PSP Investments' CEO Discusses Their Inaugural Climate Strategy
The Public Sector Pension Investment Board (PSP Investments) announced today the launch of its first Climate Strategy, setting out an enhanced ambition to guide emissions reduction across its investment portfolio. The objective of the Climate Strategy is to support the global transition to net-zero emissions by 2050 by proactively managing climate risks, unlocking investment and carbon reduction opportunities associated with climate-aligned assets, strengthening carbon disclosure, and enhancing collaboration with a wide range of stakeholders.
“At PSP Investments, we have considered ESG factors, including climate, in our decision-making for many years. This puts us in a good position to launch our climate strategy today”, said Neil Cunningham, President and CEO at PSP Investments. “PSP Investments is committed to using its capital and influence to support the transition to global net-zero emissions by 2050. We understand the important role that the financial sector can play in addressing climate change whether it be our investment choices, providing capital to support the transition to global net-zero or encouraging the reduction of GHG emissions among the companies in which we invest.”
The focus areas, as laid out in the PSP Climate Strategy Roadmap, include increasing investments in assets that support climate mitigation and adaptation, and reducing our exposure to carbon-intensive investments that don’t have transition plans. PSP Investments also commits to engage with portfolio companies to encourage carbon footprint reductions, the adoption of science-based transition plans and the uptake of disclosure practices aligned with the Task Force on Climate-Related Financial Disclosures (TCFD).
As part of its new Climate Strategy, PSP Investments has also released its bespoke Green Asset Taxonomy which it uses to quantify GHG emissions exposure across its investment portfolio to set a baseline and to monitor the progress of emissions reduction over time.
PSP Investments will aim to:
- Increase investments in Green Assets to C$70 billion by 2026 from a C$40.3 billion baseline in 2021.
- Increase investments in Transition Assets to C$7.5 billion by 2026 from a C$5.1 billion baseline in 2021 and ensure that assets representing 50% of PSP Investments’ carbon footprint will have commitments to implement mature, science-based transition plans by 2026.
- Reduce holdings in Carbon Intensive Assets that lack transition plans by 50% by 2026 from a $7.8 billion baseline in 2021.
- Promote the adoption of science-based transition plans.
- Enhance GHG data coverage across the portfolio by aiming to obtain GHG data for 80% of its in-scope portfolio by 2026.
PSP Investments will have an equally important role to play in growing the market for sustainable finance. Following its inaugural C$1.0 billion Green Bond Issuance in February 2022, PSP Investments will aim to steer at least 10% of its long-term debt financing toward sustainable bonds by 2026.
“The most recent research on climate change is clear and we must all step up to increase our ambition”, continued Neil Cunningham, President and CEO at PSP Investments. “We embrace the need to take action on climate risk while also positioning our portfolio to deliver the investment results required by our mandate. Research shows that corporations that are actively managed and plan for climate change can secure a higher return on investment as compared with companies that do not. By executing its climate strategy, I believe that PSP Investments can support the transition to global net-zero emissions by investing for a better tomorrow.”
About PSP Investments
The Public Sector Pension Investment Board (PSP Investments) is one of Canada’s largest pension investment managers with C$204.5 billion of net assets under management as of March 31, 2021. It manages a diversified global portfolio composed of investments in public financial markets, private equity, real estate, infrastructure, natural resources and credit investments. Established in 1999, PSP Investments manages and invests amounts transferred to it by the Government of Canada for the pension plans of the federal Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force. Headquartered in Ottawa, PSP Investments has its principal business office in Montréal and offices in New York, London and Hong Kong. For more information, visit investpsp.com or follow us on Twitter and LinkedIn.
Late this afternoon, I had a chance to go over PSP's Climate Strategy Roadmap with its President and CEO, Neil Cunningham.
I want to thank Neil for taking the time to talk to me and also thank Maria Constantinescu for arranging this Teams meeting and for sending me the material to properly cover this inaugural climate strategy.
I will get to my discussion with Neil below.
First, PSP's Climate Strategy Roadmap is well laid out in this 15-page report and it's important to note that while the organization has a longstanding history of integrating ESG—including climate considerations—into its investment decision making, this is the first time it is providing a concrete roadmap on how it plans on achieving net zero by 2050 or earlier.
Before I get into the five actionable items in the roadmap, it's worth understanding why PSP is taking the necessary steps to address climate change risk across its portfolios.
From the introduction:
We believe that climate change is a long-term structural trend that will have a material impact on investment risks and returns across sectors, geographies and asset classes. As an institutional investor, we adopt a long-term world view and are seized with the potential for the financial sector to support the transition to global net-zero. As a global corporate citizen, we embrace our responsibility to use our capital and influence to drive Paris-aligned decarbonization across our investment portfolio.
