Jane Goodland: Hello, and a very warm welcome to the LSEG Sustainable Growth Podcast where we talk to leading experts about a wide range of topics spanning sustainability, business and finance. I'm your host, Jane Goodland, and this week I'm joined by Richard Manley, Chief Sustainability Officer at CPP Investments, which manages the Canada Pension Plan Fund of over $780 billion Canadian dollars on behalf of 22 million Canadians. Richard is also a member of the Greenhouse Gas Protocol Steering Committee and Chair Emeritus of the ISSB Investor Advisory Group. A very warm welcome to the show, Richard I'm really looking forward to our conversation, I hope you're doing very well today.
Richard Manley: I am, thank you very much for having me.
Jane Goodland: So Richard, you've been in financial markets your whole career and seen sustainable investing go through a number of evolutions. I'm curious to know about that and where we find ourselves after the evolution we're going through now in 2026.
Richard Manley: Absolutely, so yeah, without going too far into ancient history, I had 25 years on the sell side as an equity analyst covering different sectors, doing some less conventional things, conglomerate arbitrage research, div and swap research before becoming involved in research management. But for the last 10 years, I was on the sell side, I was also leading Goldman Sachs's sustainability research product, GS Sustained. And in that capacity advising many of their institutional clients in how to build what in the time was ESG integration capabilities. And then more recently I joined CPP Investments seven years ago and since joining have been actively involved in the development of their sustainability strategy. But also integration of sustainability factors into the life cycle of their investment process. Touching on the macro, we are in an interesting time. I think anybody who became actively involved in sustainability over the last six or seven years, you've probably only really experienced the heydays of sustainability followed by a bit of an aggressive stop. And it is worth reflecting on the fact that this is actually the third time this century, that the tide has gone out on sustainability. It did come back pretty swiftly on the prior occasions, and I would note it came back much more grounded in value, so value creation, rather than values. And another thing to reflect upon is, obviously, as responsible investing was first coming to light, many of the first approaches to integration were normative, often informed by faith asset owners. But normative exclusion criteria where people were saying, you know, we're ready to concede returns, not to have exposure to specific parts of the economy. We then went through a cycle of seeking to maybe exclude the worst in class companies on potential disengagement with sustainability factors, orientate portfolios towards, you know best in class. And now I think most mainstream financial institutions when they talk to integration of sustainability are talking about integration. And that is really seeking to ensure they're getting compensated where companies aren't quite you know navigating sustainability risks appropriately or thinking about sustainability or board and management engagement with sustainability factors as a lens on the culture of a company that can inform long-term durability of returns. You know one last cohort to reflect upon is obviously the emergence over the last decade or so, of greater philanthropic participation in addressing some sustainability factors. And with that, the impact of the emergence of impact investors. And I think one thing that's interesting as we reflect upon where we are today and how did we get here, is you almost think of a normal distribution of capital and institutions participating in sustainability integration. On the left-hand side of the distribution, you've got a smaller number and less capital involved in norms based exclusion criteria. On the right-hand side, you have got a smaller number of institutions and capital actively involved in what you could be viewed as concessionary or impact orientated approach. And then a very large cohort of institutions in the middle of the distribution, both by number and by assets invested, actively seeking to integrate consideration of these factors to deliver not only superior return outcomes but also seek to mitigate risk when they can. And I think we will maybe in a couple of years look back and reflect on how did we get here today and say in part it maybe was because the narrative from the extremes overwhelmed the narrative of the middle and really confused why people are integrating. You know, these factors into both corporate strategy and into the investment process.
Jane Goodland: Yeah, I think that's an interesting reflection actually, because I think there is a kind of a disproportionate amount of communication and energy put between, behind those kind of ends of the spectrum. So I'm interested in your mandate at CPP Investments in the context of integrating sustainability into your investment approach and also touching on your investment beliefs. Tell me a bit more about that.
