In his annual year-end letter, our CEO John Graham reflects on the Fund’s performance and key investments, what the year ahead may bring, and why Canadians can count on us.
The case for sustainability is increasing, pushing investors to lean in.
Richard Manley, Chief Sustainability Officer
This letter marks my first year as Chief Sustainability Officer (CSO) at CPP Investments. It is my pleasure to work alongside the talented, dedicated and hard-working team executing the activities described in this report. These actions helped us tap into additional drivers of value creation for the Canada Pension Plan (CPP) Fund in the year ending June 30, 2023. Overall, we believe this past year paved the way for progress, but we know there is more work to do.
At CPP Investments, we believe the value of companies integrating sustainability effectively into their strategy, operations and financial disclosures is increasing. So is our ambition to integrate sustainability into the life cycle of our investment process to drive value creation.
Below are some of my observations on the sustainable investing space over the past year. By sharing how we make sense of a quickly evolving investment landscape, we hope to contextualize how we integrate sustainability factors and, subsequently, our expectations for our portfolio companies.
What we are seeing in sustainable investing
I am pleased to share there has been real progress in advancing the integration of sustainability in investments over the last 12 months. However, war in Ukraine and a shifting geopolitical landscape have undermined the headline impact of these positive events.
Consensus has consolidated around the belief that the financial sector should be empowered to finance the transition to a low-carbon future rather than mobilized to pursue a divestment agenda. The U.S. unveiled its Inflation Reduction Act – a significant approach to de-risking innovation in transition solutions, and Canada closely followed suit with its own measures. The International Sustainability Standards Board (ISSB) launched reporting standards, creating a global baseline for companies to report material sustainability factors, which we welcome and endorse. The U.K.’s Transition Plan Taskforce (which included our participation) published a framework for issuers to develop and report their own transition plans. COP15 in Montreal secured a global commitment to protect our ecosystems, and we began seeing the first clear signals of climate-related risk translating into asset prices in the real estate sector. These are critical advances in policy, market infrastructure and price discovery in the sustainability space.
Despite many positives, approaches to environmental, social and governance (ESG) integration have elicited fierce scrutiny and polarizing public debate. While that happens, greenhouse gas (GHG) emissions continue to rise. However, the more nuanced debate of how to decarbonize the energy system – acknowledging the need for low-carbon, secure, affordable energy sources – is welcome progress.
An optimal green transition remains possible
Maintaining public and political support for the whole economy transition is key to move beyond ambition and commitments into delivery of the optimal transition to a net-zero economy. The optimal green transition is one that removes the most GHG emissions, from operations, while pursuing opportunities that create value for businesses and stakeholders and avoiding sharp dislocations in specific industries and geographies. Currently, the transition continues to be influenced by the interplay between regulation, technological progress, future customer and corporate behaviour, abatement costs and carbon prices. We see these variables at play as we pursue our own net-zero commitment at CPP Investments.
Despite the noise and sustained growth in emissions, we remain optimistic about the opportunities ahead for patient capital with advances in policy and market infrastructure.
Trends to watch
The increasing affordability of transition solutions and the signal companies send by favouring low-carbon energy-efficient buildings provide a clear price signal to owners and developers. This momentum in the real estate sector, which is responsible for roughly 30% of annual global CO2 emissions is sure to have knock-on effects across industries. We expect this trend to continue. Looking ahead, products across asset classes that constitute climate solutions are likely to merit a green premium, relative to carbon-intensive or grey alternatives.
The emergence of a green pricing premium is significant for two reasons. First, it tells companies that there is a volume and price benefit for decarbonizing. Second, a premium for green alternatives today is likely to translate into a grey-discount over time – a signal that should act as a warning bell for investors not yet integrating sustainability factors into their investment life cycle. For companies unable or unwilling to decarbonize relative to their peers, we foresee the emergence of a grey discount to a greening benchmark.
Highlights from this year’s report
At CPP Investments, we consider sustainability factors to be dynamic and emerging risks and opportunities. The emergence of ChatGPT is a prime example. The responsible deployment of generative artificial intelligence (AI) offers profound opportunities to drive innovation, solve challenges and improve productivity, but the potential for irresponsible deployment also introduces novel risks for businesses using this technology without appropriate oversight. That is why we added AI oversight to our expectations of company directors to make clear that change remains a constant in this emerging space.
Notable highlights from this year’s report include updates to our Policy on Sustainable Investing, which includes an expanded definition of what we consider to be business-relevant sustainability factors. Our updated Proxy Voting Principles and Guidelines (PVPGs) also now include the consideration of nature and its potential impact on a company’s long-term performance. And we are also sharing a progress report on our commitment to net zero. This is where we share details on how we are maintaining carbon neutrality, in our own operations, and our increasing investment in green and transition assets. We also explain how we are using our Decarbonization Investment Approach to surface embedded value for the CPP Fund.
Please read this year’s report knowing that professionals across CPP Investments collaborate daily to make the activities reported here a reality. It is their dedication and relentless pursuit of excellence that helps us deliver value in the best interests of the CPP’s more than 21 million contributors and beneficiaries.
Listen to the full audio excerpt.
The case for sustainability is increasing, pushing investors to lean in.
