Decarbonisation Culture
Head of Sustainability at CDPQ Bertrand Millot highlights the pension fund’s focus on decarbonising the real economy, as well as comprehensively divesting from the oil industry.
Caisse de dépôt et placement du Québec (CDPQ), the Canadian pension fund with net assets of C$434 billion (US$319 billion), recently completed its full withdrawal from oil production and thermal coal mining – thereby becoming one of the first institutional investors to have done so.
This achievement was one of several high points in the pension fund’s 2023 sustainable investing (SI) report, published in April. In addition, CDPQ has reduced the carbon intensity of its corporate portfolio by 59% compared to 2017, when it released its inaugural SI strategy. It also increased its green assets by 34% during the same period to C$53 billion, putting it within reach of its 2025 target of C$54 billion.
Back in 2017, CDPQ’s SI strategy covered the whole portfolio, with targets on investing in green assets and reducing its carbon intensity. But the pension fund exceeded the original targets by 2021, and decided to up its ambition.
“We also came to the realisation that operating under tight, rigorous medium-term targets makes it impossible to invest in brown-to-green strategies, as such strategies have the potential to substantially increase our carbon footprint,” Bertrand Millot, Head of Sustainability of CDPQ, told ESG Investor.
To address this issue, the fund created a C$10-billion transition envelope in 2021 to invest in decarbonising companies in the four highest-emitting sectors: transport, materials, power production, and agribusiness.
“We look for assets that have a clear transition plan and help them finance it,” said Millot. One example where CDPQ has provided such support is Australian energy company AGL Energy, which aims to replace coal-fired electricity with renewable energy generation by 2035.
CDPQ now holds C$5 billion in transition assets. Based on the decarbonisation plans of companies included in its transition envelope, the pension fund’s capital could help them reduce their collective footprint by 31% by 2030 and 85% by 2035, according to the report.
No more oil
While many asset owners are still debating the merits of divesting from fossil fuel companies, CDPQ made the choice to completely pull out of the oil sector (production and refinement) and thermal coal mining – used for electricity generation.
This is in line with commitments the fund made in its 2021 revised climate strategy, as well as with the International Energy Agency and the UN Intergovernmental Panel on Climate Change’s verdict on new oil projects being incompatible with global decarbonisation trajectories.
“While the oil sector initially talked about greening their operations and increasing investments in renewables, the industry backtracked around one-and-a-half years ago due to profitability challenges,” Millot explained. “At that point, we questioned the logic of continuing to engage with companies by telling them to stop doing what they do best. Instead, we are focusing our energy on engaging the companies that consume oil and working to reduce demand.”
In addition to divesting from oil, CDPQ plans to deepen its practice in the biodiversity space and expand the scope of its commitments in nature-positive themes. It has dedicated a C$2 billion envelope to sustainable land management in forest and agricultural land sectors by 2026. Among these assets, C$370 million are focused on carbon capture, wetlands restoration and species protection.
The pension fund is engaging with companies to halt deforestation and other harmful practices, encouraging them to reduce their impact and improve practices, especially in food production and other planted commodities.
“The brown-to-green path would be going from non-organic to organic farming practices, for example,” Millot said. “However, nature-positive themes are complicated, as they are very local and business-specific. For example, we will engage fast-food companies that source potatoes, fish, chicken, coffee, and wheat – which are six or seven very different conversations.”
Given the complexity of the conversations, CDPQ has undertaken various initiatives to improve its knowledge, working to close the data gap and develop the right tools for investment analyses. It is also taking part in several industry initiatives, such as the Taskforce on Nature-related Financial Disclosures Forum and Farm Animal Investment Risk and Return.
As well as new initiatives in the biodiversity space, the pension fund has recently adopted a social policy.
“We have previously done a lot of social work internally in our ESG and sustainability practices, but hadn’t formalised it in a separate social policy,” Millot said. “We want to further explore the subject, including looking at blended finance, as well as addressing housing issues and various other areas.”