Richard Manley: So, CPP investments, as you said, yes, there is an act of law in Canada called the CPP IP Act that outlines a mandate to maximise returns without any undue risk of loss, followed by taking into consideration all the factors that might impact the sustainability of the fund. And as a result of that, you probably have picked up there, it didn't mention the word sustainable once, which might beg the question if there's no expectation of doing it then then why do you consider sustainability factors as I said earlier across the life cycle of our investment approach? And I think the easiest way to distil this is into the three big bucket drivers of long-term value creation when we think about investing in companies. Firstly is the financial performance of the business, is it capable, is the assets in a place that allow it to generate superior returns on the capital invested? The second is, is the industrial positioning or the strategic positioning of the company in the industry, does it actually have defensible moats that are likely to inform the ability to perpetuate those financial returns into the medium term? And then the third bucket, which is what is the culture in the boardroom and the management committee? Is this a company whose board and management team are seeking to proactively identify the risks that could impair value in the medium term and actively manage them. Or similarly, are they proactively seeking to identify the opportunities being presented by the sector and industry that they operate in and go out and capture those values? So where we see here, we hear and see so many arguments for integrating sustainability into what institutions do. But maybe I just pivot a little bit and say, really, in essence, it comes down to a belief that making more informed decisions, will yield superior outcomes and I haven't yet found anybody willing to take the other side of that debate that you know making less informed decisions is the right way to either run a business or to invest. But we should apply a materiality lens to that so yes we believe that companies who proactively seek to identify the material risks and opportunities that are at the nexus of their industry or their corporate strategy, and then mitigate those risks and capture those opportunities will simply deliver superior outcomes over the long term. And that investors that in turn are able to do the same and identify those businesses and those management teams will probably outperform in the long-term. So we believe that doing this and doing this well will accrue to superior risk adjusted returns.
Jane Goodland: Sounds very unradical actually when you put it like that. So I think that's a great summary of the approach. Can we explore what that means at a company level now? And particularly I'm really keen to understand what your expectations of companies are regardless of their sector or industry.
Richard Manley: Absolutely, and I'll just clarify, so obviously we invest directly and through third parties, we don't manage anyone else's money. And as you said, we invest across most asset classes, public and private, equity and credit, but the vast majority of our investments are in public and private credit. So start with a little bit of governance 101; we stand behind our respect of the triad. And when we refer to the triad, we are referring to the discrete roles, rights and responsibilities that accrue to us as an owner, to the board as directors and to the management teams as executives. And we believe that the executive team of a company are responsible to the business and that means really required to consider the long-term interests of the business, but accountable to the board. And in turn, the board itself is also responsible to the company, but accountable to owners like ourselves. We are not there to run the business. That is for the management team and is for the board to approve strategy and appointments within the company. But we do have some rights. And they are the appointment of directors, the approval of the accounts, changes to bylaws, dividend distributions and the like. And I think, the governance framework that exists across most markets we invest in is still, I think, a very, very effective tool to engage with companies to ensure that boards, the directors we are responsible for appointing, are actually discharging their duty to the company. So, what are our expectations and we document this each year in an updated policy, called the PBPG, the Proxy Voting Principles and Guidelines. We publish that to ensure that the companies we're investing in understand our expectations of them. And they, in a nutshell, say, we expect the board to be able to demonstrate that they are providing appropriate oversight of the management team to ensure council and oversight to ensure, that all material business risks and opportunities have been considered in the setting of strategy, its operational implementation, and then their communication to the market. And where we conclude that boards are unable to demonstrate that, then we will, in terms of different parts of the policy, withhold support for those directors. Really concluding that if they are unable to demonstrate they are, you know, meeting that expectation, they may not be acting in the interest of the company. And it may be time for the nominating committee chair to challenge themselves as to whether they have built a board that is really fit for the purpose of providing oversight of the company.
Jane Goodland: Let's focus on climate change for a moment and in particular thinking through physical risk and transition risk and also how scenarios are helping you to analyse and think through some of the issues that companies are facing. Tell me about that part of your work.