Richard Manley, Chief Sustainability Officer
This letter marks my first year as Chief Sustainability Officer (CSO) at CPP Investments. It is my pleasure to work alongside the talented, dedicated and hard-working team executing the activities described in this report. These actions helped us tap into additional drivers of value creation for the Canada Pension Plan (CPP) Fund in the year ending June 30, 2023. Overall, we believe this past year paved the way for progress, but we know there is more work to do.
At CPP Investments, we believe the value of companies integrating sustainability effectively into their strategy, operations and financial disclosures is increasing. So is our ambition to integrate sustainability into the life cycle of our investment process to drive value creation.
Below are some of my observations on the sustainable investing space over the past year. By sharing how we make sense of a quickly evolving investment landscape, we hope to contextualize how we integrate sustainability factors and, subsequently, our expectations for our portfolio companies.
What we are seeing in sustainable investing
I am pleased to share there has been real progress in advancing the integration of sustainability in investments over the last 12 months. However, war in Ukraine and a shifting geopolitical landscape have undermined the headline impact of these positive events.
Consensus has consolidated around the belief that the financial sector should be empowered to finance the transition to a low-carbon future rather than mobilized to pursue a divestment agenda. The U.S. unveiled its Inflation Reduction Act – a significant approach to de-risking innovation in transition solutions, and Canada closely followed suit with its own measures. The International Sustainability Standards Board (ISSB) launched reporting standards, creating a global baseline for companies to report material sustainability factors, which we welcome and endorse. The U.K.’s Transition Plan Taskforce (which included our participation) published a framework for issuers to develop and report their own transition plans. COP15 in Montreal secured a global commitment to protect our ecosystems, and we began seeing the first clear signals of climate-related risk translating into asset prices in the real estate sector. These are critical advances in policy, market infrastructure and price discovery in the sustainability space.
Despite many positives, approaches to environmental, social and governance (ESG) integration have elicited fierce scrutiny and polarizing public debate. While that happens, greenhouse gas (GHG) emissions continue to rise. However, the more nuanced debate of how to decarbonize the energy system – acknowledging the need for low-carbon, secure, affordable energy sources – is welcome progress.
An optimal green transition remains possible
Maintaining public and political support for the whole economy transition is key to move beyond ambition and commitments into delivery of the optimal transition to a net-zero economy. The optimal green transition is one that removes the most GHG emissions, from operations, while pursuing opportunities that create value for businesses and stakeholders and avoiding sharp dislocations in specific industries and geographies. Currently, the transition continues to be influenced by the interplay between regulation, technological progress, future customer and corporate behaviour, abatement costs and carbon prices. We see these variables at play as we pursue our own net-zero commitment at CPP Investments.
Despite the noise and sustained growth in emissions, we remain optimistic about the opportunities ahead for patient capital with advances in policy and market infrastructure.
Trends to watch
The increasing affordability of transition solutions and the signal companies send by favouring low-carbon energy-efficient buildings provide a clear price signal to owners and developers. This momentum in the real estate sector, which is responsible for roughly 30% of annual global CO2 emissions is sure to have knock-on effects across industries. We expect this trend to continue. Looking ahead, products across asset classes that constitute climate solutions are likely to merit a green premium, relative to carbon-intensive or grey alternatives.
The emergence of a green pricing premium is significant for two reasons. First, it tells companies that there is a volume and price benefit for decarbonizing. Second, a premium for green alternatives today is likely to translate into a grey-discount over time – a signal that should act as a warning bell for investors not yet integrating sustainability factors into their investment life cycle. For companies unable or unwilling to decarbonize relative to their peers, we foresee the emergence of a grey discount to a greening benchmark.
Highlights from this year’s report
At CPP Investments, we consider sustainability factors to be dynamic and emerging risks and opportunities. The emergence of ChatGPT is a prime example. The responsible deployment of generative artificial intelligence (AI) offers profound opportunities to drive innovation, solve challenges and improve productivity, but the potential for irresponsible deployment also introduces novel risks for businesses using this technology without appropriate oversight. That is why we added AI oversight to our expectations of company directors to make clear that change remains a constant in this emerging space.
Notable highlights from this year’s report include updates to our Policy on Sustainable Investing, which includes an expanded definition of what we consider to be business-relevant sustainability factors. Our updated Proxy Voting Principles and Guidelines (PVPGs) also now include the consideration of nature and its potential impact on a company’s long-term performance. And we are also sharing a progress report on our commitment to net zero. This is where we share details on how we are maintaining carbon neutrality, in our own operations, and our increasing investment in green and transition assets. We also explain how we are using our Decarbonization Investment Approach to surface embedded value for the CPP Fund.
Please read this year’s report knowing that professionals across CPP Investments collaborate daily to make the activities reported here a reality. It is their dedication and relentless pursuit of excellence that helps us deliver value in the best interests of the CPP’s more than 21 million contributors and beneficiaries.
About the Author
Richard Manley
Chief Sustainability Officer
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This letter marks my first year as Chief Sustainability Officer (CSO) at CPP Investments. It is my pleasure to work alongside the talented, dedicated and hard-working team executing the activities described in this report. These actions helped us tap into additional drivers of value creation for the Canada Pension Plan (CPP) Fund in the year ending June 30, 2023. Overall, we believe this past year paved the way for progress, but we know there is more work to do.