CDPQ is also making good progress on diversity, equity and inclusion. According to its SI report, 46% of the fund’s employees are women and 57% of its actively managed public companies count at least 30% women on their boards of directors. In addition, its voting policy has changed to include another diversity indicator than gender.
A further focus area for CDPQ is tax. According to Millot, the pension fund is making “great progress” as one of a few institutional investors to have a policy on this issue. In 2023, it published 199 pre-investment opinions on tax practices.
“We want to ensure that the corporates in our portfolio pay their fair share of tax and contribute to sustainability in both economic and social spheres,” he added. “Governments need that money for social ends.”
Managing the data
While asset owners have access to environmental, social and governance (ESG) information from multiple sources – such as company disclosures and third-party data vendors – obtaining reliable and comparable data remains a challenge.
To address this, CDPQ has built a new tool for managing ESG data named ‘AGIR’, aiming to centralise and facilitate access to ESG information on its portfolio companies. According to Millot, AGIR will help drive greater efficiency and provide better analysis, as 85% of the fund’s portfolio is managed internally.
“While we have data from external vendors on public assets, their ESG standards are quite diverse and we might not subscribe to their views,” he explained. “Additionally, we don’t have any such data on private assets. Therefore, we decided to develop a tool internally that we can use with both public and private markets, which reflects our view and priorities.”
AGIR is based on the Sustainability Accounting Standards Board’s grid, which CDPQ has adapted to its needs, and aligned with the International Sustainability Standards Board standards. Importantly, the tool provides granular insight and separates three dimensions to determine whether the fund can invest or not: sector risk, corporate governance practices and product sustainability.
“For example, if you mix risk and corporate practices, all the mines end up with a poor rating because mining is inherently risky,” Millot said. “However, we will need mines – whether copper, lithium or iron – in the future, so it is important to understand which are engaging and improving. We need to have the granularity to decide where good practices are in place.”
The sustainability of the product also needs to be examined apart from corporate practices and risk, he explained.
“Questions around corporate governance practices, such as allowing staff to unionise or putting in place anti-corruption policies, need to be addressed whether the company produces electric vehicles (EVs) or operates a coal-fired power station,” Millot continued. “Obviously, the company producing EVs has a green product that is helping towards the transition, whereas a coal-fired power plant is not working towards the global agenda.”
He added: “AGIR provides greater granularity, which gives CDPQ a baseline to measure impact. Producing EVs is not an excuse for treating staff poorly – we need to have tools that allow us to measure these things and influence the companies.”
Collective ambition
Finding solutions for systemic, multi-faceted sustainability challenges such as climate change and biodiversity also requires involvement from governments, industry, civil society and finance.
“To make this happen, we need to build partnerships,” said Millot. “Even though CDPQ is big, we are small by global standards, so our voice alone is not going to carry much weight. We need the collective voices of like-minded people to actually move the needle.”
Millot commended initiatives such as Nature Action 100 and Spring – the UN Principles for Responsible Investment’s new stewardship initiative on nature – which he said helped the investment community develop standards and share methodologies.
“Industry collectives, with the assistance of academics and other experts, can help asset owners develop a common understanding of what best practices are and help move companies in the right direction,” he added.
The Net Zero Asset Owner Alliance, which CDPQ co-founded with Allianz, and the Sustainable Markets Initiative, is another good example. And, despite a few setbacks since launch at COP26 in 2021, the Glasgow Financial Alliance for Net Zero (GFANZ) should also survive, Millot posited.
“There are many different species of ‘finance animal’ involved: asset owners, which are long-term patient holders of capital; asset managers, which have fiduciary responsibilities aligned to their clients and more short-term horizons; and banks, which are essential to the financial system but highly regulated and with different priorities,” he explained. “The fact that these various groups need to talk to each other under the GFANZ umbrella and create common solutions, is a good thing.”
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