Anyone hoping to capture the attention (or capital) of the Canadian Pension Plan – the world’s biggest private equity investor – may find useful the following morsels about the pension’s sustainability priorities.
The $421 billion pension’s purpose of providing retirement security “requires us to make sustainability an important factor in our decision-making”, president and chief executive John Graham wrote in CPP’s 2023 sustainability report, published this week. “We carefully consider business-related sustainability factors at every stage of the investment process.”
CPP advocates for companies to make sustainability disclosures in line with the International Sustainability Standards Board’s IFRS S1 and S2 disclosure standards, which were launched earlier this year. “These new standards are assurable, enforceable and designed to elicit decision-useful information connected to financial statements… We believe that widespread adoption of this new global baseline will spur companies to more closely examine and manage activities that are having an increasingly material impact on longterm value creation,” the report states.
Real estate climate risk framework
CPP has developed a framework to measure and assess climate-related risks in its real estate portfolio (CPP has a 9 percent target allocation for real estate). The framework allows CPP to measure both physical and transition risk, and the fund has used it to assess climate risks across its entire private real estate portfolio, according to the report.
“Scenario analysis efforts are taken into consideration during our strategic allocation process in portfolio construction, our climate risk monitoring, and our due diligence process during security selection,” the report states.
CPP has started conducted scenario analyses to project how different climate change and policy scenarios could impact asset valuations and its portfolio. “In a business-as-usual scenario where carbon prices do not increase markedly from their current levels and global decarbonisation efforts are less successful, there could be a potential negative impact to the fund’s market value by up to 13 percent in a given year during the next 30 years”, the report states.
“The impact is largely driven by physical climate risks, including chronic changes in precipitation, ecosystems and sea levels, as well as the rise in frequency of extreme weather events.”