Charles Emond has a unique perspective on the powerful role that capital can play in driving change. He is the president and CEO of Caisse de dépôt et placement du Québec (CDPQ), which has worldwide investments of more than (US) $291 billion, including in pension funds, insurance plans, and other organizations in Québec. Emond came to the role in February 2020 with a commitment to invest sustainably while generating returns and helping develop the economy of tomorrow.As part of that commitment, Emond cochairs the Investor Leadership Network (ILN) CEO Council, representing the leaders of 14 global investment firms that want to help drive the transition to a more inclusive and sustainable low-carbon economy.
Emond recently spoke with McKinsey senior editor Diane Brady about his increased focus on addressing climate change and how that is shaping CDPQ’s investment strategy. An edited vesion of their conversation follows.
McKinsey: What inspired you to take on this leadership role at ILN?
Charles Emond: From the pure organizational perspective, this initiative is dear to our hearts. ILN is focused on concrete actions, giving investors tools to assess and incorporate climate risk into their portfolios. Here are the sectors that produce the most carbon and the levers that reduce it. As a portfolio manager, it helps you assess a company’s disclosure. Is it credible? Is it complete? Disclosure is absolutely key to making informed decisions. It helps to drive a conversation.
McKinsey: Your companies have invested in ESG [environmental, social, and governance] for years. What’s changed?
Charles Emond: A CEO recently told me that, a year or two ago, ESG was the last question that would come up in [an investor] meeting, if there was time. Now those meetings start with that question. We have 42 depositors that care about these issues and trust us to manage their money. We have this commitment to be carbon neutral by 2050. To drive sustainable and inclusive growth, it’s helpful to have a grid and act accordingly.
To meet our commitment to be carbon neutral by 2050, we need to act now. In 2017, we really focused our climate strategy on three things. The first was increasing investments in low-carbon or greener assets by 80 percent. We doubled our target so that today we have about $26 billion in those assets. We’re one of the top investors in the world in renewables. The second target was reducing our carbon intensity by 25 percent by 2025. Today, we’re at 21 percent. The third was ensuring that leadership aligns with the low-carbon transition.
The team has annual carbon targets that impact their compensation. We give an ESG report to our depositors and the public. Instead of being a constraint, having these targets tied to compensation has become a source of pride.
It’s moved from being a “nice to have” to a “need to have.” For shareholders, it’s no longer peripheral. There’s a vast and growing number of people who demand it. Increasing low-carbon assets is easy. When we invest in a wind farm or light-rail transit, everybody applauds. Reducing carbon intensity can be trickier. The reality is that some sectors pollute more. We think it’s important that investors not run away from those problems but confront them and help companies transition to cleaner output. The question is how to do it. That’s why we’re measuring our impact not only from greener assets but also from helping the transition of the real economy underneath. You’ve got to have both.
McKinsey: What’s the outlook for the fossil-fuel industry in terms of attracting capital?
Charles Emond: Transition is the key word. We closely monitor sectors with high carbon emissions. As long-term investors, we are working to accompany companies on this important transition. We expect to see improvements and are helping them to identify more sustainable business opportunities and drive effective change.
McKinsey: How do you work with companies to help them make this transition?
Charles Emond: A few years ago, talking about emissions was like raising a sensitive topic to an old friend. Now that friend likely understands the importance. It’s no longer a conversation about the need to change but rather the pace of change. You can influence that through a dialogue with the management team. You can also use your votes, which speak loudly. We help them set targets and identify sustainable opportunities. We ask them to stop harmful practices, if there are any. And we tell them to improve disclosure.
In November of last year, we announced a new policy governing the exercise of voting rights for public companies. It targets 300 companies in our portfolio in about 28 countries. It sets our expectations in areas such as disclosing climate risk. We give people time to change, but it’s meant to have some teeth because the clock is ticking. So it’s a balancing act. We’re supportive, but we also provide what I’d call “healthy tension.”
McKinsey: Do you see this as a fiduciary duty or a moral duty?
Charles Emond: Whether you’re an investment manager, pension fund, or a portfolio company, if you don’t act according to these new standards, it’s going to impact your revenues. Increasing inequalities impacting minorities, younger people, and women will affect your long-term growth and our collective benefit. We’re not creating an ecosystem that sets winning conditions. It’s arithmetic. And this is the right thing to do.
