The Canada Pension Plan Investment Board, which invests on behalf of the country’s CPP pension scheme, used its influence as a major institutional investor to push 35 companies to make “material“ commitments and improvements to climate-related disclosures and practices in the past year, according to its latest report on sustainability investing made public Wednesday.
Officials at Canada’s largest pension voted against 65 directors at 35 companies where they “concluded the board failed to demonstrate adequate consideration of physical and transition related impacts from climate change,” the report said.
CPPIB, which invests in public and private companies including direct investments, voted in favour of climate-related shareholder proposals that sought deeper disclosures on topics such as operational emissions management, asset portfolio resilience and public policy, the report said.
Richard Manley, managing director and head of sustainable investing at CPP Investments, said the approach with public companies in the portfolio is to articulate clearly how the Canadian pension believes sustainability-related factors should be integrated to inform strategy and enhance returns or reduce risks in the business.
“As a global investor, we proactively identify dynamic and emerging material business risks and opportunities and seek solutions to reduce or capture their potential within portfolio companies and align incentives,” he said in a statement.
When CPPIB officials do not see a concrete plan, they approach the company to see if anything is in the works that has not been disclosed. Sometimes that results in immediate progress, as it did last year with a large Asian company engaged in logistics and procurement that had a “very considerable… electricity emissions-related footprint,” Manley said in an interview.
“So this was a business that really needed to be doing more than was clear they were doing — but the engagement yielded very real insights.”
If a company does not have a concrete plan, even after engagement, the pension giant has an “escalating” response — first put in place in 2021 — that begins with a vote against the chair of the risk committee of the board, or whichever committee is deemed to be the logical one for developing such a strategy. If nothing further is done by the following year, CPPIB casts its vote again the whole committee and can ultimately vote against the entire slate of directors, Manley said.
Over the past year, the Canadian pension also expanded its voting practice of pushing for more female representation on boards of directors by including two additional countries: South Africa and New Zealand.
“We expect to apply a… 30 per cent threshold to more countries and markets in the next few years including in emerging markets,” the sustainability report said.
For CPPIB, which has a mandate to maximize investment returns “without undue risk of loss” and had net assets of $523 billion at the end of June, sustainable investing means following the objectives set out in its governing legislation against the backdrop of escalating climate risk, the report said. This includes looking for opportunities presented by the transition to a greener economy and towards net zero emissions targets set by companies, investors and government.
“Maximizing the long-term value of a business today requires boards and executives to anticipate and manage a highly dynamic environment,” said John Graham, chief executive of CPP Investments. “Our sustainable investing approach helps to protect the retirement savings of the nation’s workforce.”
In February 2022, CPPIB committed to ensure its portfolio and operations are net zero of greenhouse gas emissions by 2050. On Wednesday, pension management officials reiterated that they plan to do this by continuing to invest in companies across all industries “that are driving and demonstrating carbon-reduction innovations” and practices CPPIB believes will lead to “enhanced risk-adjusted returns.”
Shortly after Graham took over as CEO last year, he said CPPIB had no plans to institute a blanket divestment of oil and gas assets during his tenure, in part because he believes science will find solutions to many of the issues that have made environmentalists and some investors question such holdings.
“Simple divestment is essentially a short on human ingenuity,” he said in April 2021, adding that there are “incredibly bright, talented” scientists and engineers in the oil and gas industry.
By contrast, Quebec’s Caisse de dépôt et placement du Québec has committed to divest all its oil production assets by the end of this year. When this was announced in the fall of 2021, the assets were valued at $3.9 billion.
Targeting companies over environmental, social and governance (ESG) issues has been a powerful tool used by institutional investors, but there has been some pushback recently from large global investors. For example, Blackrock, the largest asset manager in the world, said last spring it was likely to vote in favour of fewer climate proposals from companies in its investment portfolio this year than it did in 2021.
CPPIB’s Manley said he thinks the term ESG, which gained traction around 2004, is opening the door to debate and pushback because there are many different interpretations and applications that can stray from fiduciary responsibility and value creation.
“Unfortunately, the abbreviation ESG has become a lightning rod,” he said. “For some people, it’s exclusion, from some others, it’s avoidance of worst in class. For others, it’s an orientation towards the best in class.”
