This Week in Pensions & Investments: 03-11-2023

Here are the top stories covering pensions and investments this week: 

1) Let me begin by covering something I should have mentioned last week. Michiel Willams of Net Zero Investor reports OMERS’ sustainability chief on why the C$127bn fund’s green investment spree will not slow down:

OMERS, the defined benefit (DB) plan for municipal employees in Ontario, is increasingly positioning itself as one of Canada's greenest pension fund investors.  

The C$127 billion investor currently has around C$19 billion invested in assets which it has labelled as “green”, and recently it announced ambitious plans to increase sustainable allocations to C$30 billion by the end of the decade.

OMERS also earmarked C$3 billion specifically towards investing in high-carbon assets in need of funding for targeted decarbonization, singling out recent investments in energy firms such as Ontario-based Bruce Power and Nextbridge, as well as carbon capture project Deep Sky, which aims to build air and seawater carbon capture.

The fund also recently invested in Northvolt and Group 14, which both specialise in battery innovation and it allocated funds to Belgian renewable energy firm Groendus.

Moreover, OMERS made news this summer as it teamed up with Netherlands-based pension giant ABP to acquire Dutch energy infrastructure business Kenter, in a deal which valued the firm at close to €700 million ($764 million).

Following this flurry of transactions, time for Net Zero Investor to scrutinise the pension giant's sustainable investment strategy and allocation decisions. 

In an exclusive interview, OMERS' chief sustainability officer Michael Kelly opens up about the pension fund's investment choices.

You recently earmarked C$3 billion specifically towards investing in high-carbon assets in need of funding for targeted decarbonization. Tell us about the rationale behind this decision.

We are actively evaluating how we can support real-world emissions reductions. We created the transition sleeve to facilitate investment in high-carbon assets that are in hard to abate sectors or are enabling others to transition. We didn’t want to discourage investment in assets that are enabling real world emissions reductions that might otherwise jeopardize our interim goals. So, if an investment has an aligned net zero 2050 goal and is enabling decarbonization, we think that is a potentially good use of our capital and is eligible for the transition sleeve. The emissions from these assets would be exempt from our interim goals.

The strategy is part of your plan to increase OMERS' green investment portfolio to C$30 billion by the end of the decade. What are your priorities while allocating fresh funds?

We already have more than C$19B in green assets, which includes investments in renewables, low-carbon power generation, green certified buildings and energy efficiency. We recently launched our Climate Action Plan, which includes a comprehensive strategy to continue to move us forward on our pathway to achieving net zero by 2050. 

"We didn’t want to discourage investment in assets that are enabling real world emissions reductions that might otherwise jeopardize our interim goals."

                                                            --Michael Kelly

Our plan is aligned with the Paris Agreement and the latest climate science. It includes interim targets which hold us accountable now – a 20% reduction of our portfolio carbon footprint by 2025, and 50% by 2030, from our 2019 baseline. We have currently exceeded our 2025 target with a 32% reduction to date.

Sure, but how does that translate in actual investment decisions and allocation choices?

We are actively seeking out investments in companies involved in innovative climate solutions, including through an active and dedicated green technologies investment team. We've made some interesting investments in the battery sector for example. This includes Northvolt, which delivers low-carbon batteries for multiple industries, Group 14, which manufactures advanced silicon battery materials, and Redwood Materials, which recycles and refines lithium ion batteries.

As you mentioned, OMERS has invested in Northvolt and Group 14, as well as Dutch and Belgian renewable energy firms Kenter and Groendus. You said you now plan to prioritise stewardship and engagement efforts with these companies, in order to ensure that they have credible 2030 transition plans in place. Tell us more.

The primary focus of our engagement and stewardship efforts is on the highest-emitting companies in our portfolio rather than companies like those you’ve mentioned which are already enabling the transition through their products, operations and business strategies. However, we do engage with the climate-forward companies in our portfolio to stay on track and to continue our learning around the energy transition and related markets, technologies and opportunities.