Moreover, it's part of its mandate to take all risks into account when investing in the best interests of its contributors
and beneficiaries of the Plans:
Our mandate is to manage amounts transferred to us by the Government of Canada in the best interests of contributors and beneficiaries of the Plans, and to invest our assets with a view to achieving a maximum rate of return without undue risk of loss, having regard to the funding, policies and requirements of the Plans and the ability of those Plans to meet their financial obligations. This is our obligation to our sponsor, the Government of Canada, and our steadfast commitment to the contributors and beneficiaries on whose behalf we invest.
Meeting our mandate over the long-term requires that we take all relevant risk/return factors into account. It is central to guiding our direction, and is institutionalized through our investment beliefs, our responsible investment approach and our corporate strategy, PSP Forward, which positions us to be an insightful global investor and valued partner that is selective across markets and focused on the long-term.
An important focus area of our corporate strategy is the integration of ESG (environmental, social and governance) factors into our portfolio construction and investment decisions. We strongly believe that climate change is one of the key ESG factors that will drive the long-term performance and risk profile of our investment portfolio. Our comprehensive climate strategy is a reflection of the priority we place on ESG and climate change in our activities.
It's also worth noting PSP's progress to date on addressing climate change:
PSP Investments has a longstanding history of integrating ESG—including climate considerations—into investment decision making. In recent years, we have accelerated our efforts to measure our portfolio GHG exposure, and to assess and address the physical and transition risks, and opportunities.PSP Investments’ Corporate View on Climate Change, updated in 2021, proactively addresses climate change as part of our investment strategy by: integrating climate risks and opportunities into decision making; measuring and managing GHG emissions across our investment portfolio; enhancing our climate disclosures and encouraging our portfolio companies and partners to do the same; and, seeking out collaborative efforts with partners, stakeholders and experts. Measuring GHG intensity across investment portfolios is complex and evolving. GHG data remains sparce but the need to understand our climate risk exposure and engage portfolio companies on decarbonization opportunities is pressing. These needs drove PSP Investments to develop and operationalize a Green Asset Taxonomy which we used to quantify our GHG emissions exposure across our investment portfolio to set our baseline. The Green Asset Taxonomy also allows us to track GHG changes over time by company and by portfolio. This enables us to monitor progress against our targets, informs our investment decision making and provides information to facilitate engagement with portfolio companies. More information on the Green Asset Taxonomy can be found on our website.
Below, more details on PSP's Green Asset Taxonomy:
Next, the goal of this initiative and five action items are laid out:
The overarching objective of our climate strategy is to support the global transition to net-zero emissions by proactively managing climate risks, unlocking investment and carbon reduction opportunities associated with climate-aligned assets, strengthening carbon disclosure, and enhancing collaboration with a wide range of stakeholders. Our long-term commitment is to use our capital and influence to support the transition to global net-zero emissions by 2050.
1. Climate Integration
2. Climate Investing and Sustainable Finance
Now, it is worth highlighting this:
3. Engagement and Proxy Voting
4. Reporting and Disclosure
5. Leadership and Collaboration
That in a nutshell is PSP's Climate Strategy Roadmap.
Discussion with Neil Cunningham, President and CEO of PSP
As I stated at the beginning of this comment, late this afternoon, I had a chance to go over PSP's Climate Strategy Roadmap with its President and CEO, Neil Cunningham.
Neil looks great, he's eager for the weather to warm up so he can play some golf and I enjoyed seeing him.
I told him I was sad to learn he will retire at the end of fiscal 2023 but I was happy PSP's inaugural Climate Strategy Roadmap is happening under his watch, leaving another positive legacy of his to the organization.
Climate change is something Neil and the entire team at PSP take very seriously and he told me this roadmap was part of a collaborative effort across the organization:
"I'll give credit to by communications team and everyone not only because it is well written, as you point out, but also because there was a lot of thought has gone into this over some time. I'm also glad you mentioned the collaboration because this isn't a Neil strategy but a PSP strategy. We took all the time to think about all the different aspects we want to cover and what the potential pitfalls were going down one road or another. So we are proud of this strategy. We launched it yesterday internally and the staff are pretty pleased and excited by it."
I told Neil that I like this roadmap because everyone knows it's important to address climate change so employees know the WHY but with the climate strategy in place, they see the HOW and that enables them to fully engage behind the strategy.
