Canada Pension Plan Investments plans to invest in venture-stage climate solutions such as biofuels, hydrogen and carbon capture and storage technologies as part of its net-zero strategy.
CPPIB, Canada’s largest pension fund with a portfolio worth C$550 billion ($432 billion; €382 billion), has announced a target to reach net-zero carbon emissions across its portfolio by 2050. “Our approach to net zero is about finding good opportunities to invest in the transition,” Deborah Orida, CPPIB’s chief sustainability officer and head of real assets, told New Private Markets. This includes ramping up its investments in “green and transition assets” from C$67 billion at present to C$130 billion by 2030.
CPPIB is, in part, relying on the global transition to a low-carbon economy to achieve this, Orida said: “For our whole portfolio by 2050, we think the economy can reduce carbon emissions significantly with the advancement of technology, including carbon capture and sequestration, and regulations, carbon markets and reporting, so it’s really only at the margin that [CPPIB will need to invest in carbon offsets to achieve net zero].”
The pension expects to invest in venture-stage technologies “that will assist the energy evolution”, said Orida. These investments would be from CPPIB’s Sustainable Energies group, which sits within the Real Assets department Orida leads and invests across asset classes and “across the whole energy spectrum” – including fossil fuel energy generation, renewables, agriculture and energy technologies.
“The Sustainable Energies Group has made an earlier stage investment in carbon capture. And we’ve also done research in areas like hydrogen and biofuels. We don’t have a specific target [to invest in venture-stage climate technologies] because we want the opportunity to find the best risk-adjusted returns across the whole spectrum.”
The pension’s enthusiasm for venture capital is a nascent development, affiliate publication Venture Capital Journal reported. CPPIB established a venture capital programme in 2019 to sit within its C$95 billion private equity strategy, allocating $1 billion to venture fund investments. CPPIB began delving into venture that year because funds in the market had grown to CPPIB’s appetite size, Monica Adractas, who leads CPPIB’s venture team told VCJ in 2020. And the pension began seeking the technology insights that venture investing can provide to support its deals elsewhere, Adractas added.
The primary way CPPIB will achieve its net-zero target is by decarbonising its assets, Orida said: “Our position is to focus on active investing and influencing to move towards net zero. We have a very pragmatic and realistic view of how the economy transitions towards net zero, which involves an evolution and transition of the energy industry and of other high-emitting industries. We don’t think that divesting, and losing the opportunity to help influence and enable that transition, is the right thing for us as it relates to our returns. And it doesn’t achieve anything as it relates to the world getting to net zero.
“Our goal is to work with companies that we think are well positioned strategically to be able to make this transition and, as part of our diligence, understand the decarbonisation plan and be underwriting that as part of our investment thesis.”
Choosing engagement over divestment for high-emitting assets is a common refrain in private markets, but Orida provides two examples to show CPPIB is actively supporting its fossil fuel assets to transition. Wolf Midstream, an existing CPPIB portfolio company, “started as a conventional midstream company, but we backed them to develop the Alberta carbon trunk line. As a result, they have a first-mover advantage in carbon capture and storage,” Orida said. And CPPIB is considering an investment in the power sector for which “a key part of the underwriting is [questions such as] ‘What does the existing portfolio look like?’ and ‘What are the plans to use carbon capture or other fuels to change the complexion of the portfolio over time?’”.
CPPIB is not the first Canadian pension fund to set a net-zero target for its portfolio: the Ontario Teachers’ Pension Plan, the Ontario Municipal Employees Retirement System and Caisse de dépôt et placement du Québec are among other giant Canadian investors to have set 2050 targets. But for CPPIB, which has a C$11.6 billion exposure to fossil fuels, it is a major step.
CPPIB reduced its fossil fuel exposure from 3.6 percent of its portfolio in 2016 to 2.8 percent of in 2020, according to a report published in 2021 by the Canadian Centre for Policy Alternatives. But in 2021, CPPIB increased its exposure to oil sands producers and its chief executive John Graham announced that CPPIB will not divest from oil and gas assets during his tenure, affiliate title Responsible Investor reported. Its position on divestment from high-emitting sectors, such as oil and gas, remains unchanged, Orida said: “We don’t believe in blanket divestment. We think there is an opportunity to make attractive returns by enabling companies to make a transition.”
Late last year, CPPIB made a $20 million investment in forest protection schemes through a partnership with US-based non-profit Conservation International, which will generate voluntary carbon credits. But this is not, the pension confirmed to Responsible Investor, part of its net-zero plan.