So can you share with us how you go about this in practice?

We directly engage with both public and private companies in our portfolio to promote sustainable business practices and long-term thinking. For example, engagement on climate change and company net zero pathways is a priority area for us for higher-emitting sectors. We often have seats on the board of our private assets, which gives us a unique ability to engage directly with these portfolio companies.

In July, OMERS teamed up with Netherlands-based pension giant ABP to acquire Dutch energy infrastructure business Kenter, in a deal which valued the firm at close to €700 million ($764 million).

At a broader level and specifically regarding our public markets portfolio, we also collaborate with like-minded investors through platforms such as Climate Engagement Canada, Climate Action 100+ and the Institutional Investors Group on Climate Change (IIGCC) to collectively amplify our efforts. In addition, we actively contribute to enhancing the sustainable finance ecosystem through our membership in organizations such as the Investor Leadership Network, which is currently co-chaired by our CEO.

And can you explain how you translate those meetings in action.

Our plan describes our overall approach to sustainable investing, then digs deeper into specific actions we are taking in respect of climate change. This includes integrating climate change factors into our investment decisions to better understand both the risks and opportunities across all asset classes. 

It outlines our approach to engagement with both public and private companies within our portfolio, and how we collaborate with like-minded investors, regulators and other stakeholders to advance the ecosystem around sustainable finance. This includes key issues like better disclosure of climate-related data, with standards harmonized globally where possible.

Better disclosure of climate data and global standards are issues that go way beyond Canada's pension investment space. How do you see the role of asset owners in shaping and driving the net zero agenda?

With our long-term horizon we often say that for us a quarter can be viewed as 25 years rather than three months in duration. We think and plan accordingly by seeking to understand and assess systemic changes unfolding in the world around us. Climate change is not a risk that individual investors can avoid or diversify away. 

Instead, it requires a cohesive and aligned approach by governments, policy makers, regulators, civil society and companies as we move through the transition together. Asset owners such as OMERS with longer time horizons can play an important role in working to drive change, achieve greater influence with companies and help inspire meaningful progress towards a lower-carbon economy.

"With our long-term horizon we often say that for us a quarter can be viewed as 25 years rather than three months in duration."

                                 --Michael Kelly

Thank you. Anything else you'd like to share with Net Zero Investor readers?

Governments, business, civil society, and the investment community have an important and collaborative role to play in enabling and accelerating the decarbonization of the global economy. This includes encouraging and adopting science-based emissions-reduction targets and credible transition plans, improving climate data and disclosures.

This also includes making the effort, at a government, corporate and individual level, to understand one’s own carbon footprint and pathway and the effect of our choices on both. We are committed to reporting on our progress against existing objectives, deepening our capabilities, and setting new goals as we work together to achieve the Paris Agreement commitment to limit global warming and achieve net zero by 2050.

Read full article here.

2) CPP Investments’ first Sustainable Energies Group (SEG) Leaders Summit brought together 45 executives from companies in CPP Investments’ SEG portfolio with energy-sector leaders from Canada, the United States, London, India and Brazil:

The idea was to connect companies in the Fund’s orbit that may not regularly interact. And like our own SEG group, this inaugural event brought together renewable and traditional energy under one umbrella to see what could happen.

We hosted the gathering in Alberta—not only because it is home to one of the world’s most beautiful natural landscapes, but also because it has a reputation for responsibly-produced energy and skilled talent that can help advance the energy transition.

The Head of SEG, Bill Rogers, rallied everyone around a shared objective: delivering excellent risk-adjusted returns while addressing the energy trilemma of security, affordability and sustainability.

As Bill Rogers, Global Leadership Team – Managing Director and Head of Sustainable Energies, put it, “the solution to your current challenge, may exist in this room.”

