Climate and Energy Analysis of the CPPIB's 2023 Annual Report
Yesterday the Canada Pension Plan Investment Board (CPPIB) released its annual report for the fiscal year ending March 31, 2023. With $570 billion in assets under management, the CPPIB is making big and growing investments in climate solutions and taking a more sophisticated approach to managing climate-related financial risks. But a close read of its 2023 annual report shows Canada’s national pension manager continues to obscure its exposure to and prolongation of the fossil fuel economy while failing to understand that its mandate will be impossible to fulfill without urgent action to avert catastrophic climate change. The CPPIB has considerable work to do to establish a credible climate strategy.
Below is the good, the bad and the ugly of the climate and energy highlights from the CPPIB’s 2023 annual report. For more information on the CPPIB’s approach to the climate crisis and investments in fossil fuels, see Shift’s detailed analysis of the CPPIB from its 2022 Canadian Pension Climate Report Card.
The Good
Large and growing investments in renewable energy
The CPPIB’s large and growing investments in renewable energy helped our national pension fund generate positive returns in a volatile global economy, including:
A $925 million investment in ReNew Energy Global, one of the largest renewable energy producers in India, that increases the CPPIB’s stake in the company from 29.5% to 51.9%;
The launch of Floen, a 50/50 partnership with Brazilian investment holding company Votorantim S.A., that’s focused on investing in the energy transition in Brazil;
Golden State Wind, a joint venture 50% owned by the CPPIB, provided US$150 million in financing for floating offshore wind off the central coast of California;
The CPPIB expanded its strategic partnership with Octopus Energy, investing a total of US$525 million in the global clean energy technology pioneer based in the UK to support Octopus’ global expansion and renewables strategy.
A $350 million commitment to Blackstone Credit’s BGreen III fund, which targets opportunities in renewable energy, storage, energy efficiency and “critical energy infrastructure.”
The CPPIB’s smart approach to helping companies decarbonize
The CPPIB reports that it has updated its Abatement Capacity Assessment Framework and trialed its “decarbonization investment approach” on twelve existing assets, spanning the real estate, infrastructure, agriculture, energy and media sectors, and during the due diligence process for two new investments. These initiatives are designed to help companies develop net-zero transition plans, but it is unclear if the CPPIB will make these assessments public. Further, the CPPIB’s investment strategy clings to a deeply misguided belief that fossil fuel companies can somehow be decarbonized without phasing out oil and gas production. Fossil fuel producers have neither credible nor profitable pathways for transition and continuing to invest in them creates significant and growing risks for the retirement security of Canadians and the climate.
The Bad
The CPPIB’s ideological opposition to fossil fuel exclusions
The CPPIB maintains its unjustified position on fossil fuel exclusions, saying it will “(continue) to invest in and exert our influence on the whole economy transition as active investors, rather than blanket divestment” (p.65). Shift fully supports the CPPIB having a robust program of influence, engagement and advocacy to help high-carbon, hard-to-abate industries and companies decarbonize. But the CPPIB continues to disregard the scientific consensus that achieving net-zero emissions by 2050 requires an immediate end to fossil fuel expansion and the simple fact that “transition” inherently means phasing out fossil fuels, which do not have a profitable or credible pathway to decarbonization.
Conflating “green and transition assets” and obscuring fossil fuel investments
The CPPIB reports a $13 billion increase in “green and transition assets” to reach $79 billion by the end of Fiscal 2023, on the way to the CPPIB’s goal of $130 billion by 2030 (p.66). The CPPIB provides a more coherent definition of “green and transition assets” in its annual report (p.70), but it has never disclosed to Canadians an inventory of “green and transition assets”, making its $79 billion claim impossible to verify.
CPP Investments - Annual Report 2023, p.70.
The CPPIB’s reporting also makes it impossible, perhaps intentionally, for Canadians to understand how much of our national retirement fund is invested in fossil fuels vs. renewable energy and other climate solutions. For some investment departments (Total Fund Management, p.50-51, Capital Markets and Factor Investing, p.52-53), the CPPIB does not report its investments by sector diversification at all, including for energy, utilities and infrastructure. For other asset classes (Active Equities, p.54-55; Credit Investments, p.56-57; Private Equity, p.58-59; and Real Assets, p.60-61), the CPPIB casually conflates “Utilities”, “Utilities and Other Infrastructure”, “Energy and Resources”, “Power Generation”, and “Other”. This opaque investment department and asset class reporting masks how much the CPPIB invests in oil, gas, coal and pipelines.
Pretending the climate crisis is “business-as-usual”
Even as wildfires and floods ravage communities across Canada, the CPPIB’s annual report fails to communicate a sense of urgency about the worsening climate crisis or the role of a half-trillion dollar pension manager in mitigating the crisis. The CPPIB simply says that “We believe that consideration of climate risk at the strategic allocation level is important for institutional investors with diversified global portfolios” (p.19) and that “Climate change represents both a significant risk and investment opportunity for the Fund as the economy transitions in line with sovereign climate commitments. We believe that the performance of the Fund will be influenced by how well our portfolio companies and the portfolios adapt alongside the global economy on the path to net zero” (p.22). This still does not sound like an investor that understands the increasingly dire and urgent warnings about the systemic, existential risks of the climate crisis. The CPPIB doesn’t seem to recognize that the investment and asset management decisions of a half-trillion investment manager have a critical role to play in ensuring Canadians have a safe climate future to retire into.
