The Canada Pension Plan Investment Board’s (CPPIB) renewable-energy holdings topped $3 billion in June, more than doubling the assets it held in the sector a year earlier and up from $30 million in 2016. 

Along with its more than hundredfold increase in renewable-energy investment in just three years, CPPIB has started screening all new investments in its $400.6-billion portfolio for risks and opportunities linked to climate change, according to the pension fund’s latest report on sustainable investing.

“We believe climate change is real and that the energy transition is something that we should be thinking about as we build our portfolio for the long term,” said Deborah Orida, senior managing director and global head of active equities at CPPIB, and the lead author of the sustainable investing report.

On Monday, CPPIB announced it was acquiring renewable-energy company Pattern Energy and taking the firm private in a $2.6-billion deal that valued Pattern at about $6.1 billion. The fund’s prior investments in the sector include a 49 per cent stake—worth about $2.25 billion—in Enbridge’s wind and solar power projects in North America and Germany. It invested $740 million in Toronto-based Cordelio Power, which spun out of CPPIB’s 2018 acquisition of NextEra Energy Partners’ Ontario assets.

The focus on renewable energy and climate-related risk underscores the growing pressure on companies and investors to minimize their financial exposure to climate change and how their operations contribute to the problem. In July, eight of the world’s largest sovereign wealth funds, managing a combined US$15 trillion, announced they would ramp up the integration of climate-change issues into their investments. 

While CPPIB has aggressively expanded its renewable holdings in recent years, its broader investments in the energy sector have increased, as well. It invested $8.2 billion in the energy sector in fiscal 2019, up from $6.1 billion in 2018 and just $1.4 billion in 2016. 

The fund’s philosophy differs from other institutional investors taking more hardline approaches to sustainable investing. Norway’s sovereign wealth fund, for instance, said in March it will divest from firms that do oil and gas exploration; only those with renewable-energy divisions could stay in the portfolio. In October, Kommunal Landspensjonskasse, the country’s biggest public pension fund, shed its last remaining investments—US$33 million in equity holdings and US$25 million in bonds—in companies with business in Canada’s oilsands, including Cenovus, Suncor, Imperial Oil and Husky. 

“We’ve been trying to build our portfolio in a way consistent with the energy transition,” said Orida. “Our mandate is to maximize returns without undue risk of loss for 20 million Canadians. If we don’t allow the investors to make these risk-return assessments that include how much of the risk is priced in, it’s hard to be comfortable that you’re maximizing returns.” 

While CPPIB does not have explicit climate-related criteria or targets its investees need to meet, it is doubling down in evaluating how those companies are safeguarding against their exposure to and impact on climate change. “One way this work is really starting to come through is in the climate change security selection framework we launched in April,” Orida said in the report. “Investment teams must now include descriptions of relevant climate change-related risks and opportunities that impact investment decisions in their screening memos and final investment recommendations.” That assessment, Orida said, factors into investors’ decisions on whether to invest in a company and, if they do, how they calculate the appropriate risk-adjusted returns on that investment.

The report also highlighted the fund’s growing focus on improving gender diversity in its portfolio. It voted against the election of 626 directors responsible for nominations at companies whose boards featured no women. The fund had identified a total of 687, but decided the all-men boards were justified in nine per cent of the cases. 

CPPIB first tested the gender voting proxy system in Canada in 2017, voting against 45 companies that year with no women on their boards. By 2018, “nearly half” of those companies had appointed at least one woman, the report said. In 2019, the fund only supported directors of boards that had at least two women—it voted against 35 companies that didn’t meet that criteria.