The highlights:

  • We’re in the early innings of the energy transition and while the direction is clear, the path will be bumpy.
  • It will be more challenging to make returns at levels seen in the last decade.
  • The revival of industrial strategy in the face of global challenges, such as climate change, presents complexities for long-term global investors and businesses. Green industrial policies, ranging from carbon taxes to cap-and-trade to energy decarbonization incentives (as in the U.S. Inflation Reduction Act), have multiplied in response to climate change. Industrial policy can be inflationary since it draws capital away from where it might otherwise have landed.
  • New energy players will need to scale dramatically and work collaboratively with incumbents in the sector. There will be a need for traditional energy for the foreseeable future.
  • Regulatory matters remain a challenge. Stakeholder management is critical to delivering successful long-term projects in today’s environment.
  • As people consume more data, there will be an increase in demand for energy to support the technologies associated with that consumption. As a result, energy costs will continue to rise, becoming a higher percentage of balance sheets for technology-forward companies. This could result in the rationing of data consumption in the future.
  • There was widespread agreement among both traditional and renewable energy players that the pervasive mindset of if it isn’t broken, don’t fix it, is changing to it will eventually break, so let’s think about how to fix it sustainably.
  • Capacity and scale matter. However, being a fast follower, rather than a first mover, can be beneficial where there is little precedence for regulatory approval and social license to operate hasn’t yet been granted from the community.
  • Renewables producers can barely meet demand growth in the market. Green hydrogen projects are expected to go global; and offshore wind will continue to scale as companies look for wind hubs rather than single farms.
  • In global markets, legacy utility infrastructure can be a fundamental barrier to growth in renewable energy. Yet, some players are generating base load renewable power for utilities by combining wind and solar for less than the cost of coal.
  • A bright spot ahead? The (positive) role of technology in driving innovation and catalyzing change.

At CPP Investments, we believe that betting on a single piece of technology today is a fool’s errand—this view was reinforced by participants. We believe that we need to be nimble and agile and invest in various technologies that will allow us to keep pushing the global economy toward a net-zero future.

For more information about our Sustainable Energies Group, contact Bill Rogers.

Watch clip with Bill Rogers here. 

My take: How dare you host this in Alberta? They're the enemy now (/sarc). 

In all seriousness, great insights, however, was anything discussed on how pension funds can advance nuclear energy projects around the world?

3) CPP Investments sold stakes in German offshore wind assets:

Toronto, CANADA (November 3, 2023) – Canada Pension Plan Investment Board (CPP Investments), through its wholly owned subsidiary CPPIB Renewables Europe S.à r.l, today announced it has agreed to terms with a wholly owned subsidiary of Enbridge Inc. to sell its 24.5% stake in two German offshore wind assets, Hohe See and Albatros.

The wind farms are located approximately 100 kilometers from the German North Sea coast and began operating in 2019 and 2020. Together, the wind farms produce a combined 2.5-million-megawatt hours of electricity, supplying energy to more than 700,000 households. CPP Investments acquired its interests in the assets as development projects from Enbridge in 2018 as part of a broader renewable power partnership that continues in other areas of Europe and North America.

“Since our initial investment in these assets in 2018, the European offshore wind market has continued to mature and we’ve realized solid returns during our ownership,” said Bill Rogers, Managing Director, Global Head of Sustainable Energies, CPP Investments. “The renewable energy sector, and offshore wind specifically, remains an important investment strategy for us, and we will continue to seek opportunities in the sector that best fit the scale and flexibility of our capital.”

CPP Investments’ net proceeds from the transaction, after certain costs and adjustments, are expected to be C$374 million.

The transaction is subject to customary conditions and is expected to be complete by the end of 2023.

See press release here.

4) How can investors be resilient to market trends? What role could AI play in the investment decision-making process? How can investors help tackle climate change? In a recent FCLTGlobal podcast on “Long-term Investing in a Changing World," Jonathan Hausman, Ontario Teachers’ Executive Managing Director of Global Investment Strategy, spoke with host Sarah Williamson about managing uncertainty and normalizing change as two ways investors can prepare for rapid change and unknown challenges.

