Climate & Energy Analysis of CPPIB's FY2024 annual report
Last week, the Canada Pension Plan Investment Board (CPPIB) released its Fiscal Year 2024 annual report, growing our national pension portfolio to $632 billion and reporting some progress towards CPPIB’s net-zero by 2050 commitment.
It’s clear that CPPIB is taking a sophisticated approach to managing climate-related financial risks, making big and growing investments in climate solutions and working to help many companies derive value from achieving real-world emissions reductions. But CPPIB has not yet aligned the Canada Pension Plan with climate safety. It is making risky bets on fossil fuel expansion, obfuscating its exposure to high-carbon assets that lack credible transition pathways, and relying on dubious carbon offsets in both its operations and investment portfolio. CPPIB appears to be underestimating the urgency and severity of the climate crisis, and the critical role its investment and asset management decisions must play in averting catastrophic global heating outcomes.
Read on for the climate and energy highlights from CPPIB’s annual report.
Big and growing investments in climate solutions
CPPIB continued to make big and growing investments in climate solutions in the fiscal year ending March 31, 2024 (FY2024). The annual report said that CPPIB’s “investments in renewable energy continued to benefit from the global energy transition and investor demand in that sector,” and featured:
£93 million in financing for the construction of an offshore wind farm off the coast of the United Kingdom (UK).
A further £380 million investment in Octopus Energy, a clean energy technology company based in the UK. Following previous investments in Octopus Energy in recent years, CPPIB now owns 12% of the company.
A further US$905 million investment in Pattern Energy Group, one of the largest developers and operators of wind and solar energy in North America.
A new partnership with and a €130 million investment in Power2X, an Amsterdam-based energy transition and industrial decarbonization company focused on green hydrogen, ammonia, methanol and biofuels.
More fossil fuel investments
Despite its significant and laudable investments in climate solutions, CPPIB continues to risk Canada’s national pension fund on fossil fuels, betting against Canada’s climate obligations and the Paris agreement by risking capital on the ongoing expansion of oil and gas production. This investment in oil and gas expansion comes despite warnings that global fossil fuel demand is poised to peak and decline this decade. As of December 31, 2023, Shift estimates that CPPIB already holds between $21.72 billion and $63.35 billion in fossil fuel investments.
The annual report summarizes CPPIB’s investments in oil and gas over the last year, including:
The signing of a definitive agreement in support of the proposed merger between Aera Energy and California Resources Corporation that would see CPPIB become the 11.2% owner of California’s largest oil and gas company. In 2023, CPPIB became the 49% owner of Aera Energy, which is California’s second largest oil and gas producer. CPPIB is reportedly planning to wind down Aera Energy’s oil and gas business “over time” and “replac(e) it with renewables and carbon capture and storage facilities” to turn it into a “green asset.” CPPIB has not disclosed this transition plan to Canadians.
A US$500 million investment in Quantum Capital Solutions Fund II, which will invest primarily “in the conventional energy sector in the U.S.” Quantum Capital Solutions has previously provided financing to oil and gas producers Devon Energy and Antero Resources and exploration and production companies in the Permian Basin.
“Green and Transition assets”
CPPIB reports that it now holds $83 billion in “green and transition assets”, on the way to its target of $130 billion by 2030. In FY2024, CPPIB “adjusted (its) methodology for calculating green and transition assets and (it) recalculated (its) previously reported figures to reflect this change,” leading it to revise its FY2023 figure for “green and transition assets” downward from $79 billion to $76 billion. CPPIB reports that the year-over-year increase from the revised figure of $76 billion in FY2023 to $83 billion in FY2024 is due to new investments in “green and transition assets”, increased valuations of existing eligible assets, and existing assets becoming eligible by taking actions such as getting certified by the Science Based Targets initiative.
While CPPIB has clear definitions for differentiating “green” from “transition”, Canada’s national pension manager continues to obfuscate which particular assets it considers to be “green” vs. “transition”. Without transparent disclosure from CPPIB, Shift can only speculate on what our national pension manager categorizes as “transition” in its FY2024 report. But Shift speculates that some of CPPIB’s “transition assets” may include:
An agreement to acquire Allete, an electric utility conglomerate with a growing portfolio of renewable energy and electricity distribution and transmission assets in the US Midwest. But Allete also owns a lignite coal mine in North Dakota, gas pipelines in Wisconsin, and a fleet of coal- and gas-fired power plants that do not yet have Paris-aligned phase-out plans.
