Climate risk and energy transition present huge investment opportunities for pension plan sponsors seeking to invest for the long term, said Bertrand Millot, head of sustainability at the Caisse de dépôt et placement du Québec, speaking during a panel session at an event hosted by the United Nations’ principles for responsible investment in Toronto earlier this month.
He noted it’s critical for pension plans to manage the risks associated with climate change. The Caisse, which has roughly $450 billion in assets under management, started its climate journey in 2017 and has been focusing on defining its strategy in this area and setting targets for investing in green assets and the fund’s journey to decarbonization. It has since linked all employees’ remuneration to achieving these targets, which Millot said was important in order to achieve alignment from all internal services and departments.
Read: Caisse on track to meet ESG goals, according to sustainable investing report
The Caisse drew from external taxonomies, which he said made it easier to facilitate discussion on defining what constitutes green assets. The pension established a transition risk framework and physical risk practice for its physical assets. It also engages internally with public and private companies in its portfolio on climate risk.
The Caisse’s due diligence and engagement is working, said Millot. “Today we have tripled our green assets to $54 billion, which is about 12.5 per cent of AUM, and have reduced the carbon footprint by 60 per cent since 2017.”
But he acknowledged the plan’s success in decarbonizing its portfolio is just one part of the climate solution. “The planet is not decarbonizing as fast. . . . We need to put a lot more emphasis on corporate alignment [and] corporate transition plans, shifting the focus from carbon portfolio to the directionality of carbon within portfolio companies.”
He noted an area of growing importance is decarbonizing the real economy. The power of collaboration is very important on that journey, including through institutional investment organizations such as the Net-Zero Asset Owner Alliance (which is helping guide methodologies), the PRI, Climate Action 100 and the Sustainable Market Initiatives. “It’s very important to collectively work on risk methodologies, . . . use them to speak a common language cause we need to push companies in the same direction. We need to push governments in the same direction and this is the next phase.”
Read: How Canada’s large pension funds are approaching green investment disclosures
While a lack of reporting data can be an issue, it shouldn’t be an excuse to not start decarbonization efforts, said Millot. “We need to all get comfortable with the fact that data certainty is not going to happen. Companies are going to do projections. . . . which will be more or less correct. That’s part of the cultural change within an organization — to set targets and to look forward as opposed to through the lens of analyzing capital markets in the past.”
There’s no doubt that data is an issue across the board, but companies can’t lean on this as an inhibitor or hurdle from taking action, said Elsa Palanza, managing director and global head of sustainability and environmental, social and governance at Intermediate Capital Group, who also spoke during the panel session. She noted data sets will naturally continue to grow and get better the more companies are able to lean in.
Millot acknowledged there has been backlash against ESG reporting but added the best way to combat those voices is to tell the full story.”Make sure management teams of portfolio companies have something to say. It’s easy to tell a story if you have something to say. . . . [They should] consider the strategy, the supply chains, the threats and opportunities that climate change poses and think about it . . . because they might use that as a competitive argument to reduce their footprint to those suppliers. It’s also a way to make them think about climate risk and physical risk. And we’re doing that hands-on in our infrastructure portfolio.
He noted that the Caisse hasn’t experienced financial consequences from having decarbonized faster than its peers. Indeed, he said the plan’s fiduciary obligations is its No. 1 priority and always will be. “We’ve managed to invest in climate solutions and decarbonize the portfolio without endangering it by being smart in the choices we’ve made.”
Read: Caisse receives top grade for climate strategy across 11 public pension investors: report