McKinsey: Are you worried about climate change on a personal level?
Charles Emond: Yes. Absolutely. We believe the clock is ticking, and science is clear about that. I don’t need numbers to get worried, but they can get you even more worried. In Canada, the weather-related costs of the last decade alone are double the total cost of the past 30 years. And Europe’s got the hottest year on record. So it’s like compounded interest here. At some point, there’s going to be a limited ability to reverse this trend.
We’re managing the pensions of six million Québecers. We owe it to them and to future generations to invest in making this transition. Also, I have two kids. And even though they’re young, they’re sensitive to these issues.
McKinsey: What do you think is the role of regulation in addressing these issues and in driving the behaviors you want to see in your portfolio companies?
Charles Emond: You always need regulation. As Jean said, governments can help set up a framework so that behaviors adapt accordingly, or there’s an incentive to move in a certain direction. Then I think the private sector is sometimes better equipped to set that into action.
The voting policy I talked to you about spells it out. Our preference is to engage with companies, to lead by example and benchmark our own progress, to give investors relevant tools, and to endorse the behavior we’re looking for.
And that’s why we think that the climate-change initiative is so important, because it will speed up the use [of carbon-reducing tools.] Do I see a need for regulation? Yes. It’s part of the solution, but it doesn’t bring you to the final destination, in my mind. You need widescale endorsement of these objectives.
McKinsey: How should investors measure the success of their portfolios going forward?
Charles Emond: You’ve got to anchor it on principles, moving from capital to constructive capital. That means taking a broader view of investment. Depositors need solid returns over the long term, and factoring in climate change is part of that. Now there is another layer whereby you take a step back and say, “What is the impact that’s coming with our investing? Is that directionally positive? Is that in line with our core values?” These are all difficult things to measure, but there’s a sanity check on top of all of it at that end that is an important element.
McKinsey: If I’m a CEO of a company, what do I need to do to get more of your money?
Charles Emond: Well, I’d say get ahead of the curve. Show leadership in your industry and ambition that will bring in capital, and hence, good returns. When there’s an important trend, differentiate yourself. Best-in-class companies in every sector attract capital and differentiate themselves.
That’s about competitive positioning, which is a language that CEOs can relate to. The mindset is also shifting. The sales pitch needs to be less focused on the bad things that might happen if you don’t do something, and instead focus on the good things that could come if you do something.
There are a lot of possibilities out there. To me, it’s about showing leadership and conviction, not just checking the box because you have to. If we take climate change as an example, it is a factor that is here to stay and will become more and more material in the future. Whether we are talking about transition or physical impacts, companies that today are fully integrating the climate factor within their strategies to help identify opportunities and mitigate risks have a better chance to outperform in the future.
McKinsey: What is your message to CEOs?
Charles Emond: This train is not reversing. It’s here to stay, and it’s going to accelerate. We talk about that with leaps forward in technology. It’s also happening with climate and ESG. These issues are here to stay and may actually represent the biggest investment opportunity.
There’s a Venn diagram in which doing the right thing actually creates a good outcome. I think we’re at this juncture; this crisis probably made us realize a lot of important things at an important moment. We can’t miss this opportunity or let that momentum drop, because it will have an impact for generations to come. It’s a privilege to invest people’s money, but it comes with responsibilities.
This is an excellent interview with Charles Emond and I am happy he really got into it with McKinsey’s Diane Brady.
Notice the tone of the conversation? This is where we are going, the clock is ticking, we need better disclosure and actions now, this train is not reversing.
There's an urgency and seriousness to the discussion without being overly alarmist or sensationalist.
Moreover, unlike US public pensions caving into the politics of divestment, Charles Emond and his Canadian counterparts are clear, divesting out of fossil fuels is off the table, preferring instead a strong engagement with an action plan to measure success in sustainability over the long run.
Quite frankly, divesting out of fossil fuels is easy but it's stupid and shortsighted. It goes against the fiduciary duties of these large public pensions to maximize returns without taking undue risks and it only shifts the risk off to a private fund that probably doesn't care about ESG and impact investing.
Engaging with high carbon polluters means putting pressure on them to disclose emissions and to figure out ways to reduce them to achieve carbon emission reduction targets.
