"Decarbonizing a portfolio at scale on a sustainable basis is almost impossible." - CPP Investments CSO
In an interview with Net Zero Investor, Richard Manley, chief sustainability officer, managing director, and head of sustainable investing at CPP Investments, talks about seizing net-zero opportunities within the firm’s investment portfolio.
CPP Investments' primary investment mandate is clear: to maximize returns while minimizing the risk of loss. “In developing our net zero commitment, we had to ensure that our approach to long-term decarbonization of the fund wouldn’t place us at odds with our mandate, today or in 2049,” Manley told Net Zero Investor.
“As soon as we then started to reflect upon the implications of seeking to decarbonize a portfolio, it became quickly clear that decarbonizing a portfolio at scale on a sustainable basis is almost impossible, unless you see a commensurate reduction in emissions in real economy,” he added.
This realization led CPP Investments to focus on several key constraints shaping their approach.
Firstly, they needed to comprehend the pace at which the real economy decarbonizes, as this could limit the financial sector's ability to decarbonize its loan books and investment portfolios. Second, they recognized the levers they could control, such as portfolio design and security selection, along with governance rights to hold directors accountable for integrating climate risk into company strategy.
“There is a perception that the financial sector is a silver bullet to drive decarbonization in the real economy, but the reality is that financial market participants have limited capacity to force change in investee companies or creditors,” Manley said.
Lastly, they considered external variables like changes in consumer and corporate behavior, technological advancements, market infrastructure development, and the policy environment.
Rather than setting specific short-term decarbonization targets, CPP Investments committed to increasing its ownership of green assets over time, Manley said. “We committed to holding our portfolio company boards to account, to decarbonizing our own operations, to invest to support the transition of grey sectors where the return opportunities presented themselves and to report on our progress.”
Making portfolio greener
Shifting focus to green policies, Manley outlined several methods employed by CPP Investments to make their portfolio greener.
“One way is simply to invest in new green assets,” Manley said. “Certainly, when we look across the real estate portfolio today, it's very hard to identify any developments underway that do not meet green building criteria.”
Moreover, they conduct Abatement Capacity Assessments to determine a business's potential to decarbonize, enabling them to work with management teams to create comprehensive transition plans. They also identify assets in the market that have derated due to their carbon footprint and explore post-acquisition decarbonization opportunities.
Manley acknowledges that “conventional energy” will remain crucial for the global energy supply for decades. The goal is to reduce emissions associated with hydrocarbons that cannot be substituted in the short term.
“Oil and gas producers could deliver a much cleaner molecule to market by comprehensively decarbonizing the production, processing and transmission processes in the value chain,” he said. “This is a real opportunity for the industry to dramatically slow global warming from continued hydrocarbon consumption until long-term substitutes are developed and deployed at scale.”
When it comes to engagement and stewardship, CPP Investments emphasizes their proactive approach in reinforcing expectations within their portfolio companies. “It's absolutely critical and a foundational pillar of how we communicate and reinforce our expectations of directors and executives of the businesses in our portfolio,” said Manley.
In closing, Manley notes the evolution of the climate debate, shifting from “divestment to investment.”
“It's also very constructive that we have moved away from a singular focus on greening the energy system to the delivery of a secure, affordable and green energy system that supports the sustainable decarbonization of the economy and preserves public and political support for confronting the challenge ahead of us,” Manley continued.
“We've long been of the view that to talk about the transition is too simplistic, and that the debate has to be about how we deliver the optimal transition,” he said.
