Inclusion of ESG factors by the Caisse de dépôt: Institutional example
“The inclusion of ESG factors creates value by judiciously positioning our portfolio, and sheltering us from certain risks,” explains Bertrand Millot. Doing the right thing for the planet is a result, but the primary objective is to maximize the yield and positioning of our portfolio, for the future of Quebec’s retirees.”
The CDPQ sees a correlation between a company’s ESG approach and its performance. Successfully managing sustainability requires an open, agile corporate culture, focused on collaboration, diversity and inclusion, and employee mobilization. These are also factors for success with regard to return on investment.
Sustainable investment also entails a defensive function. Bertrand Millot notes that examples of value destruction related to poor management of ESG questions have been common for several years. In no specific order, he mentions the two Boeing 767 Max crashes, which revealed major governance problems; Volkswagen’s “dieselgate” experience; and the sexual misdemeanours of Harvey Weinstein. “So it’s essential to take ESG factors into account, in particular the quality of governance, to protect the Caisse’s investment value.”
With regard to climate change, the CDPQ has committed to holding a net zero portfolio by 2050 and should be completely withdrawn from the oil production sector by the end of this year. It plans to triple the value of its investments in low carbon assets compared to 2107, to reach $54 billion by 2025. The Caisse chooses its “green” assets based on the Climate Bonds Initiative (CBI) criteria.
Last year, it increased its portfolio’s carbon intensity reduction target to 60% by 2030. The climate factor is included in all its investment decisions, in addition to linking attainment of climate objectives with the variable portion of the remuneration of its teams. In addition, the CDPQ created a $10 billion transition envelope to contribute to the decarbonization of the major carbon emission sectors.
The Caisse also has social objectives, including fighting “abusive tax planning” and for equity, diversity and inclusion (EDI). In 2020 it launched the Equity 253, which has $250 million to deploy over four years to support Canadian companies that use EDI as an impetus for performance. Currently, women occupy 39% of the seats on its management committee and one quarter of its investment positions; one quarter of its employees self identify as being part of a visible minority or Indigenous.
The Caisse is conscious of its significance as a major investor and strives to engage directors and officers in companies to improve their ESG results. It is also quick to use its share voting powers. “For example, we vote against the re election of the chairs of board members selection subcommittees and the chairs of the board of directors of companies in which women do not comprise at least 30% of the members of the board,” explained Bertrand Millot.
“The inclusion of ESG factors creates value by judiciously positioning our portfolio, and sheltering us from certain risks.” — Bertrand Millot
A type of risk
Despite the importance it gives to the quality of governance for companies in its portfolio, the CDPQ has made a few mistakes. Its investment in Celsius Network – a New Jersey based crypto asset lending company whose poor governance was put on the defensive during its bankruptcy in 2022 – attracted more than a little criticism. Charles Emond, CDPQ president, publicly stated that this was an exception in the vast portfolio of the Caisse and that diligent verification does not always guarantee success.
Although unwilling to comment directly about this case, Bertrand Millot notes that all investments bear their share of uncertainty. “In some sectors, such as mining, the dangers related to ESG factors and volatility are higher. However, an investor of our scale must maintain a highly diversified portfolio and we must make choices. We always try to select the best in each sector, but this does not completely eliminate the risk that an investment goes wrong.”
“We always try to make the best choices in each sector, but this does not completely eliminate the risk that an investment goes wrong.” — Bertrand Millot
The Caisse believes that it has a moral obligation to serve as a model for sustainability for smaller managers. This includes transparency with regard to its decision making process, as well as discussions and meetings with managers to explain its approach.
The CDPQ is involved with local and international organizations, such as Finance Montréal, through which it signed the “Statement by the Quebec Financial Centre for a Sustainable Finance”. It sits on the board of directors and several committees of the Net Zero Asset Owner Alliance. It participates in the Investor Leadership Network and has joined the Sustainable Markets Initiative, a coalition of the international financial community to accelerate the transition to a more sustainable economy. “We have the means to contribute to these initiatives and to undertake the technical work that will then help smaller funds,” explains Bertrand Millot.
But the current context appears to be less favourable for ESG securities. Those investing for the short term note that fossil fuels have greatly increased in share value since the start of Russian aggression on Ukraine. In the United States, a true anti ESG movement has sprung into action in several Republican states. The governments of Florida, West Virginia, Utah, Minnesota, Louisiana and Arizona have introduced laws to prevent institutions in these states from cooperating with managers that incorporate ESG factors in their decisions. A recent survey by KMPG indicated that 48% of North American, European and Asia Pacific asset managers planned to pause their ESG strategy or re evaluate it in 2022.
Bertrand Millot believes that current market contexts will not lead to long term harm to ESG investments since the challenges that make a shift toward sustainable finance urgent have not disappeared. However, he admits following the anti ESG movement south of the border with some concern. “We hope it won’t spread, but we have to take it into account in our positioning,” he admits.
NET CDPQ ASSETS,
DECEMBER 31, 2021:
IN 2021, THE CDPQ HELD
IN LOW CARBON ASSETS.
IN 2021, THE CDPQ
REDUCED THE CARBON INTENSITY
OF ITS PORTFOLIO BY
COMPARED TO 2017 AND 79%
OF ITS PORTFOLIO
WAS COMPOSED OF
LOW CARBON ASSETS.
IN 2021, THE CAISSE
DISCUSSED ESG WITH
N ITS PORTFOLIO.
Source: 2021 Sustainable Investing Report, CDPQ
de la CDPQ