A commitment to provide up to US$138 million in financing to energy management and power generation company VoltaGrid. While VoltaGrid provides innovative power solutions for remote mining, utilities, distributed power generation, energy storage and electric grids, the company’s operators appear to be focused on the gas industry. One of VoltaGrid’s key products is a 2.5-MW fossil gas generator that produces on-site mobile “low carbon” power, particularly for oil and gas production. The company also operates five compressed natural gas (CNG) terminals across the U.S., including the largest CNG terminal in the Permian Basin. And VoltaGrid claims that its “net zero carbon offsets” can help companies “achieve carbon neutrality today”—without actually cutting emissions from their own operations.
Shift supports the use of Canada Pension Plan capital to accelerate the decarbonization of high-carbon, hard-to-abate companies and industries– but only if they have a credible, science-based decarbonization pathway. The only Paris-aligned pathway to decarbonization for fossil fuel companies is the managed phase-out of production and early retirement of assets. With its obfuscation of “green and transition assets”, CPPIB makes it impossible for Canadians to determine which of its assets have credible transition plans, and which do not. As the climate crisis worsens, CPPIB must provide Canadians with transparency in how it plans to decarbonize high-carbon assets and phase out fossil fuel production in line with 1.5°C emissions scenarios.
Ongoing failure to acknowledge the impact of CPPIB’s investments on the climate
CPPIB is clearly using sophisticated tools to measure and assess climate-related financial risks. It’s tracking global efforts to combat climate change, integrating the analysis of climate risks and opportunities across the entire organization and using scenario analysis to stress test its portfolio against different global heating scenarios. CPPIB also partnered with more than 15 portfolio companies, spanning the energy, natural resources, real estate and financial services sectors, to help them reduce their operating emissions. And CPPIB recognizes that “Climate change in particular represents a significant risk and investment opportunity for the Fund as the whole economy transitions in line with sovereign climate commitments.”
But CPPIB neglects to mention that its own investment and asset management decisions can have an impact on the trajectory of the climate crisis and energy transition. For example, CPPIB marked Earth Day on April 22nd by committing US$300 million to Houston-based oil and gas company Encino Acquisition Partners LLC (Encino Energy, or EAP), which is 98% owned by CPPIB, to support “EAP’s accelerated development of the Utica oil play.” This makes a mockery of CPPIB’s net-zero emissions commitment and ignores the consensus science from the International Energy Agency and Intergovernmental Panel on Climate Change that makes clear that oil and gas expansion must cease immediately and production must be rapidly phased out in order to limit global heating to 1.5°C. Financing oil and gas expansion undermines the long-term stability of the Canada Pension Plan and threatens the retirement security of Canadians in a safe climate future.
In its FY2024 annual report, CPPIB said that its Real Assets (RA) portfolio is:
“expected to be more sensitive to climate change risk than some other departments. RA’s initiatives and contributions towards meeting key climate metrics and targets are critical for the Fund to achieve its net-zero commitment by 2050. Exposure to operational, legal, and regulatory risk is, in part, driven by different transaction types, including investments with controlling interest that can often involve greater asset management and oversight requirements.”
That’s why it’s so puzzling that CPPIB would choose to commit US$300 million to Encino Energy, which is part of the RA portfolio, in order to expand oil production. CPPIB is essentially creating more climate risks for its own portfolio, while making the climate crisis worse for its own members.
Contrast CPPIB’s ongoing financing of oil and gas expansion with the acknowledgment of double materiality by Ontario’s University Pension Plan: “We also recognize that climate change presents a systemic and material risk to the ecological, societal, and financial stability of the economy as a whole … The materiality of climate change for UPP is twofold: UPP’s ability to realize adequate investment returns and provide retirement benefits depends on a stable climate; and UPP’s investments affect the stability of the climate.” Similarly, the CEO of the Caisse de dépôt et placement du Québec (CDPQ) wrote in the Quebec pension manager’s 2023 Sustainable Investing Report, released in April, that “we believe it’s simply counterproductive to help increase the supply of (oil).” And CDPQ reported that “we have taken decisive action, including completing our exit from oil production and coal mining; we no longer want to contribute to the supply of these two types of energy, which are not energies of the future.”
