CPPIB’s sustainable energies chief: ‘our net zero approach does not involve fossil fuel divestment’

In a range of interviews with Canadian pension funds, Net Zero Investor scrutinises the net zero policies and investment choices of some of the largest retirement schemes in the North American country.

Following exclusive sitdowns with he CDPQ in Québec and the University Pension Plan as well as the Ontario Teachers Pension Plan, both in Ontario, NZI's next stop is Toronto, as Bill Rogers, head of sustainable energies at the Canada Pension Plan Investment Board (CPPIB) opens up about his fund's investment strategy.

The CPPIB, which operates as CPP Investments, was set up in 1997 and held C$575 billion in assets under management at the end of June. 

Renewables are gaining momentum, it seems to be somewhat of a buzzword in the international climate finance community. The IEA even said recently that investments in solar are set to eclipse oil production this year. Are you very much part of this journey?

We are definitely well into the journey with approximately half of the portfolio in our sustainable energies group invested in renewables. The vast majority of this is through renewables developers or IPPs that we control or co-control. These businesses are both generating clean and affordable power from existing projects but also developing and constructing new projects. In fact, we have over 100GW of gross new renewables project under development around the world with our portfolio companies, and the capital commitment to build those is not yet fully reflected in our portfolio. 

Can you single out an investment that really stood out for you.

Sure, for example our portfolio company Pattern Energy Company’s SunZia project, is developing over 3GW of new wind projects in New Mexico and a transmission line to deliver that power to demand centres in California – this will require over $9b of capital. So, we expect lots of growth in our renewables portfolio in the years to come!

At the end of March, your sustainable energies portfolio hit over C$32 billion in net assets. What is the key emphasis in your portfolio?

We have a very diversified portfolio across the energy mix. As well as our power and renewables businesses, we have investments in upstream, midstream, distributed energy and energy technology. We're very focused on transitioning the energy system, and with a very clear approach that doesn’t involve divestment of fossil fuels, we are actively working with both new energy players and traditional energy companies to decarbonize their business. Our recent investment in Aera alongside IKAV in the US is a great example of this kind of opportunity.

Looking at growth and expansion, where do you spot investment opportunities?

We see significant investment opportunities across the entire transition, and we have set a goal to double our portfolio of green and transition assets before the end of the decade. This will include deployment of capital to transition existing assets but also adding new companies and projects to the portfolio which are already green, where we can generate the right risk adjusted returns, as well as new companies where we can accelerate their decarbonisation. We have the flexible capital, and we can bring a plan and the capabilities to decarbonize those companies.

And what about clean tech solutions and such firms? It seems many investors are chasing those companies in recent months, given the flurry of transactions worldwide.

Yes, we do also see investment opportunities in companies which are developing solutions and leveraging technology to help accelerate the transition. Two different investments here are great examples. Firstly, we acquired a stake in Octopus Energy in the UK in December 2021, while they have very high profile as a successful customer-centric energy utility, they are also offering their cutting-edge technology to support other energy companies decarbonise and enable integration of greater renewables on the power grid.

Secondly, we acquired a significant stake in Redaptive, a US-based company which installs energy-saving and energy-generating equipment to help organizations reduce energy waste, save money, lower their carbon emissions, and meet their sustainability goals.

Also read
Energy transition assets draw inflows as capital owners embrace impact investing: ‘a valuable tactic’

Finally, we also recently invested in Power2X, which is very focused on the decarbonisation of traditionally hard-to-abate sectors, including how green molecules can help them transition. This is a successful business with distinctive expertise which our capital and resources can help scale up to support the decarbonisation of companies around the world including CPP Investment’s global portfolio.

Let's move on to the current investment climate. High inflation and rapidly mounting costs are prompting some investors to rethink their strategies. In fact, some have already cancelled entire projects altogether, for example in the UK. Do you face the same hurdles at present, what are some of the key challenges you are currently facing?

There are a few factors here that we, and every other market participant, are facing. Firstly, the impact of geopolitics and increasing protectionism. Secondly, the spike in inflation, which we can see where we're building projects around the world and buying equipment. Then we need to look at the cost of finance. While we are putting lots of equity capital to support development projects, we are also raising debt capital and the rise in interest rates has significantly pushed up the cost of debt.

But let’s not forget that at the end of the day, the energy transition is going to be driven by people. We are always on the lookout for the right people to join our teams and our platforms to help deliver the transition. It is a highly competitive market, but we believe the breadth of our mandate, the flexibility and scale of our capital and our long-term investment horizon will help attract the right people.

Close to home, just across the border in the US, there is a strong anti-ESG wind blowing. Does this impact your investment strategy in any way? Or the corporates you are dealing with?

We're investing across the energy system and our mandate is to maximise returns without undue risk of loss. We also are convinced that ESG factors – or sustainability factors - are important drivers of returns. We believe that good governance, being cognizant of social issues and environmental issues is just part of being a good investor. 

Also read
Uncle Sam vs John Bull: the irresistible investor appeal of Biden’s IRA

Because of the nature of our business, we haven't been caught up in middle of the debate –we've been doing ESG for over a decade and our approach has been consistent, but dynamically reacting to investment opportunities and asset management as risks and opportunities evolve. These factors do matter and do drive performance.

Finally, you previously led CPP Investments’ sustainable energy efforts in Europe and Asia. What can you say about regional differences or alternative approaches in various key markets?

We really do have a broad mandate to invest globally, and we want to continue to build out a global portfolio, enhancing the diversification that can be delivered by regional differences. Obviously, Europe has been a long-time leader and supporter of the energy transition and many markets have well established renewables sectors. 

North America has had a significant boost with the passing of the Inflation Reduction Act a little over a year ago. That's a place that we're excited about and looking to invest more capital. In emerging markets, Brazil and India are key for us - the opportunities are compelling, and we have substantial renewables investments in both driven by attractive energy market fundamentals and supportive regulatory regimes combined with long standing CPP Investments local teams.

Anything else you would like to share with NZI readers?

Something that’s really important to us is partnership, it’s one of the guiding principles for our organisation, but also really key to success. We don’t have to do this alone, and other firms don’t either. We already have many successful partnerships in markets around the world, and we expect those to grow, but we are also looking to establish and nurture new ones. Those can be with companies that either already have scale and seek our expertise, or want to tap into our long-term capital, or tap into our people to capitalise on amazing new ideas!

Also read
UPP’s responsible investment MD on the investor role of pensions in the energy transition