This will also involve investing in new technologies to reduce emissions, something Leo de Bever recently discussed on my blog.
Late this afternoon, the first federal budget in two years was released in Canada, and as expected, the federal government promised more than $17 billion in climate change programs, much of it in the form of incentives to encourage heavy industry to curb their emissions and grow Canada’s clean technology sector (Michael Sabia pays close attention to Leo de Bever, which is a good thing!).
But as Charles Emond and Jean Raby rightly note, governments can only help set up a framework, incentivizing companies to move a certain direction, but the private sector is better equipped to set that into action.
I don't just believe that for climate change, I believe it for all aspects of ESG investing, including hiring more people with disabilities which I touched upon on Friday when I discussed John Graham's letter to Canadians.
"Oh Leo, you make leaders uncomfortable when you talk about diversity and inclusion and how people with disabilities are systematically discriminated against."
And, so what? Let me make this crystal clear, this blog expresses my opinions and it's not just about pandering and praising Canada's large pensions or avoiding hard discussions.
And this blog is a powerful platform, I will give a voice to those who are unheard and have been systematically discriminated against. Period.
I strongly feel that Canada's large pensions and other large private and public organizations can do more to hire more women, blacks, ethnics, aboriginals, LBGTQ+ and especially people with disabilities at al levels of their organization.
Going from 0% of people with disabilities to 1, 2 or 3% is a step in the right direction. It won't be done overnight but with technology, there's simply no excuse for not hiring more people with disabilities.
It's like that panel discussion at the CFA Toronto's 2021 Spring Pension Conference last week which CN Investment Division’s CEO Marlene Puffer moderated featuring Donna Mathieu, VP, CIO and Treasurer of NAV Canada; Rachel Volynsky, CIO Mercer Delegated Solutions and Fiona Frick, CEO of Unigestion.
At one point they were talking about why more women are not being hired and someone said "it's because they're underrepresented in the CVs they receive."
As Marlene Puffer noted, "it's simply math", if you receive a stack of resumes and only 5% are women, no wonder more women are not being hired.
Similarly, if you receive a stack of resumes with zero people of disabilities, you will never hire a person with disabilities.
"Well, Leo, it's tricky, we can't treat people with disabilities the same way we treat other employees."
Excuse me? Would you ever dare say that to a black or gay employee? These are ridiculous excuses expressing strong and erroneous biases! People with disabilities don't want to be treated differently because of their disability, they might ask for minor accommodations which is well within their legal right but most importantly, all they ask for is for equal opportunities at being hired/ promoted based on their abilities to deliver the same output.
Why am I bringing this up again? Because ESG investing is taking off, everyone is jumping on the bandwagon, including BlackRock and Vanguard, but like Charles Emond, I want to see this translate into concrete actions, not just in the "E" but the "S" of ESG.
And that means benchmarking, taking a hard look within your own organization and coming up with a concrete action plan.
Alright, let me get something else off my chest. Le Devoir put out an article (in French) that more than $14 million was paid to CDPQ's senior managers in 2020 and that Charles Emond received a total compensation of $3.45 million.
Last week, CDPQ released its Annual Report for the year ended December 31, 2020, titled Constructive Capital (the English version will be available this week).
In the French version, the media harped on executive compensation:
But as I keep reminding people,compensation is benchmarked to industry standards and it is primarily based on achieving long-term performance targets.
And while CDPQ pays its senior executives very well, they're slightly underpaid relative to their counterparts in Toronto and it's not because of performance issues (not saying they're not being paid very well or up to industry standards, just calling it like I see it).
Quebec's media loves harping on executive compensation at CDPQ without giving proper context. I see the same thing in British Columbia where the media go after BCI's executives every year.
These are large sophisticated pensions investing across public and private markets, the work is grueling, the pressure is on to execute and deliver, and it's a very competitive market (banks, private funds, etc.), so they need to compensate their employees properly to attract and retain them.
If you're going to pay civil servant salaries, nobody is going to want to do these high stress jobs, and it will be reflected in the long-term results.
Alright let me wrap it there, think I've stated enough.
Remember to read my recent conversation with Charles Emond to gain more insights on his vision, strategy, focus on execution and how he likes to lead this important organization.