Below, read an abridged version of Hausman's interview with FCLTGlobal, including his take on the biggest trends influencing investment strategies:

Ontario Teachers' was a pioneer of the modern public pension model. What are some of the drivers behind its success?

The model originated from Ontario Teachers' Pension Plan in 1990. The Government of Ontario, one of two sponsors of Ontario Teachers' (the other is Ontario Teachers’ Federation), decided it was better for pension assets to be invested and managed by an organization that was independent from its sponsors. Our two sponsors also made the decision to bring on a professional board and management to oversee the Plan.

The 1990s also saw a period of real innovation in asset management, which we were part of. We brought our asset management responsibilities in-house – delivering a cost advantage to our members, which are the active and retired teachers in Ontario – and adopted a more rational model of allocating capital to drive long-term returns for our members and meet a specific defined benefit objective. 

How do you keep that long-term focus, while adapting to the very important trends that continually arise?

It’s important to remember, and something that is continually top of mind for us, that we serve one client. Our long-term focus is grounded in delivering on our mandate and promise to our members – it’s a long-term mindset to meet a long-term objective.

One thing we’ve tried to do is create capacity and bandwidth around tracking long-term, secular trends. We want to be able to surf these trends. You can't anticipate them completely, but you can try to navigate them in ways that can provide you with a greater alpha result than others. We are focused on three components of this strategy: prepare, act and innovate.

Prepare means you put thought and energy (and pre-work) into trying to make your organization resilient in the face of things that you can't anticipate. And that means bringing together folks who may be working in different silos to think about the implications of various potential shocks and then trying to build that musculature inside the organization.

Act is all about conviction. There's no formula for investing in this era, in my opinion. You can only do that by learning and recognizing you don't have all the answers. It's working with partners and outside experts who may have more specialized knowledge than yourself and building conviction inside the organization so that you can act.

And innovate is about being open to different ways of doing business and building the capabilities to capture opportunities that arise out of change. This is what we are working towards because we recognize that we are in a different investing era today. 

What are some of the trends you're monitoring at the moment?

One trend we're watching closely is artificial intelligence (AI) and how it may disrupt the business environment, and likewise how it can enhance our approach to investing. The latest advance in AI, Generative AI, dramatically reduces the cost of prediction, which will have extensive impacts on a wide variety of businesses. Meanwhile, this tool can significantly enhance our approach to investing and value creation by helping us to separate the “signal” from the “noise”. We believe those who build facility with these tools will be better able to navigate the marketplace than those who do not. So we need to move with some dispatch, as this technology will rapidly become table stakes. You don’t want to get left behind.

Another trend is the shift in the geopolitical paradigm. Previously, we lived in a hyper-globalized environment. The rules of the global game all felt like they were going in the same direction: Open markets, open societies, open capital. But the underpinnings of this system, including a rock-solid US security guarantee and multilateralism are fading, and the global system is becoming more fragmented. This has greatly increased complexity and made it difficult to have conviction in as many geographies.

The answer is focus. While we invest in many countries, we've been able to reduce the number of geographies in which we're focused and develop real conviction within those geographies. And for each of these strategic countries, we have a plan, and we try to stick to it. 

Investment in climate, specifically in biodiversity, is another big trend. How has your climate strategy developed in recent years?

We believe increasing the positive environmental impacts of our activities plays a critical role in protecting the long-term value of our investments. You must believe that you can make a difference – with the companies you own and with the assets you have under management. Mitigating climate change doesn't happen through words, however. It happens through action. As active managers, we believe in working with our portfolio companies to improve their climate strategy rather than simply divesting. We see the solution as engaging with the companies we own – regardless of size – and taking an active approach, whether through working with management of the private companies we own, or through proxy voting with the public companies we own.

We also recognize that tackling climate change is a process, but it is one that requires discipline and clear targets. We have therefore set clear interim net zero goals for 2025 and 2030, of reductions of carbon intensity of 45% and 67%, respectively. We’re also utilizing our investment levers to tackle emissions well beyond the portfolio footprint of Ontario Teachers'. To do this, we've allocated approximately $5 billion to High Carbon Transition (HCT) assets to accelerate decarbonization of high emitting businesses. We think this makes good business sense as well as having a strong impact.

