By Tom Gresham
A commitment to sharply increase its investments in green and transition assets while integrating climate risks into its investment decision-making are among the central tenets of the Public Sector Pension (PSP) Investment Board’s inaugural Climate Strategy Roadmap.
The roadmap, which was released this spring, identifies a series of priorities as part of PSP Investments’ determination to play a central role in the investment community to help finance a global transition to reduce warming and climate change. In the roadmap, PSP states its belief that climate change represents “a long-term structural trend that will have a material impact on investment risks and returns across sectors, geographies and asset classes.” The corporation believes the financial sector can play an important role in supporting decarbonization in alignment with the Paris Agreement treaty on climate change signed in 2015.
Neil Cunningham
Neil Cunningham, president and CEO of PSP Investments, says PSP has included climate in its decision-making “for many years,” which has helped to position the corporation as it plans its new climate strategy.
“PSP Investments is committed to using its capital and influence to support the transition to global net-zero emissions by 2050,” Cunningham said in a press release. “We understand the important role that the financial sector can play in addressing climate change whether it be our investment choices, providing capital to support the transition to global net-zero or encouraging the reduction of [greenhouse gas] emissions among the companies in which we invest.”
The roadmap’s emphasis on climate investing and sustainable finance includes ambitious short-term targets to track PSP’s progress. Among them, PSP commits to increasing its investments in green assets from C$40.3 billion in 2021 to C$70 billion in 2026 – a 74% increase in just five years. For the purposes of the roadmap, green assets include those that show low-carbon performance, outperform relevant benchmarks, and enable climate mitigation and adaptation through its products or services. PSP said that investing in green assets should reduce the exposure in its portfolio’s greenhouse gas emissions exposure and play a part in cutting carbon emissions from the economy.
PSP does not plan to completely cut high-emitting companies from its portfolio. Instead, the corporation aims to encourage those organizations to take steps toward reducing their emissions and climate impact. In particular, PSP aims to build its investment in transition assets from C$5.1 billion in 2021 to C$7.5 billion – an increase of 47%. PSP defines transition assets as heavy emitters that show promise of becoming “climate-aligned” through their mitigation plans. In that vein, PSP plans to reduce its holdings of carbon-intensive assets without transition plans by 50%, from C$7.8 billion in 2021 to C$3.9 billion in 2026.
“PSP Investments believes that transformation requires ongoing engagement with high-emitting portfolio companies to set clear expectations and to support their transition,” PSP said in its roadmap. “We will prioritize active engagement on climate change over exclusion or divestment. However, we may choose to exclude or divest from investments where long-term financial risks do not align with our investment beliefs and the meeting of our mandate, or where the board or management of portfolio companies are unwilling to adopt appropriate mitigation plans to reduce their operational carbon footprint.”
In general, PSP’s roadmap emphasizes that it will continue to be a “climate-aware investor,” considering its portfolio exposure to climate-related risks in investment decision-making and asset management practices. That will include assessing exposure through annual total fund climate change scenario analysis, stress-testing, and asset-level climate vulnerability studies.
The roadmap also includes an emphasis on being “an active steward of the assets we own,” which will mean more outreach to portfolio companies that will share the corporation’s expectations on climate change. Sustainability will play a role in proxy voting decisions, according to PSP. Similarly, PSP said it not only will be fully aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures when it comes to climate disclosures, but it will expect its portfolio companies to do the same. In terms of its own activities, PSP will complete and start to implement plans to reduce its operational carbon footprint by the close of 2023.
Cunningham says that taking action on climate risk does not conflict with building a portfolio that delivers investment results.
“Research shows that corporations that are actively managed and plan for climate change can secure a higher return on investment as compared with companies that do not,” Cunningham says. “By executing its climate strategy, I believe that PSP Investments can support the transition to global net-zero emissions by investing for a better tomorrow.”