"Yes, we told our employees there is one primary takeaway and three takeaways. The primary takeaway is we are committed to using our capital and influence to support the transition to global net zero by 2050. That was the starting point, the north star. This is our commitment. Then I had three takeaways for employees. First, as you mentioned, we are already doing this but let's keep score. We set 2021 as the base year because you can't set targets unless you know where you're starting. We were pleasantly surprised having developed our made in PSP Green Asset Taxonomy how we were already invested in green assets without having a specific goal but just by using the screens of where we thought the best returns are. The second and it blends in with the first, is it's very much in line with our mandate, the fact that we ended up with $40 billion in green assets indicates the two are not contradictory but go hand in hand. And the third, and this is what really resonates with employees, this is something that is transversal across the organization, it's not just the investment teams or responsible investment team but everyone has a hand in it. Even our communications people said this is the most meaningful thing I've been involved in years at PSP, they really feel engaged by this. So that is the overall context, the north star of where we are going and how this fits into the activities of employees in terms of culture and engagement."
The transversal engagement across all teams at PSP - Communications, Finance, Responsible Investments, IT, etc. -- is critical and I'm glad Neil expanded on this because to do this right, you need a collective effort across the organization.
I did ask Neil about the Green Asset Taxonomy and he told me it was internally generated but verified by external experts and he mentioned that taxonomies vary across regions (US, EU and Asia) but added:
"...taxonomies just like reporting are not perfect so we said let's get something that works for us that we understand and can apply across our portfolio. It is science based, our responsible investing team does have an input providing information to the various organizations making contributions. So they're not coming from nowhere, they're coming from a position of knowledge and then applying it across our portfolio. I would expect over time our taxonomy will change, I expect taxonomies to converge over time as best practices evolve, just like reporting will. We are a great supporter of TCFD and SASB reporting but that's not to say they are perfect. We expect these standards will improve and be more widely adopted over time and that's a good thing. "
I agree with Neil, standards and frameworks are evolving and over time, they will converge as best practices are widely adopted all over the world. But you still need to forge ahead.
As he told me: "There's a risk of analysis/ paralysis and we are trying to avoid that."
Next, we talked about investing in green assets to achieve net zero by 2050. I gave him the example of real estate, an asset class he led for years at PSP before heading up the organization, which is a big part of the global greenhouse gas emissions problem.
I told him that he always found real estate assets that attracted businesses to them. He replied:
"You put your finger on it, to a large extent, it is market driven. Even when I was running the real estate group, it wasn't hard to see tenants in the future were going to be demanding certain types of office space or certain type of building to operate in from air quality, to light to things we've been thinking about for a long time and it has been evolving. If that's what employees want and tenants want, if you can deliver that, you can attract a higher occupancy and rent and ultimately a lower cap rate when you exit. So, all these things are positive when you do your investment screen."
"The same principles apply to the other asset classes. Our Natural Resources portfolio - timberland and agriculture -- we got into them recognizing the inflation protection they provided but realized over time the market is really valuing these assets. Our timber assets, for example, are great carbon sinks as well as great income producing assets. So those are the easy ones. In infrastructure, we saw the wave of responsible investing coming so a lot of our investing there is in renewable energy whether it's hydro, solar, wind or taking transmission assets and making them operate cleaner. So this is a theme that runs through particularly the real assets area but increasingly in private equity and in public equity. We're seeing GPs much more focused on assets where a dollar of green will trade for a higher multiple than a dollar of brown. And so it's less direct than our own investments in real assets but it's still very real in the sense that it's the market momentum and what consumers want that really drives the investment hypothesis. So we've made a big commitment in terms of our own conviction to say this is a trend we are investing in. When we developed our PSP Forward strategy, this is one of the key trends we identified, this isn't market noise, this is a long-term trend and it's not going to turn back the other way so it becomes part of the investment hypothesis for every asset class."
I then asked Neil how PSP's Climate Strategy will be implemented across the portfolios:
"Our Responsible Investment team is involved in every investment we make. The head of the team sits on every investment committee and ensures those are key considerations. No investment team would arrive at an investment committee having NOT spent some time with the RI team to make sure they fully appreciate what the risks are. The teams are getting better at identifying [the key considerations] themselves but having the expertise of someone else to say 'yes but don't forget this' is a key element for all of our investing and has been for some time. Otherwise the investment process doesn't really change, it's the same people just with a greater awareness so the RI team makes a lot of education along the way. The investment teams ensure those discussions take place and are part of their proposal because they know it's not going anywhere without these key considerations. So when I say it's transversal, it's very much through the entire organization to execute on this. Coming up with these targets was a collaborative effort. The investment teams said 'yeah, we can do that'. It's not something being forced down their throat, the investment teams are buying into it and can accomplish these targets."
Lastly we discussed how PSP will measure success on its new climate strategy.