With regard to biodiversity, we believe this is gaining currency worldwide, much in the same way climate change did 15 years ago. Our aim is to look at this as a growing market that can have a real impact. For example, we've invested in GreenCollar, which works with landowners and managers throughout Australia to develop projects in such areas as regenerative farming and stewardship of land to enhance natural capital which it then monetizes through carbon credits. 

Listen to Jonathan's full podcast here.

5) The Caisse de dépôt et placement du Québec has signed a deal to acquire a 695-kilometre power transmission network in central Brazil in a transaction valued at up to $108.5 million.

The Quebec fund manager says Integração Transmissora de Energia SA (Intesa) will be integrated into Verene Energia, its Latin American power transmission platform.

Intesa’s network extends across central Brazil and is equipped with two substations.

The transaction is expected to close by the end of the year, subject to customary closing conditions and approvals.

CDPQ says the deal is its second power transmission investment in Latin America in the past 18 months.

It follows the acquisition of nearly 1,100 kilometres of power lines in Brazil and Uruguay.

See press release here

6) At the recent QEMP Conference and Networking event in collaboration with CDPQ, the global investment group announced its ambition to more than double the size of its assets entrusted to Québec external managers to as much as $8 billion by 2028.

This renewed ambition is in line with CDPQ’s recent announcement that it was increasing its commitment to the Quebec Emerging Manager Program (QEMP), as well as with its overall objective of reaching $100 billion in investments in Québec by 2026. With these additional funds, CDPQ is looking not only to capitalize on Québec’s financial expertise by drawing on the existing pool of local talent, but also to serve as a catalyst for performance and innovation and contribute to the growth of the asset managers industry in Quebec.

Québec’s economic development is at the heart of CDPQ’s mission. This means taking advantage of a variety of tools and expertise, including external asset management by local talent, an industry in which we want to create new partnerships and pursue our portfolio diversification strategy.”
- Kim Thomassin, Executive Vice-President and Head of Québec

To increase our commitments, we want to rely on established managers that perform well in their investment universe and have the expertise needed to take advantage of new market trends over the coming years. This new ambition reflects not only our desire to continue working with emerging managers, but also to keep pace with their growth.”
- Mario Therrien, Head of Investment Funds and External Management

My take: I remain supportive but highly skeptical of the Quebec Emerging Manager Program (QEMP). To be blunt, I hear the performance is lackluster. I'd like to see the performance of all these managers since inception (make it fully transparent). The same goes for CPP Investments' program to seed new hedge funds, although that program is seeding top fund managers from all over the world with a long track record (still, make their performance fully transparent).

7) Canadian Finance Minister Chrystia Freeland will seek to challenge Alberta Premier Danielle Smith's plan to pull her province out of the Canada Pension Plan (CPP), in a meeting with provincial and territorial counterparts on Friday. Read Reuters article here.

8) Stefane Marion, Chief Economist and Strategist at the National Bank wrote this in a Hot Chart this past week going over how our domestic pension funds continue to shun domestic equities:

Data recently released by Statistics Canada showed that the assets of our trusteed pension funds grew to $2.2 trillion in the first quarter of 2023 (equivalent to 80% of GDP). As most of the growth was once again concentrated in foreign assets, the share of Canadian assets in the total fell to an all-time low of 41.1%. As today's Hot Chart shows, Canadian holdings are less than half of what they were in the mid-1990s. In equities, the disinterest of pension funds has been even more brutal, with their exposure to Canadian equities falling from 77% to a paltry 22% of total equities. While we understand the need for international diversification, a balance is needed at a time when the decline in Canada's GDP per capita is being exacerbated by a decline in our capital stock due to surging FDI outflows from Canada. As Peter Letko, a respected Canadian portfolio manager, recently pointed out, "a country that stops investing in its future on the basis of diversification alone will wither". Interestingly, we note that the World Bank recently ranked Canada as having one of the highest regulatory quality indexes in 2022. On the basis of governance alone, we believe there is a strong case for our pension funds to invest more domestically. For those still wondering, the “G” in ESG stands for “governance”`.

