Canada Pension Plan Investment Board - with more than $380 billion (C$523 billion) in assets under management - firmly believes that decarbonisation begins at home. As a consequence, it has set about driving its own operations to net-zero rather than simply divesting from carbon intensive sectors.
“Decarbonising our portfolio is very different to decarbonising our own operations,” Richard Manley, managing director, head of sustainable investing at CPP Investments told AsianInvestor.
The Canadian pension fund released its 2022 Report on Sustainable Investing last month which focuses on three key areas — sustainability-related considerations in the investment life cycle, its net-zero commitment and how its active ownership delivers results.
Manley explained that while the market was focused on simply reducing financed emissions around COP26, his fund had observed there was a growing view that this may not be the most effective way for financial institutions to support decarbonisation of the global economy.
“We believe the most effective way to deliver investment returns and support decarbonisation of the economy is, as an active owner and investor, to hold portfolio companies to account to develop credible transition plans, invest in venture capital/growth equity opportunities, to develop new technologies, scale green solutions and provide transition financing to support the greening of grey sectors,” he said.
The process of creating net-zero targets for its own operations and its portfolio companies “is hard and no one should think otherwise,” said Manley.
CPP Investments believes it is on track to achieve carbon neutrality for its internal operations by the end of fiscal 2023.
To achieve this target it is heeding the advice that it provides to its portfolio companies and has initiated an abatement capacity assessment on its own operations to better understand the best economic levers to decarbonise its own operations.
“We do see tangible opportunities for improving efficiency, decarbonising our energy consumption and makikng investments to address some of our scope 1, 2 and some of our scope 3-related business travel,” he said.
“However, it is also clear that as a global fund with offices and investments across the globe, until there is a low carbon solution to business travel, we will need to use offsets for some time to come to deliver upon our commitment to carbon neutrality,” said Manley.
CPP Investments — like hundreds of asset owners and managers — has publicly made the commitment to achieve a net-zero portfolio by 2050, is in line with the Paris Agreement.
While Manley admits there is still a long way to go, he says the companies his fund has engaged with on the net-zero mission have been very responsive and he believes the goal is achievable.
“Our engagement approach started by outlying our expectations of directors to ensure climate is appropriately integrated into strategy and hold them accountable where this is not the case,” he said. “This has resulted in over 100 votes against directors in the last two years, but also more than half as many companies committing to raise their climate performance.”
When it comes to engaging these companies to adopt science-based targets and transition plans, CPPIB’s focus has been on working with them to conduct abatement capacity assessments to develop transition plans grounded in economic feasibility, he said.
“Many companies have considerable capacity to start their decarbonisation journey through efficiency measures and low-cost investments creating capacity to better understand the more challenging parts of their portfolio. This allows them to demonstrate progress on short-term reductions while developing robust long-term plans,” said Manley.
SCOPE 3: A TOUGH NUT
On the road to net-zero, tackling Scope 3 emissions “is tough” as they include all the emissions that a company is indirectly responsible for throughout its entire value chain, said Manley.
“The concept has been around for a long time, and while it is an important factor for a company to understand when appraising the long-term feasibility of its industry vertical to transition, it has real problems when aggregated to a portfolio,” he said.
“When a company calculates its own emissions, its power generators’ emissions, its suppliers’ and its customers’ emissions there is no double count.”
However, when a bank, insurer or investor, lends, insures or invests in companies across the economy, this is where getting an accurate Scope 3 calculation becomes a problem, he explained.
“The second you own a power generating company with some thermal generation, own the customers of that power generator and then own the suppliers and customers of those customers, the same emissions start to get double, treble and conceptually even quintuple counted,” said Manley.
He said that while some might say “so what?”, the challenge, as more financial institutions seek to measure their financed or facilitated emissions, is it will quickly become clear that comprehensively reported financed emissions are larger than total emissions and a major challenge when reporting changes in annual finance emissions.
“Each year the power generating company switches toward more renewables, its Scope 1 will fall, its customers’ Scope 2 will fall, their suppliers’ downstream Scope 3 will fall and their customers’ upstream Scope 3 emissions will fall,” said Manley
As a result, banks, insurers and investors will then report an annual reduction in financed emissions that is multiples larger than the absolute reduction in emissions removed from the economy.
“At best this risks accusation of greenwash, at worst these risks undermine the credibility of climate reporting in the financial sector,” he said.
There is a solution to properly tackling Scope 3, but it would require investment, he said. In essence, the solution requires treating emissions less like income tax —where everyone reports them — and instead to treat them more like VAT or sales tax where they are only reported once.
“This doesn’t mean stop reporting Scopes 1-3, it means being able to report them gross and net — of emissions financed by someone else — to allow stakeholders to understand climate risk in the industry and also appropriately report financed emissions and their year-on-year change,” said Manley.