The Caisse de dépôt et placement du Québec is reaching its targets to cut carbon emissions from its $434-billion investment portfolio years ahead of schedule, but much of the hardest work is still to come.
The Montreal-based pension fund manager said in an annual sustainability report released Wednesday that it has cut the intensity of carbon emissions from its investment portfolio by 59 per cent since 2017. That puts it just shy of a 60-per-cent reduction it aims to achieve by 2030.
The Caisse’s portfolio also now includes $53-billion in low-carbon assets – comparatively green investments such as renewable energy, sustainable transportation and low-carbon buildings – which puts it ahead of schedule to reach a goal of $54-billion by 2025.
The fund manager’s progress to date is a result of important shifts in the way it invests. It has shed $8.9-billion of investments in oil production and thermal coal mining. It gave investment teams a carbon budget, and tied decarbonization goals to their pay.
But its decarbonization disclosures also highlight the huge challenges that large investors face in getting adequate data to measure their portfolio companies’ emissions, and persuading company executives to act swiftly.
“This is where the asset owners have influence,” said Marc-André Blanchard, global head of sustainability for the Caisse, in an interview. “We’re starting the discussion now internally about what should be our next targets.”
The Caisse first set decarbonization targets in 2017 and since then, “it has gone fast, but the curve is starting to slow,” said head of sustainability Bertrand Millot. Investors have made many of the easier changes to their portfolios, and even as global standards to measure carbon emissions are starting to coalesce, there is a major dearth of solid data about how companies are faring.
The sharp drop in carbon intensity in the Caisse’s investment portfolio does not include Scope 3 emissions – the greenhouse gas emissions caused downstream by companies in which it invests – because the Caisse does not have reliable carbon data from companies representing two-thirds of assets it owns.
“Companies need to produce the data first,” Mr. Millot said. “The minute you make anything real, there is a huge Scope 3 [footprint] – whether it’s oil, whether it’s food, whether it’s clothing, whether it’s computers – the minute you can buy something physically and hold it in your hand.”
The Caisse’s intensity disclosures also don’t include emissions from a $10-billion “transition envelope” it created in 2021, earmarking money to invest in heavy-emitting industrial sectors and push to decarbonize them. The Caisse has invested $5-billion so far and aims to reduce those companies’ carbon footprint by 85 per cent by 2035, though the largest reductions are not projected until 2034 and 2035.
For example, the Caisse provided financing for Australian-based AGL Energy Ltd., which is working on a transition plan to replace coal-fired electricity with renewable energy by 2035, about a decade faster than its previous plan. But power plants such as those run by AGL are still in high demand even as renewable energy sources – some of which provide intermittent supply, such as solar and wind – are being built.
“Actually closing those plants takes time,” Mr. Millot said.
The Caisse’s decision to stop investing in coal mining and oil production could put it in the crosshairs of a political backlash against environmental, social and governance (ESG) policies, led by vocal politicians in parts of the United States, where the Caisse has 38 per cent of its investments. Toronto-Dominion Bank and Bank of Montreal have lately been caught up in efforts by West Virginia’s state treasurer to boycott financial institutions taking a stand against lending to coal projects, given the state’s heavy reliance on mining.
Mr. Blanchard, who is also head of the Caisse’s global investing division, said it is important to separate political rhetoric over ESG from the work that companies are doing on decarbonization and renewable energy, which he expects will make them more valuable over time than rivals who are laggards. Mr. Millot points out that Texas, where the ESG debate is fraught, “is a powerhouse of wind power.”
“It’s important for us not to stumble on the vocabulary here and be focused on the value creation,” Mr. Blanchard said.
The chance to unlock value – and avoid getting stranded in a global transition – is the case the Caisse made to portfolio companies and external fund managers in 308 discussions about ESG last year, in addition to using its voting power as a shareholder to put pressure on portfolio companies.
“That’s how we’re going to create value, and the impact of it could be very big,” Mr. Blanchard said. “For us, it’s an offensive play, not just a defensive play.”
James Bradshaw