But he said there should be no confusion or debate about ensuring management teams proactively identify and mitigate risks and identify and capture opportunities, which will result in the most informed business decisions and best outcome for companies regardless of the terminology used.
“I don’t see there’s a debate to be had about that,” he said. “That’s just good business in this new century.”
Schroder Investment Management Ltd., a global asset manager, released an annual survey Wednesday that found 56 per cent of Canadian investors believe investing sustainably is the only way to ensure profitability for the long term.
The Schroders’ Global Investor Study surveyed more than 23,000 investors, including 1,000 in Canada.
Canadian investors put more emphasizing on investor engagement on climate issues than their counterparts in the United States, according to the study, with 63 per cent of Canadian investors listing climate efforts including decarbonization and physical risks as one of the top three most important areas investors should engage on with companies, compared to 59 per cent of U.S. investors.
Earlier today, CPP Investments published its 2022 Report on Sustainable Investing:
- Reinforces our approach that factors relating to communities, environment and stewardship, including climate change, are increasingly impacting the strategic, operational and financial profile of companies around the world
- Reaffirms our Net-Zero 2050 commitment; on track to achieve carbon neutrality for our internal operations by the end of fiscal 2023
- Reports on how our engagement has contributed to material commitments and improvements on governance and climate-related disclosures and practices at public companies globally
Toronto, Canada (September 28 2022) – Canada Pension Plan Investment Board (CPP Investments) has published its 2022 Report on Sustainable Investing, which focuses on how we achieve clear objectives set out in our legislation against the backdrop of escalating climate risk, and opportunities presented by the whole economy transition towards sustainability.
“Our sustainable investing approach helps to protect the retirement savings of the nation’s workforce,” said John Graham, President & CEO, CPP Investments. “We continue to manage the dynamic and emerging material business risks and opportunities to maximize the value of the CPP Fund for the long term.”
In our 2022 Report, we focus on three key areas: sustainability-related considerations in the investment life cycle, our net-zero commitment and how our active ownership delivers results.
“For public companies in our portfolio, we articulate clearly how integration of sustainability-related factors should inform strategy and enhance returns or reduce risks in the business,” said Richard Manley, Managing Director, Head of Sustainable Investing, CPP Investments. “As a global investor, we proactively identify dynamic and emerging material business risks and opportunities and seek solutions to reduce or capture their potential within portfolio companies and align incentives.”
Sustainability-related Considerations in the Investment Life Cycle
Sustainability-related factors, including climate change, are increasingly and more directly impacting the strategic, operational and financial profile of companies around the world. The investment and asset management teams at CPP Investments integrate material sustainability-related factors both before making investments and during the period we hold the asset, as well as when our portfolio companies prepare for listing.
Since these considerations can significantly affect our assessment of a company’s risk profile and value, they are critical in determining the attractiveness of a potential investment and how we can best manage an asset once acquired. On an ongoing basis, we seek to assess, understand and address the wider factors affecting business performance – whether those are factors relating to society, environment or stewardship.
Net-Zero Commitment
In February 2022, we committed our portfolio and operations to being net zero of greenhouse gas (GHG) emissions across all scopes by 2050. Our Climate Change Principles continue to guide our decision-making so we can achieve important goals governments bestowed on us against the backdrop of escalating climate risk and opportunities by supporting the transition of the whole economy towards a net zero future.
We expect to achieve carbon neutrality for our internal operations by the end of fiscal 2023. We are conducting an Abatement Capacity Assessment on our own operations to help inform our approach to reducing absolute GHG emissions over time. We have also begun the process to procure high-quality, additional, verifiable and permanent carbon credits, as needed, to offset our operational emissions and achieve carbon neutrality. We will continue to monitor the breadth, quality and reliability of emissions data as this space continues to rapidly evolve.
Our diversified investment strategy affords us the flexibility to invest in all types of climate change opportunities across all asset classes. Our patient, productive and engaged capital is necessary to enable hard to abate sectors of the economy to transition. We will continue to invest in companies across all industries that are driving and demonstrating carbon-reduction innovations and practices that we believe will lead to enhanced risk-adjusted returns. Investment opportunities in the whole economy transition include, but are not limited to, energy systems, built space, industry, mobility, carbon markets and investments based on changing consumer preferences.