I think this debate about how much Canada's large pensions invest in domestic equities is getting a bit stale and we are missing important points.

I went over them on LinkedIn with Stefane and others and you can read my replies here.

Importantly, when looked broadly to include fixed income, real estate, private equity and infrastructure, Canada's large pension funds invest more than their share in Canada. 

Yes, they have been reducing their equities holdings in Canada but it's part of a larger strategy to invest less in public markets and more in private markets.

Here are the top stories on investments this week:

1) Billionaire investor Stan Druckenmiller said he’s bought “massive” bullish positions in two-year notes, as he’s become more worried about the economy.

In recent weeks, “I started to get really nervous,” Druckenmiller, founder of Duquesne Family Office, said in an interview with hedge fund manager Paul Tudor Jones at a conference last week. “So I bought massive leveraged positions” in the short-term notes, he said.

Druckenmiller has joined a number of prominent investors, including Bill Ackman and Bill Gross, in sounding the alarm about the economy lately. Ackman, founder of Pershing Square Capital Management, said this month that he’s unwound bearish bets on 30-year Treasuries, because “there is too much risk in the world.”

Read full article here.

2) “T-Bill and Chill” is the best strategy to investors can take amid the higher-for-longer interest rate environment, according to the so-called “Bond King” Jeffrey Gundlach:

In an interview with CNBC’s “Closing Bell” program on Wednesday, Gundlach—who has a net worth of $2.2 billion—according to Forbes, said that higher-for-longer interest rates could trigger a major economic crisis in the United States.

On Wednesday, the Federal Reserve held interest rates steady at a 22-year high of 5.25% to 5.5%. In September, the central bank warned that rates would need to be stay higher for longer than previously expected in order to tame inflation.

Gundlach told CNBC that the current federal deficit—which hit almost $1.7 trillion in fiscal 2023—was “completely unsustainable” in the current interest rate environment.

“Higher-for-longer means we have a massive interest expense problem in this country that is going to be, I believe, the next financial crisis,” he warned.

Read full article here.

3)  Treasury Secretary Janet Yellen disputed billionaire investor Stan Druckenmiller’s assertion that her department had made “the biggest blunder in history” by not taking advantage of near-zero interest rates to sell more longer-term bonds.

“Well, I disagree with that assessment,” Yellen said when asked to respond to the accusation during an interview on CNN Thursday night. She said the agency has been lengthening the average maturity of its bond portfolio and “in fact, at present, the duration of the portfolio is about the longest it has been in decades.”

And lastly a few tweets:

Alright, time to feed my little one who is growing fast (almost at 12 pounds after five weeks) and gets cranky like his daddy when he's hungry.

Below, Marlene Puffer, chief investment officer at AIMCo, joins BNN Bloomberg to talk about investment landscape, and how the institutional investor navigates economic backdrop.

Second, Josh Brown, Ritholtz Wealth, and Jeffrey Gundlach, DoubleLine CEO, join 'Closing Bell' with reaction to the Fed meeting and the market reaction to Fed Chair Powell.

Lastly, watch the 2023 fireside chat between Paul Tudor Jones and Stanley Druckenmiller.

Druck made a mint on his massively leveraged bullish bet on two-year notes this week but he needs to be more polite to Secretary Yellen.

Still, he’s right and doubled down on Friday:

“The only debt that is relevant to the US taxpayer is consolidated US government debt,” Druckenmiller said in an interview. “I am surprised that the Treasury secretary has chosen to exclude $8 trillion on the Fed balance sheet that is paying overnight rates in the repo market. In determining policy, it makes no sense for Treasury to exclude it from their calculations.”

It will go down in history as a major blunder not selling more long term Treasuries when rates were at zero.