Richard Manley: I can. So, the listeners, hopefully people are aware of the notion of degrees of warming will change the climate that we are encountering through the end of this century. The desire of the Paris Agreement is to keep that ideally to 1.5 degrees of warming since the pre-industrial era and not north of 2. You could frame it that the policy interventions that would be required to keep warming to one and a half degrees would present high transition risk. And that is policy interventions, that might impair the value of companies that were unable to decarbonize their operations. And potentially, if you go towards the high warming scenarios, and I think it's fair to say that RCP 8.5, as it's called or four degrees of warming by the end of the century could be viewed as high physical risk. And those bookends are absolutely appropriate, but obviously we should be very, very eyes open to the fact that different probabilities should be ascribed to where we land in that distribution. And also that as we get into the tails of the distribution. Uh, the uncertainty in those outcomes, you know, becomes quite material. If we look back to where we were when COP 26 was hosted in the UK, the policy environment leaving COP 26, was about 1.8 degrees of warming. So not quite 1.5, but, but certainly below the 2 degrees that this is going to be upper bound of the Paris agreement. Subsequent to that, unfortunately, we are now seeing the policy environment trend towards 3 degrees of warming, which is, if that is the scenario that we land on, meaningfully above the aspirations of Paris, and it would start to present changes in the climate that would start impact economic activity as we move through the century.
Jane Goodland: Just to be clear about when you talk about the you're kind of relating the policy environment with the warming outcomes, you mean, you know, if if all of the policy that has been kind of committed to now around the world, if all of that was an active effectively, that's what the probable outcomes would be in terms of warming. Is that just so I'm clear about that?
Richard Manley: That's right. So we still have the vast majority of the countries that were parties to the Paris agreement submitting NDCs. There's a desire through the mechanism of the COPs to update the NDC. The last COP didn't see as many updates to those NDCs as was hoped for. But I think it's still reasonable to say the vast majority of the governments around the world maintain an aspiration to, you know, limit climate change to the spirit of the Paris agreement. Clearly, though, what we have seen subsequently, and in some jurisdictions in response to affordability, cost of living crises, in other jurisdictions in response to very considerable economic growth post the pandemic, is a situation whereby, one, emissions are, curves are not bending as they have been predicted. And in some instances, we've seen backsliding on policy. Now that, as I say, puts us towards 3 degrees. The, I think it's fair to say that the distribution of outcomes that we're still modelling between that bookend of high transition risk and high physical risk are still appropriate. I think what is changing though is the likely base case. And the listeners are hopefully aware of the publication cycles of the IPCC. One of the, I think, challenges we're dealing with at the moment in terms of the update to what are called the Shared Socioeconomic Pathways, the SSPs, which is thinking about how policy might evolve and shape warming outcomes. And then the RCPs that are basically effectively the formula that ties the RCP to degrees of warming at the end of the century is, I think, two structural changes have emerged in the last few years that are not well reflected in those scenarios and one of them is the emergence of a slug of energy demand driven by AI that was really not anticipated when you know these models were last updated. And secondarily the emergence of a trend of de-globalisation. And the significance of de-globalisation is, under what is called SSP2, which is effectively middle of the road, the expectation was that we would continue to see local government, national government, and governments across the globe maintain some degree of coordinated policy response. And one of the challenges in adaptation is that if you start to see a fragmented policy response, it's not implausible that we could be looking into the future now in a scenario where a slightly warmer than expected trajectory for climate change actually is imposed upon a less proactive adaptation response on the part of government, which could start to under certain scenarios increase the impact of climate change to the economy as we move through the middle of the century. Now, as I said earlier, these are all still scenarios. We continue to see the academic community updating their analysis as new information comes to bear. It's an area of analysis where it's very difficult to move too soon because the fan of outcomes is so wide. The forecast error around the tails remains very wide. And most institutions will naturally be solving in terms of portfolio design for the most likely scenario. But that said, I think there is still tremendous value for corporates and institutional investors in proactively understanding the source and quantum of emissions in that business or in that portfolio and how economic and how technically feasible those are to remove from the business or the portfolio. And on the other side of the equation, where physical risk resides in the portfolio and the quantum of potential value at risk, but also and importantly, the levers to mitigate that risk. And then I think one thing that is maybe not often reflected upon is the fact that as people estimate damage to portfolios or the economy, is the ability not only to mitigate some of this risk. But also particularly in a portfolio, to change the portfolio composition over time to actually structurally manage that risk at an aggregate level, and dial up exposure to lower risk parts of the globe and the economy. And similarly on the other side of that, take down exposure to higher risk assets.
Jane Goodland: Looking at physical climate risk and the potential losses coming from those, I'm curious to understand a bit more your perspective on the role of insurance and what the role could be going forward. Do you think it could be more effective? I know you've got some views on this so help me understand that a bit better Richard.
