Investors Told to Embed Sustainability at PRI Event
Factors must be fully integrated if investments in public and private markets to support early-stage firms and those in transition.
Sustainability cannot be sidelined and must be integrated into investors’ core investment practices, according to investors speaking at the PRI in Person conference.
“If sustainability is seen as an adjacent activity to traditional investment practices, then it’s never going to work,” said Elsa Palanza, Global Head of Sustainability and ESG at multi-asset alternative asset manager Intermediate Capital Group (ICG).
As well as implementing process and team integration, some investment firms are tying related goals to remuneration to ensure the entire organisation prioritises sustainability themes.
“It was very important to us that we linked the remuneration of everybody at Caisse de dépôt et placement de Québec (CDPQ) to achieving our climate targets – we are one of the first investors to do this,” said Bertrand Millot, the Canadian asset owner’s Head of Sustainability.
Both were speaking at a panel session on putting net zero commitments into practice on the second day of the event, hosted by the UN-convened Principles for Responsible Investment (PRI) this week in Toronto, Canada.
Clear signal
As outlined in CDPQ’s ‘Sustainable Development Action Plan’ for 2023-28, its investment teams are required to adhere to a carbon budget by asset class to track the carbon intensity of the pensions provider’s total portfolio.
“It sends a very clear signal that climate is considered a huge investment opportunity and a long-term priority,” Millot said.
“As an asset owner, we need to manage the risks that are associated with climate change and with the energy transition, linking related targets not just to our investment teams, but to everybody at the firm – from IT to HR.”
Earlier this year, a benchmark study warned that several Canadian pension schemes have fallen behind global climate transition progress. However, CDPQ was identified as a climate leader following its decision to divest firms involved in oil production and refining and coal mining in 2022.
‘Green’ assets now make up 12.5% of CDPQ’s total C$452 billion (US$329.7 billion) in AUM. The asset owner has reduced its carbon footprint by around 60% since 2017, according to Millot.
“We have managed to invest in climate solutions and decarbonise the portfolio, joining collaborative initiatives [along the way], from the Net Zero Asset Owners Alliance (NZAOA) to Climate Action 100+ and the Sustainable Markets Initiative,” he noted.
Pushing the envelope
Millot said CDPQ is increasingly focused on supporting companies as they transition to more sustainable practices and business models.
“In 2021, we set another target to invest in brown to green [assets],” he said.
That year, CDPQ created a C$10 billion transition envelope which invests in decarbonising companies across transport, materials, power production and agribusiness.
“We now need to find ways to increase our exposure to brown sectors – so far, our transition efforts have been mostly in the power sector, such as coal-fired being converted to green sources, but we really need to shift to decarbonising on the real economy.”
CDPQ is a contributing member of the Emerging Markets Transition Debt (EMTD) initiative, which aims to invest US$400 million into emerging markets and developing economies’ energy transition across clean infrastructure, technology and decarbonisation.
The asset owner’s most recent sustainable investment report noted that it currently holds C$5 billion in transition assets and intends to reduce its transition portfolio’s collective carbon footprint by 31% by 2030 and 85% by 2035.
Companies of tomorrow
Palanza from ICG said investors should also integrate sustainability into their private markets, to equip the “companies of tomorrow”.
“We have the opportunity to go company by company and embed sustainability principles into their very fabric,” she said.
“As they grow larger, ostensibly, they might then become the next big listed and influential companies driving the global economy and [attracting large asset owners]. If sustainability is already part of their DNA at that stage, then that can only be a good thing.”
Last year, the Private Markets Decarbonisation Roadmap (PMDR) was launched to provide private markets firms with a common language and approach through which to decarbonise their business models and that of their portfolio companies. It includes an alignment scale to classify portfolio companies along the decarbonisation trajectory, with the intent to incentivise action.
Asset owners – including signatories of the NZAOA – are increasingly exploring sustainable investment opportunities in private markets.
A 2023 survey of 60 large asset owners indicated that over half of respondents planned to increase capital allocations to private markets, diversifying their portfolios via investments in infrastructure and sustainability-focused strategies.
To ensure better collaboration on sustainability, Palanza called for more communication between investors across public and private markets.
“I don’t think we have the connection points fully plugged in the way that we could – which is why conversations [between investors] are so important.”
CDPQ’s Millot said investors should work together on methodologies and tools to ensure a common language when engaging with companies on climate risks and opportunities.
“We also need to push governments in the same direction,” he said.
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