Canadian pension funds diverge in approach to fossil fuels

Canadian pension funds have defended diverging approaches to fossil fuel investing in the face of criticism on the best route for investors to net zero.

“We anticipate conventional hydrocarbons will remain a considerable share of primary energy supply for many years to come,” a spokesperson for CPP Investments, which invests C$550 billion ($440 billion) in assets of the Canada Pension Plan, told AsianInvestor.

CPP does not employ exclusionary investment screens for oil, gas, coal and pipelines, arguing that investing in fossil fuel companies and exercising its influence through engagement is more effective. The fund has committed to going net-zero by 2050.

“We believe companies [in this sector] will not only deliver strong returns, but are critical to supporting an optimal and equitable transition of the global energy system,” the CPP spokesperson said.

But Patrick DeRochi of ShiftAction, a Canadian charity that lobbies pension funds over their climate change policies, criticised the CPP approach, telling AsianInvestor that CPP had numerous assets without a net-zero pathway.

“Any company that explores for, produces, refines or transports fossil fuels does not have a credible net-zero pathway. Their core business model is in fossil fuels, which must be phased out in line with Paris targets,” he said.

CPP’s Asian investments include a C$459 million investment in China Gas Holdings, which owns gas concessions throughout China, and a 33% interest in Pacific National, Australia’s largest transporter of coal. The fund declined to comment on its Asia holdings or strategy or how it planned to steer them to net-zero.

Most of the fund’s fossil fuels holdings are in North America. These include a 26% stake in Civitas Resources, the largest oil and gas producer in Colorado, valued at $4.5 billion in June 2021, and a C$1.3 billion investment in 2011 in Teine Energy, a private company focused on acquiring and developing oil and gas assets in western Canada.

CONTRASTING STRATEGIES

CPP’s approach contrasts with the divestment strategy announced in September by CDPQ, which manages C$420 billion on behalf of Pension Plan and other Quebec-based public funds, when it committed to divest from all assets that produce crude oil products by the end of 2022 and stop new investments in oil pipelines. CDPQ has targeted a 60% reduction in the carbon intensity of its total portfolio by 2030, and has said it will reach net-zero by 2050.

In its latest results published in February, the company said it had exceeded the targets set in its first climate strategy launched in 2017. A spokesperson said it would publish a stewardship investment report early next month, but declined to comment on the rationale behind its strategies or the relative merits of divestment and engagement in reducing companies’ emissions.

DeRochi said its divestment strategy did not extend to several large oil and gas assets that it held as part of its infrastructure portfolio, which had a total value of $45 billion in February.

IN DEFENCE OF ENGAGEMENT

In the meantime, the CPP spokesperson said that divestment can do more harm than good. “We believe using blanket divestment as a tool to reach net zero will impede the world’s path to get there. Blanket divestment detached from investment considerations means losing the ability to enable the energy evolution by applying constructive influence through impactful engagement.”

Javier Capapé, director of sovereign wealth research at the Centre for the Governance of Change, part of IE University in Madrid, Spain, said that divestment is easier and cheaper, but that investor engagement, which is more expensive and effective, was preferable.

“To sell a stake in a ‘brown’ company does not mean that the company stops polluting. It looks that there is enough capital ready to invest in ‘brown’ so that these companies can even extend their activities," he said.

The engagement approach is generally preferred by Asia's asset owners including Japanese insurer Nippon Life and Singapore sovereign wealth fund GIC, who argue that "blindly divesting" from whole industries is less impactful than active engagement.

However, Jane Moir, research director, at the Asian Corporate Governance Association, told AsianInvestor that engagement of companies by investors in Asia was generally poor.  

“Investor engagement in Asian companies is generally very low,” she said, adding that she was disappointed with the level of corporate governance in Asia. “Some investors are up front about their activities and some aren’t. I don’t think they are trying to hide, but it’s just not something they collate,” she said. “We’d like to see more on how [they] voted and how they engage.”

Moir said she favoured engagement over investment. “In general, for governance, it’s always good to engage or seek to engage and to affect change [that way],” she said, noting ACGA’s focus on investors’ voting behaviour at AGMs, and its focus on adherence to the region’s stewardship codes.

CPP has increased its allocation to renewables from C$30 million in 2017 to C$7.67 billion as of March 31, 2021. “As part of our net zero commitment, we also set a target to increase our investment in green and transition assets from C$67 billion to at least C$130 billion by 2030,” a second spokesperson told AsianInvestor.

Additional reporting by Natalie Koh.