Richard Manley: So high level, just a quick recap, as we think about that hypothesis of policy interventions that decarbonize or penalise companies that can't decarbonise, and how do you manage transition risk? We'll touch on it first in a company. As I said earlier, very simply identify the source and quantum of the emissions and their technical and economic feasibility of abatement, remove those that are technically economically feasible to do now. And you can call that proven abatement capacity. No good reason to continue to emit those molecules. Then think about those that will become economic over time. Think about that as probable abetment capacity and then the tail is maybe technically not possible or uneconomic today. And think about moonshot innovation or policy support to effectively attack the tail. The other side of that coin is how do we manage physical risk and the first two bits are the same: identify the source and quantum. However, I think we're going to look back in a few years time and on reflection think wow transition risk was so much easier to manage than physical risk because it's very easy to identify where assets sit and there's a growing and really exciting innovation taking place in terms of tools to help companies, policymakers, and investors like ourselves understand the current perils. Now, one of the challenges is, more often than not, it's actually quite easy to adapt a single location to the individual peril. We see examples of assets across the Gulf Coast that have been engineered to withstand category four and five name storms, you know, a major name storm will move through the region and the assets themselves remain absolutely intact, but still not operational because of what you can call the hinterland effect, and that is local roads, local power transmission assets have been impacted in a way that people can't get to work, products can't leave the factory, or importantly, the factory can't open, not because it's been damaged, because it has no access to utilities. So straight away, you can almost think of physical risk a little bit like an onion, the assets in the middle, and the next layer becomes the hinterland effect. And then as you start to go through the layers, eventually you'll get to the upstream supply chain of the industry. What are the minerals that go into the product? What are maybe the soft commodities that go in to the product, will they still be accessible? So physical risk is very, very complex. I'd say the dissonance that we have that every financial market that is not really consequential to climate policy, board strategy around climate change, and underwriting trades, spot and forward. So we can trade FX rates, indices, commodities, spot, and they all have futures markets providing a very real indication as to the market's expectation of what these assets will cost at points in the future. By contrast, the one financial market that could really provide a valuable signal to policymakers, boardrooms, and investors as to the future impact of climate change on businesses. And you can view this as either the opportunity cost of inaction or the return on adaptation is insurance. It typically trades spot for a 12-month policy, there are emerging innovations that allow you to transfer risk a few years ahead on the different scenarios, but the notion that we have 30 year future strips for insurance is not, and I don't think he's likely to become a future, a feature of future insurance markets. However, though, that there is an alternative and that is as, as more, companies are building these, models that help us estimate the annual expected loss of specific perils in certain jurisdictions is the potential to, when providing renewal quotes for insurance, provide those future expected loss curves to allow the insured party to understand why the expectations of loss are over time, be that you know, for local government, federal government, boardrooms, investment committees, and really reframe the priority as to when should we prioritise adaptation investments, because if somebody's looking at the cost of their home insurance going from 1,000 a year to 25,000 the year, that not only has implications for the affordability of the home, but it also has real implications as to the, the future value of that asset as prospective buyers need to consider the ongoing cost of more expensive insurance. And that logic can be really extrapolated to every financial asset. So I would maybe go so far as to say two things. I am very, very confident that substantially all innovation in the financial sector over the next decade will be cracking the code on how to identify, quantify, and actively manage physical risk, but that a small innovation that may be hiding in plain sight, actually providing forward expected loss curves to, as I said earlier, policymakers, companies, and investors could go a long way to reframe the debate.
Jane Goodland: Interesting. I like the idea that maybe the solutions already exist, but we just haven't kind of got to that bit yet. So interesting one to explore a bit further. Thank you very much, Richard. And I think that brings us to a really nice point where we probably can say that's all we've got time for today. So thank you so much for coming and sharing your deep insights. I think at times it feels more like a science conversation than investment one but it just goes to show that you know, to really understand these types of risks and opportunities, you do need to become a deep expert in sustainability as well. So thank you so much for your time and see you again soon.
Richard Manley: Thank you for having me.
Jane Goodland: Well, I hope you enjoyed that conversation with Richard, and if you did, then don't forget to follow us and rate us on Spotify, Apple Podcasts or YouTube. And if you want to contact us, you can do so on email at
[email protected]. That's all from me, but watch out for the next episode very soon.