The CPPIB did not report transparently or credibly on how our national pension manager is using climate scenario analysis. The fund does not adequately explain the core assumptions used in the scenarios given, and the only climate action scenario mentioned (with the goal of limiting warming to no more than 2°C) does not align with the Paris Agreement goals or the fund’s own net-zero by 2050 commitment. The CPPIB’s claim that under a business-as-usual scenario, “there could be a potential negative annual impact to the Fund’s market value by up to 13% in the next 30 years” (p.66) is neither clear or credible.
The CPPIB does not seem to understand or acknowledge that it could become impossible to fulfill its mandate in the decades to come if global temperature increase is not limited to as close to 1.5°C as possible. The stability of global financial markets is linked directly to climate stability. The fact that the CPPIB also continues to stress test its portfolio using a 4°C global heating scenario (p.21) reveals a lack of basic understanding of the climate science underlying these models. It is ludicrous to assume that Canadians could enjoy retirement security under such a catastrophic emissions pathway.
Compensation remains untied to emissions reductions
Unlike Canadian leaders at the Ontario Teachers’ Pension Plan and Caisse de dépôt et placement du Québec, the CPPIB still does not appear to factor reducing emissions or achieving climate targets into its compensation structure.
Still no interim emissions reduction targets
Unlike climate-leading pensions in Canada and around the world, the CPPIB has not yet set short- and medium-targets for achieving its net-zero by 2050 commitment. The CPPIB says that it expects its total carbon emissions “to fluctuate in the nearer term as assets under management grow, before the impacts of emissions reductions can be seen more fully” and that “in a portfolio of our size, there are many factors that impact these figures” (p.65). This essentially makes it impossible for Canadians to hold the CPPIB to account for its progress toward net-zero emissions. In an interview about the CPPIB’s annual report with The Toronto Star, CEO John Graham “said he believes interim targets create an incentive to sell off investments in high-emitting businesses (which will likely be financed by someone else, he said), rather than spending the money it takes to reduce emissions.” Graham provides no evidence for how the CPPIB’s ownership of fossil fuel companies is reducing emissions, or why the CPPIB would choose to be stuck with assets at increasing risk of becoming stranded.
Almost no coverage of scope 3 emissions
While approximately 51% of the CPPIB portfolio’s scope 1 and 2 emissions are now directly reported by portfolio companies and the rest is estimated by external data providers or proxies, the CPPIB still does not include scope 3 emissions in its portfolio carbon footprint, reporting that only 6-7% of the fund’s scope 3 emissions are reported by portfolio companies.
“Carbon neutral” operations (using questionable carbon offsets)
The CPPIB claims to have achieved carbon neutrality across its scope 1, 2 and 3 emissions (scope 3 emissions come from CPPIB business travel) in the previous fiscal year (p.67). However, the CPPIB is using carbon credits to supposedly offset its emissions, including credits verified in accordance with Verra’s Verified Carbon Standard (VCS). A recent investigation found that 90% of VCS credits are worthless junk offsets, a growing problem found across the offset industry. Following the investigation, the CEO of Verra resigned, highlighting the growing risks of relying on carbon offsets to justify net-zero claims. This strategy of buying questionable offsets rather than making real-world emissions reductions is a waste of money and an example of greenwashing, and will make it harder for CPPIB to achieve its climate targets in the long-term.
The Ugly
Greenwashing an oil and gas company as a climate solution
In March 2023, the CPPIB announced that it purchased a 49% stake in Aera Energy, one of California’s largest oil and gas producers that accounts for nearly 25% of the state’s production. In a video message (at 2:39) accompanying the CPPIB’s annual report, CEO John Graham claims that CPPIB is “looking to pursue strong investment returns by helping Aera balance its energy transition efforts with the need to continue meeting California’s energy demands by investing in renewable energy to power existing operations.” It is next-level greenwashing for the CPPIB to feature an oil and gas company as a net-zero investment against a backdrop of forests and wind farms in a promotional video. The notion that renewable energy can be used to decarbonize oil and gas production is absurd, completely ignoring scope 3 emissions and falsely relying on expensive, non-viable technologies that can’t deliver needed emissions reductions, such as carbon capture utilization and storage. For more information on the CPPIB’s acquisition of Aera energy, see Shift’s statement from March 2023.
Highlighting a $150 million investment in America’s largest LNG exporter
In a press release announcing the release of its 2023 annual report, the CPPIB chose to highlight its $150 million investment to take a stake of nearly 1% in Cheniere Energy, America’s largest exporter of liquefied fossil gas. Touting its net-zero commitment in the same press release in which the CPPIB highlights its significant investment in one of North America’s biggest climate polluters is a stunning demonstration of climate illiteracy by the half-trillion investment manager.
Fossil fuel interests outweigh climate expertise on the CPPIB’s Board of Directors
The CPPIB provided education and training on climate change reporting and “next generation climate technologies” to its board of directors in fiscal 2023 (p.28). But unlike some other Canadian pension funds, the CPPIB does not mention climate risk or ESG as an essential skill or experience for board members (p.82). In November 2022, the CPPIB added to its board a director with close ties to the Alberta oil and gas industry (p.88) who simultaneously sits on the board of a fossil fuel company.