPP Investments, discusses how they persuade to companies to take ESG seriously so everyone benefits. 

I'm looking forward to hearing more from Richard as the new partnership with ERM takes form and evolves in the right direction.