Also, today I read that CDPQ has acquired a 15% interest in the Indiana Toll Road (“ITR”) from a subsidiary of the IFM Global Infrastructure Fund (“IFM GIF”). Following completion of the sale, IFM GIF continues to own more than 70% of ITR:
The Indiana Toll Road is a 157-mile (252 km), limited access, divided highway in the state of Indiana which is operated and maintained under a Concession and Lease Agreement with the Indiana Finance Authority (“IFA”). The road spans northern Indiana, from its border with Ohio to the Illinois state line near Chicago, feeding directly into two toll roads at the state lines – the Chicago Skyway in the west and the Ohio Turnpike in the east. Since IFM’s acquisition in 2015, ITR has successfully undergone the largest capital improvements to its roadway and structures since its original construction (Project “PUSH” or “Pavement Upgrade for a Superior Highway”). The Concession and Lease Agreement grants the concessionaire the exclusive right to collect toll and other revenues from the toll road for the next 60 years.
CDPQ and IFM Investors share similar objectives, having invested together across geographies in sectors such as ports, roads and energy.
“The success of this transaction demonstrates the high-quality nature of the ITR and the significant value adding initiatives that IFM Investors has undertaken since acquisition of the asset in 2015. We are delighted to welcome CDPQ, another like-minded, long-term partner into this key piece of U.S. infrastructure,” said Kyle Mangini, Global Head of Infrastructure at IFM Investors.
“ITR is a critical channel for the flow of goods in the United States whose resilience and importance for the logistics industry have been demonstrated in recent months. It will be as essential as ever as the economic recovery takes off,”said Emmanuel Jaclot, Executive Vice-President and Head of Infrastructure at CDPQ.“We are delighted to once again team up with a business partner of IFM’s caliber to ensure the success of this high-quality asset.”
Another great infrastructure investment with a solid partner for Emmanuel Jaclot and his team.
Let me end with some good news. The CDC says fewer than 6,000 Americans have contracted Covid after being fully vaccinated:
U.S. health officials have confirmed fewer than 6,000 cases of Covid-19 in fully vaccinated Americans, Centers for Disease Control and Prevention Director Dr. Rochelle Walensky said Monday.
That represents just 0.007% of the 84 million Americans with full protection against the virus. Despite the breakthrough infections, she said the vaccines are working as intended.
“With any vaccine, we expect such rare cases, but so far out of more than 84 million people who were fully vaccinated, we have only received reports of less than 6,000 breakthrough cases,” Walensky told reporters at a press briefing. Breakthrough cases occur when someone contracts the virus more than 14 days after their second shot, she said.
The CDC chief acknowledged that the number could be an underestimate.
“Although this number is from 43 states and territories and likely an underestimate, it still makes a really important point, these vaccines are working. Of the nearly 6,000 cases, approximately 30% had no symptoms at all,” Walensky said.
“This is really encouraging encouraging news. It demonstrates what we’ve already discussed about these vaccines. They also help prevent you from getting seriously ill,” she said.
Out of the 6,000 or so breakthrough infections, 396 people were hospitalized and 74 people died, according to CDC data released last week.
Half of all American adults have received at least one dose of the coronavirus vaccine. Of those age 65 and older, 81% have received one dose or more and about two-thirds are fully vaccinated.
Remember to get your vaccine as soon as you can, it can literally save your life if you contract Covid.
I received my first jab late last week, Moderna's vaccine, and exhibited minor discomfort. The procedure is a joke, took 5 minutes, waited 15 minutes and left to go home but that night I felt off (mild flu-like symptoms), didn't sleep well as I was hot and my left shoulder was hurting (these reactions fully subsided after two days).
The nurse reminded me I'm not fully vaccinated till my second (or in my case third) dose and to continue exercising extreme caution (no need to tell me, I hardly leave my house and we order our groceries online).
The point is the vaccine rollout in Canada is finally gaining steam and I urge everyone to stop listening to scary media stories and to go get vaccinated as soon as possible. Then, hunker down and wait, still following all public health guidelines.
Below, an interesting clip where McGill professor Henry Mintzberg talks about why we need action on this pandemic, linking pollution to the spread of COVID-19. Take the time to watch this.