Active Ownership Delivers Results
We seek to fulfill our stewardship responsibilities as an active owner, and we convey our views to boards of directors and management of public companies at annual and special meetings of shareholders. During the period covered by the report:
- We voted on over 41,000 agenda items across over 3,800 meetings;
- We voted against management in approximately 12% of cases;
- Specifically on climate change, we voted against 65 directors at 35 companies where we concluded the board failed to demonstrate adequate consideration of physical and transition-related impacts from climate change; and
- Through direct engagement, we helped secure material commitments and improvements on climate-related disclosures and practices at 35 companies and voted for climate-related shareholder proposals that sought deeper disclosures on topics such as operational emissions management, asset portfolio resilience and public policy.
We added a new voting policy to escalate our concern regarding classified boards at our public portfolio companies. We expect companies with classified boards to clearly set out appropriate sunset provisions that will define when annual director elections will commence, aligned with their transition to having a distributed shareholder base as a seasoned listing, and that governance will converge to best practice within a reasonable timeframe. During the period covered by the report:
- We applied this new policy at 200 shareholder meetings, with 555 votes against directors.
- We supported 100% of shareholder proposals requesting boards to declassify.
We enhanced our board gender diversity voting practice by expanding the countries where our 30% threshold for female representation applies to include South Africa and New Zealand. We expect to apply a rounded 30% threshold to more countries and markets in the next few years including in emerging markets.
“A company’s owner, board and management each play critical roles in creating sustained long-term value. Their relationships hinge on clear communication and trust,” added Manley. “CPP Investments is an active and engaged owner and is constructive in our partnership with companies on their sustainability and governance journeys. We recognize and respect the different roles that shareholders/owners, boards/directors, and management teams/executives each play in ensuring long-term value creation.”
As investors who take an active and engaged approach to overseeing our private investment portfolio, we target appropriate interventions to drive better returns. This can include improving governance, pricing and costs; environmental or stakeholder management; or employing our decarbonization investment approach.
“Maximizing the long-term value of a business today requires boards and executives to anticipate and manage a highly dynamic environment. This, in turn, requires greater diversity of perspective in the boardroom, an evolved culture of risk management and opportunity identification,” added Graham. “Organizations that do this well will preserve and grow shareholder value over the long term, and investors that seek to identify these companies will be well positioned to achieve superior investment returns.”
A summary of the report can be downloaded here and the full report can be downloaded here.
About CPP Investments
Canada Pension Plan Investment Board (CPP Investments) is a professional investment management organization that manages the Fund in the best interest of the 21 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments are made around the world in public equities, private equities, real estate, infrastructure and fixed income. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At June 30, 2022, the Fund totalled C$523 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Facebook or Twitter.
Take the time to read the summary of the report which can be downloaded here and the full report which can be downloaded here. The summary and full report are also available here.
The full report is comprehensive, 62 pages in all, packed with great information on how CPP Investments integrates sustainable investing and is looking at the risks and opportunities across all asset classes.
I think it is worth going over CEO John Graham's message at the top of the report:
I note the ending which is important:
What the term Environmental, Social and Governance (ESG) means to us
In the last year, debate has emerged over the utility and integrity of the term “environmental, social, governance” (ESG). At CPP Investments, the term refers to a set of factors that we analyze to make more informed investment decisions. It is an important complement to traditional financial analysis. Trade-offs between ESG considerations are inevitable and we resolve them by carefully considering which ones are likely to have the biggest impact on investment returns. To us, the ESG label is not what matters. What’s truly relevant is to assess, understand, and address the wider factors affecting business growth – whether those are societal, environmental or stewardship related.
Conclusion
Maximizing the long-term value of a business today is no longer just about strategic, operational and financial excellence. It requires boards and executives to anticipate and manage a highly dynamic environment. This, in turn, requires greater diversity of perspective in the boardroom, an evolved culture of risk management and opportunity identification, more proactive engagement on environmental footprint, labour, supply chains, cyber and data security, and other factors.Organizations that do this well will preserve and grow shareholder value over the long term, and investors that seek to identify these companies will be well positioned to achieve superior investment returns
Why do I bring this to your attention? Because John Graham is very clear, they use many factors in their investment decisions to complement traditional financial analysis and they resolve conflicts by carefully considering which ones are likely to have the biggest impact on returns.
