How One of Canada’s Largest Pension Funds Is Incorporating ESG in Its Portfolio

Compensation based on hitting climate targets, carbon budgets for portfolios, and public company board targets are all tools used by CPDQ.

Bartek Sadowski/Bloomberg

Bartek Sadowski/Bloomberg

As allocators and fund managers alike scramble to incorporate diversity and climate change into their strategies, one of Canada’s largest asset owners has released its latest report on how, exactly, a C$365.5 billion pension fund does it.

The Stewardship Report, released Wednesday by Caisse de dépôt et placement du Québec (known colloquially as CPDQ), details the fund’s 2020 efforts toward sustainability and diversity.

In the report, CPDQ said it is tying employees’ variable compensation to the achievement of certain climate targets and targeting 30 percent representation of women on boards at the public companies it invests in, among several other initiatives.

Going Green

CPDQ’s climate initiative targets were first laid out in 2017, according to a letter from Charles Emond, its president and CEO, and Kim Thomassin, CPDQ’s executive vice president who heads up investments in Quebec and stewardship investing.

By the end of 2020, the pension fund had targeted C$32 billion (USD $26 billion) invested in “low-carbon” assets, which includes renewable electricity, real estate, and transportation and industrials. CPDQ ended up hitting C$36 billion in low carbon assets last year, and is now reassessing its targets moving forward.

“Adjusting our carbon intensity reduction target will allow us to enhance our efforts across our entire portfolio,” Emond and Thomassin said in the letter. “We will pay very close attention to the decarbonization of the real economy by strengthening our commitment to our portfolio companies as the transition unfolds.”

The pension fund acknowledged in the report that more competition is likely to emerge for green assets, which “may make growing these assets more complex in the coming years.”

To continue that growth, CPDQ has assigned a “climate ambassador” to each specialized portfolio and has tied employees’ variable compensation to climate targets. They’ve also created carbon budgets for each of their portfolios.

Diversity Initiatives

Beyond these green initiatives, CPDQ is also turning its focus toward diversity at the companies it invests in.

The pension fund created a target for the public companies it invests in: 30 percent of their board of directors should be women in the next few years. At the end of 2020, 59 percent of the public companies held in the pension fund’s active management portfolio met that standard.

CPDQ said it will be talking with the companies and using its shareholder votes during meetings to reach this target.

The pension fund also launched a minority-focused fund called the Equity 253 fund in October 2020. The fund will invest between C$5 million and C$30 million in companies that emphasize diversity. These companies must ensure that women, “visible minorities,” and Indigenous people represent at least 25 percent of the board, management team, and shareholders.

The fund will invest C$250 million in total and will provide “operational guidance to implement and execute a customized diversity and inclusion plan.” According to CPDQ, it’s the largest Canadian fund that “directly targets diversity as a lever for development and expansion.”