The Caisse de dépôt et placement du Québec is setting bold targets to shelter its portfolio against the impact of climate change.
The country's second-largest pension fund is seeking more profitable investment opportunities and means to avoid assets it forecasts will be left behind in a global marketplace being reshaped by an increasingly low-carbon world economy.
The move comes as institutional investors around the world are reassessing climate risks and other so-called environmental, social and corporate governance (ESG) factors in response to stakeholder pressures, marketplace shifts and new regulations.
"The world is changing, frankly, faster than most people expected," Michael Sabia, chief executive officer of the Caisse, said at a Montreal event to discuss the pension fund's new climate policy. "We need to change the way we make investment decisions."
The Caisse is setting measurable targets to guide its investment decisions for the coming years. Most crucially, it plans to reduce the carbon footprint of the overall portfolio by 25 per cent by the year 2025.
Carbon budgets will guide the Caisse in meeting and surpassing that 25-per-cent target, and give it a capacity to assess the performance of individuals and investment teams against the budgets – compensation will be linked to their success.
The Caisse, which currently has more than $285-billion in assets under management, says it believes it is the first North American institutional investor to set a carbon target covering all of its asset classes. Part of the Caisse's plan also includes moving to reduce exposure to carbon-heavy assets, such as activities related to coal.
"There are going to be stranded assets associated with climate change," Mr. Sabia said, pointing to languishing oil prices as one area where investors might get squeezed. "We don't want to get caught in those stranded assets … We're looking for opportunities because we think it's good risk management to, over time, exit those."
Other targets of the new climate policy include plans to increase investments in renewable energy and other low-carbon assets by 50 per cent, or $8-billion, by 2020, and increased disclosure on the greenhouse gas exposure in the portfolio.
This announcement won rare praise from a coalition of organizations such as Greenpeace Canada and the David Suzuki Foundation, both of which participated in a September protest on the Caisse's investments in coal, oil, oil sands and pipelines.
Mr. Sabia said that abandoning fossil fuels through outright moratoriums would be taking the easy way out, adding that the pension fund planned to pursue a more fundamental and cultural change in thinking about investments.
The Caisse is not alone in reshaping its approach to evaluating climate risk.
Earlier this year, a European Union directive came into force requiring the region's pension funds to incorporate ESG reviews into their investment strategies. And the Caisse is the largest Canadian pension fund yet to release a detailed response to the task force on climate-related financial risk that was chaired by former New York mayor Michael Bloomberg. The task force in June recommended financial institutions provide a full accounting of the potential risk to their asset values and investments from climate change.
"This is a welcome position, which reflects the Caisse's engagement on the recommendations of the task force," said Celine Bak, a senior fellow with the Waterloo-based Centre for International Governance Innovation, which convened Canadian institutional investors to discuss how to implement its recommendations, including a potential leadership role for the Liberal government in Ottawa.
"This is an opportunity for the federal government to send a strategic signal about the importance of reflecting climate change in long-term investment plans," Ms. Bak said.
At the same time, some of the other large Canadian pension funds have been building new teams to review climate and other ESG risks. The thinking is that for long-term investors, these ESG factors can have an impact on the financial performance of investments over time in ways such as brand erosion or changes in consumer demands.
At the Canada Pension Plan Investment Board, climate change is one of its four key ESG pillars and is perceived as a significant risk factor that can affect investments.
"We think it's something that we have to take seriously in our time-frames and do more to understand, quantify and figure out whether we're paying the right price," Mark Machin, CEO of CPPIB, said of climate change's impact on investments at a recent conference in Toronto. "At the end of the day our mandate is simple. It's not to change the world. It's to maximize returns without undue risk of loss for our 20 million beneficiaries."