Moreover, he states: "To us, the ESG label is not what matters. What’s truly relevant is to assess, understand, and address the wider factors affecting business growth – whether those are societal, environmental or stewardship related."
This is what Richard Manley was stating in the article above. Regardless of the ongoing debate on ESG, there should be no confusion or debate about ensuring management teams proactively identify and mitigate risks and identify and capture opportunities, which will result in the most informed business decisions and best outcome for companies regardless of the terminology used.
On their website, they state it very clearly:
The nature of economic business risks and opportunities has fundamentally changed in this century.
Companies are operating in an increasingly competitive and digitally connected world, as they look to provide goods and services for almost eight billion people. This has led to heightened and rapidly evolving stakeholder expectations of sustainable and inclusive growth. As a result, sustainability-related factors, including climate change, are increasingly and more directly impacting the strategic, operational and financial profile of companies around the world.
We believe that companies and investors that are resilient, agile and able to anticipate, manage and integrate these factors into their strategy are more likely to preserve and create value over the long term than those that do not.
Keep in mind, CPP Investments'mandate is to maximize returns without undue risk of loss, taking into account the factors that may affect the funding of the CPP and their ability to meet its financial obligations.
They also note: "In carrying out our mandate, we aim to continually develop, execute and enhance the investment strategy that balances prospective risk and reward in order to ensure the long-term sustainability of the CPP Fund."
Everything CPP Investments does is to ensure the long-term sustainability of the CPP Fund and this is why sustainable investing is such a critical part of their investment strategy. It is viewed as a way to enhance their investment strategy to deliver better risk-adjusted returns over the long run.
And this is why the work done by the Sustainable Investing Group headed up by Richard Manley, Managing Director, Head of Sustainable Investing, is so important:
I recently covered the ILN Net Zero Playbook which featured case studies from some of Canada's large pension investment managers, including CPP Investments and insights from Richard's colleague, Maria Montero:
Maria Montero, Principal in CPP Investment Board’s Sustainable Investment Group and Co-Lead of ILN’s Climate Change Committee says, “We believe navigating the risks and opportunities presented by the whole economy transition required by climate change will be a defining challenge of the 21st century. Investors can play an active role in financing real economy emissions reductions and as a result reduce financed emissions. This report draws on practical case studies from ILN’s membership to provide a helpful overview of approaches that long-term investors, like us, can take to steward our portfolios to net zero.”
The summary report also explains the actions the organization is taking to achieve net zero by 2050:
CPP Investments invests across public and private companies and it obviously has a lot of weight given its size but it is easier to implement change in private companies where they have more control.
Again, take the time to read the summary of the report which can be downloaded here and the full report which can be downloaded here.
The full report contains a lot more details and examples which is why it is worth reading it carefully.
I congratulate everyone who took part in this report, it is truly excellent and well written.
It demonstrates how CPP Investments is committed to sustainable investing all while it stays laser focused on its mandate.
It also shows you how we need to move past the ESG debate which many critics have gotten wrong and focus on what matters for the sustainability of businesses over the long run.
As John Graham notes: "To us, the ESG label is not what matters. What’s truly relevant is to assess, understand, and address the wider factors affecting business growth – whether those are societal, environmental or stewardship related."
I know I keep harping on this but I cannot overemphasize this point because it is critically important to understand that when done right, sustainable investing is more than just ESG, it's about enhancing the investment strategy to deliver the best risk-adjusted returns over the run.
As Richard Manley notes, it's about ensuring management teams proactively identify and mitigate risks and identify and capture opportunities, which will result in the most informed business decisions and best outcome for companies regardless of the terminology used.
“I don’t see there’s a debate to be had about that,” he said. “That’s just good business in this new century.”
Exactly, companies that understand this will thrive whereas those who refuse to understand this will become obsolete and will not have access to long-term capital.
Below, CPP Investments President & CEO, John Graham, spoke at the Canadian Club Toronto about the Fund’s F2022 results, as well as their approach to investing in the energy evolution and how diversity & inclusion plays into the Fund’s strategy (late June).