CPP fund prom­ises ‘huge push’ to eval­u­ate cli­mate change risks

En­ergy tran­si­tion trig­gers search for more in­vest­ments in al­ter­na­tive sources

Windsor Star - - FP WINDSOR - BAR­BARA SHECTER Fi­nan­cial Post bshecter@post­media.com

Canada Pen­sion Plan In­vest­ment Board chief ex­ec­u­tive Mark Machin pledged Thurs­day to step up the as­sess­ment of global cli­mate change risks to make bet­ter in­vest­ment de­ci­sions, as the fund he over­sees posted an an­nual net re­turn of 11.6 per cent. “We’re go­ing to make a huge push on it this year … We want to do a much bet­ter job of be­ing able to un­der­stand the risks that we’re tak­ing on in each in­vest­ment and the risks we have em­bed­ded in the port­fo­lio, and make sure we’re be­ing paid for them,” Machin said. “If we’re not be­ing paid for the risk, then it doesn’t make sense to own them. Oth­ers, where we think we’re be­ing paid for the risk, then we’ll con­tinue to own them.” He said much more work needs to be done on key ques­tions in­clud­ing how quickly the “en­ergy tran­si­tion” from tra­di­tional sources to al­ter­na­tives and renewables will take place. This will be in­flu­enced by a num­ber of fac­tors, from ge­og­ra­phy to gov­ern­ment pol­icy and reg­u­la­tion to so­cial de­mands. “No­body ’s cracked this, no­body ’s got a great tool kit yet, so we’re hav­ing to de­velop it our­selves,” Machin said. “We don’t think it’s go­ing to hap­pen by next year. We think there’s still go­ing to be a role for oil and gas-re­lated as­sets for some pe­riod of time. But how fast that tran­si­tion hap­pens is one of the key driv­ers, and then we need to un­der­stand all the other risks em­bed­ded in each in­vest­ment.” CPPIB, which in­vests money for Canada’s na­tional pen­sion scheme, is pair­ing its plan to build bet­ter ways to mea­sure the risks in­her­ent in sec­tors such as oil and gas with a con­certed search for more in­vest­ments in al­ter­na­tive and re­new­able en­ergy as­sets.

The lat­est in a string of deals, an­nounced last week, is a joint ven­ture with En­bridge Inc. that will see CPPIB buy a stake in North Amer­i­can re­new­able power as­sets and off­shore Euro­pean wind projects. Last month, the pen­sion or­ga­ni­za­tion signed a $741-mil­lion agree­ment to ac­quire a port­fo­lio of six Cana­dian oper­at­ing wind and so­lar power projects from Nex­tEra En­ergy Part­ners LP.

The Cana­dian deals com­ple­ment ear­lier in­vest­ments in wind and so­lar as­sets in Brazil and In­dia. “We see value in those par­tic­u­lar op­por­tu­ni­ties,” Machin said. “Al­ter­na­tive en­ergy is get­ting more and more cost com­pet­i­tive, so you’re go­ing to see more de­mand for al­ter­na­tive en­ergy.”

In the lat­est fis­cal year, CPPIB posted the sec­ond-high­est an­nual net in­come in dol­lar terms — $36.7 bil­lion — since the fund’s in­cep­tion. The fund’s net as­sets stood at $356.1 bil­lion as of March 31, up from $316.7 bil­lion a year ear­lier. The bulk of the growth came from in­vest­ment in­come, with $2.7 bil­lion flow­ing in from net con­tri­bu­tions to the Canada Pen­sion Plan. The fund’s 10-year an­nu­al­ized net re­turn was eight per cent, with the five-year re­turn of 12.1 per cent. Net of in­fla­tion, the re­turns were 6.2 per cent and 10.4 per cent, re­spec­tively. In­vest­ment gains have off­set de­clin­ing em­ployer and staff con­tri­bu­tions, which fell to $2.7 bil­lion in fis­cal 2018 from $4.3 bil­lion in fis­cal 2017 and $5.2 bil­lion in fis­cal 2016. Machin said the lat­est fis­cal yearend re­sults were driven in part by a “syn­chro­nized eco­nomic up­turn” across most of the ge­ogra­phies in which CPPIB in­vests. Low volatil­ity for most of the year also con­trib­uted, as did the fund’s di­ver­si­fi­ca­tion of in­vest­ments across ge­ogra­phies, sec­tors, and as­set classes.

But buoy­ant economies and mar­kets, along with com­pe­ti­tion from big pen­sion, pri­vate eq­uity, and sovereign wealth funds, tend to drive up as­set prices, which can cre­ate a tough in­vest­ment en­vi­ron­ment. “That’s def­i­nitely a chal­lenge. We have to be very dis­ci­plined,” Machin said. “We are con­stantly turn­ing things down be­cause valu­a­tions are too high.” Machin said eco­nomic growth hasn’t been hurt by the Fed­eral Re­serve’s tight­en­ing of the U.S. money sup­ply through higher in­ter­est rates and other mea­sures, which were off­set by a ma­jor drop in U.S. gov­ern­ment tax rates. “The fis­cal stim­u­lus in the U.S. — while it’s a one-off — will have a ben­e­fit this year and next. So it’s gone from hy­per­stim­u­la­tive con­di­tions to just stim­u­la­tive con­di­tions in the U.S.,” Machin told The Cana­dian Press.

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