Scenario Analysis
CPPIB included brief reporting on two scenarios it used to assess the potential impacts of climate change on its portfolio and stress test the resilience of its investments, using a set of generally accepted climate scenarios like The Bank of England 2021 Climate Biennial Exploratory Scenario (CBES) and The Network for Greening the Financial System (NGFS) scenarios. CPPIB found that in a business-as-usual scenario where global decarbonization efforts are less successful, the fund’s market value could potentially drop by 15% in a given year during the next 30 years, largely driven by physical risks. In a scenario where “policy actions are more heavily concentrated in years after 2030 through abrupt adoption of stricter mitigation efforts to limit warming to no more than 2°C, the Fund’s market value could be negatively impacted by up to 12% in a given year during the next 10 years,” largely driven by transition risks. There is growing concern that such scenarios systematically underestimate the catastrophic climate impacts and associated negative economic and financial impacts of a warming world.
With CPPIB’s own scenario analysis showing the financial risks of higher global heating scenarios, it is puzzling why CPPIB would invest in assets that are actively making these scenarios more likely to occur. If CPPIB wants global decarbonization efforts to be more successful, it must start using its significant expertise, influence and leadership to publicly support, advocate for and strengthen government climate policies, laws and regulations. Without robust climate policies in Canada and around the world to rapidly slash greenhouse gas emissions, CPPIB’s mandate could become impossible to fulfill.
Greenhouse gas emissions accounting
CPPIB’s annual report includes detailed and credible accounting of its portfolio emissions. The portfolio’s absolute emissions increased marginally over the previous year, largely due to an increase in the CPP’s size. CPPIB has been steadfast in its refusal to set interim emissions reductions on the way to net-zero by 2050– something that sets it apart from most of its peers in the Canadian pension sector. This lack of interim targets makes it impossible for Canadians to hold CPPIB accountable to its net-zero commitment and ignores the urgent need to drastically reduce emissions immediately in order to keep the goals of the Paris agreement alive.
Notably, approximately 47% of CPPIB’s portfolio emissions are now directly reported by companies. CPPIB does not include scope 3 greenhouse gas emissions in its reporting, due to insufficient data quality and coverage. But CPPIB reports that 24% of its scope 3 emissions are now directly reported by portfolio companies, up from 6-7% the previous year.
Use of carbon credits to offset operational emissions
CPPIB purchased 13,873 carbon credits from the Canadian Darkwoods Carbon Project in FY 2024, in order to offset its operational scope 1, 2 and 3 carbon emissions. The credits were retired at the end of the year, and the Darkwoods project was validated and verified in accordance with the Verified Carbon Standard, the Climate, Community and Biodiversity Standards and under the Sustainable Development Verified Impact Standard. A 2023 investigation by The Guardian found that 90% of rainforest carbon credits under the Verified Carbon Standard do not represent real emissions reductions.
While Shift recognizes that some operational emissions, such as air travel, are currently unavoidable, CPPIB should place a strict limit on the role of carbon offsets in its own operational emissions reduction efforts, its net-zero commitment and the net-zero commitments of portfolio companies.
No requirement for climate risk skills or experience on CPPIB’s board
While CPPIB has a Board composition matrix with a diverse set of skills and experience, there is no requirement for CPPIB directors to have skills, experience of knowledge in climate risk, energy transition, or even more generic “ESG” experience.On the contrary, other Canadian pension funds, such as OMERS and Ontario Teachers, for example,’ explicitly include ESG and climate risk as a skill set on their board composition matrix.
Meanwhile, one-third of CPPIB’s Directors are concurrently directors or executives of fossil fuel companies, raising concerns about potential conflict between these directors’ fiduciary duty to Canada Pension Plan members and their legal obligation to companies that are building gas plants, expanding oil and gas production, selling gasoline and lobbying to delay the energy transition.