Neil told me their responsible investing report will be out in the fall as to not mix it up with the annual report and that is where they will communicate progress on their climate strategy and other areas of ESG investing (climate strategy is the 'E' in ESG but the responsible investing report discusses the 'S' and 'G' too).
Note to all pensions, do NOT do everything all at once, please publish your responsible investing reports at a different date than your annual report. It's too confusing when you do everything together.
Anyway, I am glad I had this chance to talk to Neil Cunningham, he's really a great guy to talk to, a solid and sharp CEO with immense experience and it shows when you talk to him.
I thank him once again for taking the time to talk to me and also thank Maria Constantinescu for setting this all up.
Tomorrow, I will cover AIMCo's results and go over them with both Co-CIOs (I'm on it).
A good reminder to everyone that this blog is a unique platform and I am going to be reaching out to more pensions to cover every aspect of their investing in more detail.
I thank all of you who value the work that goes into these comments and support my efforts (you know who you are).
Below, investors have the power to drive solutions to climate change and support a transition to a net-zero carbon world. With 1% of pension savings across the 37 OECD countries representing US $320 billion, there is great potential for pension schemes to capitalize upon investment opportunities that have positive impact and drive the transition to a net-zero economy while making a financial return.
The shift to a net-zero carbon economy will have practical consequences on people and communities, for example, job losses in some sectors, and growth opportunities and new skills required in others. This is one reason why the transition to net-zero needs to be a just transition, considering the social impacts of tackling climate change.
The Impact Investing Institute has developed four Impact Investing Principles for Pensions, which provide practical guidelines on how pensions can pursue an investing strategy that can contribute to delivering a just transition, and how pension trustees, advisors, fiduciary managers and asset managers can adopt a ‘transitional mindset’ – considering the risks and opportunities within their portfolio presented by the transition to a more sustainable world. The Principles have been adopted by a number of pension schemes and investment consultants and are supported by key industry bodies.
Join the Impact Investing Institute and hear from a range of voices in the industry who will share the investment opportunities and case studies presented by adopting a just transition investing approach, the advantages for institutional investors, such as pensions funds, in adopting a transitional mindset and how that can help to build socially and environmentally resilient economies in the future.
Update: On Friday morning, someone at the Public Service Alliance of Canada (PSAC) brought to my attention David Milstead's Globe and Mail article, Canada’s largest federal employee pension plan doesn’t aim for net zero in new climate strategy where he notes:
Many pension plans globally have announced goals to divest totally from fossil fuels, or adopt other measures that would likely remove from their portfolio any companies that lack a transition plan.
“We were obviously aware of what our peers say, but we look at our own operation, we look at our own assets and our own strategies and, frankly, our own mandate,” Mr. Cunningham said. “And we said this is what we can do, which we think is concrete and will lead to where we need to go, and once we achieve these targets, then we’ll set new ones.”
Mr. Cunningham cited the views of former Bank of Canada governor Mark Carney, a climate crusader who now advises a multibillion-dollar energy transition fund at Brookfield Asset Management.
“He’s saying let’s invest where the carbon is, and let’s remove the carbon,” Mr. Cunningham said. “So when you think of our carbon footprint as an investor, when we put money into that [company], it would increase our carbon footprint. It’s got a certain level of emissions, but our capital will be used to reduce that emission over time.”
The point has also been made by the Canada Pension Plan Investment Board, which pledged in February to reach net-zero by 2050. CEO John Graham said carbon emissions across its portfolio could climb in the initial stages of a net-zero plan that features a focus on seeking opportunities to decarbonize operations in high-emitting sectors.
PSP manages money for the pension plans of the federal public service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force.
Shift Action for Pension Wealth and Planet Health, a climate advocacy group, said on Thursday in a statement that PSP’s broad commitment to support global net-zero emissions “is not the same as a commitment to align PSP’s portfolio with the Paris Agreement goals committed to by its government of Canada sponsors. This is a missed opportunity.”
However, SHIFT said, “it’s clear that PSP is listening to the growing concerns of beneficiaries and beginning to recognize the scale and urgency of the climate crisis.”
With all due respect to SHIFT (I read their statement and wasn't particularly impressed), PSP isn't beginning to recognize the scale and urgency of the problem. It is laying down a clear framework to tackle a very complex issue and even though it hasn't made explicit commitments as to when it will achieve net-zero, it is definitely moving in the right direction and I suspect when the responsible investment report is released this fall, it will be in a better position to track progress and make a long-term commitment.
All this to say, patience is required, PSP is thinking very carefully about these issues and fulfilling its mandate to its beneficiaries, taking all risks into account. In my professional opinion, this Climate Strategy Roadmap is unambiguously a positive step in the right direction. Happy Earth Day!!