CPP fund promises ‘huge push’ to evaluate climate change risks
Energy transition triggers search for more investments in alternative sources
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.