2 MessagefromManagement
4 Generatingvalueoverthelongterm
5 Deliveringoptimalperformance
6 Acknowledgingtherealityourclientsface
7 Usingourleversofinfluence
12 MakingthegrowthofQuébec’seconomyandcompaniesapriority
14 Investinginthetransition
24 Supportingsustainablegrowththroughtwomajorinternationalinitiatives
26 Promotingdiversityandinclusionatalllevels
32 Requiringresponsiblegovernancepractices
40 Supportingcommunitiesinanunprecedentedcrisis
43 Appendices
CDPQ | 2020 SIR2
Message from Management
This year also sawcitizens around theworld standup insupportofsocialjustice.Theechooftheirvoicesisastrongsignalthatencouragesustocontinueandexpandoureffortstopromoteequity,diversityandinclusion.
Whilethecrisishasseverelyaffectedeconomies,therecoveryis anopportunity forusall to rebuildbetter andbemoreambitiousinourfightagainstclimatechangeandmeetrisingneeds. By directing capital to a greener,more equitabletransition,wecangenerategrowthwhilecontributingtoamoresustainableworld.
Asaglobalinvestmentgroupthattakesalong-termapproach,wehaveanopportunity to investanddevelopassets thatfoster strongercommunitiesandhealthier livingenviron-ments.Guidedbythisambition,wecancarryoutourmissionwhile safeguarding the trust ofmillionsofQuebecers forwhomweareworking,aswellasthecommunitiesthatarehometoourportfoliocompanies.
Eachday,weassessthequalityofourinvestmentsinlightoftargetedreturnsaswellasrigoroussustainabilitycriteria.Our teamsalso rely onexpertise andclose collaborationwith ourpartnerstopromoteideasthatareimportanttous,suchasfightingclimatechange,promotingdiversityandinclu-sionandsoundgovernancewithinourportfoliocompanies.
In 2020, the COVID-19 pandemic and ensuing crisis had unprecedented impacts on communities, exacerbating already existing inequalities. Women, young people and members of ethnocultural minority groups around the globe were particularly hard hit.
3CDPQ | 2020 SIR
ENHANCING OUR CLIMATE AMBITIONS
Weworktofightagainstclimatechangeeachandeveryday.Giventhatwehaveexceededourtargetssetin2017,thisfirstphaseofourcommitmenthasbeensuccessfullycompletedthisyear.
Inthecomingmonths,wewillberesettingourlow-carboninvestment targets to focusmore on assets that supportthetransition.
Moreover,adjustingourcarbonintensityreductiontargetwillallowustoenhanceoureffortsacrossourentireportfolio.Wewillpayverycloseattentiontothedecarbonizationoftherealeconomybystrengtheningourcommitmenttoourportfoliocompaniesasthetransitionunfolds.Ourtargetisstilltiedtoourgoalofachievingacarbonneutralportfolioby2050andwearecontinuingoureffortsinthisarea,particularlywithourpartners.
Inlinewiththisvision,wehavealsoconfirmedthatwewishtoeliminateourcoalexposureandthatwehavesignificantlyreducedourexposuretooilproductionsince2017,inkeepingwithourgoaltoultimatelyeliminatethemostpollutingformsoffossilfuelfromourportfolios.
PROMOTING EQUITY, DIVERSITY AND INCLUSION
Thispastyearhassolidifiedourconvictionthatchampioningequity, diversity and inclusion is now more importantthanever.
WehaveclarifiedourexpectationsofportfoliocompaniesinourimprovedPolicy on the Principles Governing the Exercise of Voting Rights of Public Companies.Thisgovernancetoolprovidesguidanceforourvotingpositionswithregardtoourstewardshipinvestingpriorities,allowingustosignalthatourportfoliocompaniesmustimplementthischangemorequickly.
Becausewefirmlybelievethatacorporateculturebasedonequity,diversityandinclusionissynonymouswithsuccess,we also provide an inclusive work environment for thedevelopmentofallourtalent.
Inaddition,wecontinuetoworkwithourinternationalpartnersto advance these issues in our industry, both locally andaroundtheworld.
LEADING BY EXAMPLE ON BEST GOVERNANCE PRACTICES
The impactsof thepandemichaveshineda lightonhowimportantstronggovernanceis.
Transparencyandresiliencearefundamentalinthecompaniesweinvestin.
We develop our companies’ expertise in areas such asenvironmental,socialandgovernance(E S G)factors,cyberse-curityandabusive taxplanning throughdiscussionswithourexperts.
Theprogressmadeandresultsachievedinrecentmonthsillustrate the importantworkour teamsdo,ourefforts toaddressthesemajorsocietalissuesandourcommitmenttomeetourdepositors’needs.
Forthecomingyearwewillcontinuedownthispathofinvestingconstructivecapital.
Charles EmondPresidentandChiefExecutiveOfficer
Kim ThomassinExecutiveVice-PresidentandHeadofInvestmentsinQuébecandStewardshipInvesting
CDPQ | 2020 SIR4
Generating value over the long term
Expo
sitio
ngé
ograph
ique
dupo
rtefeu
illeglob
al
35%UNITEDSTATES
Total portfolio geographic exposureASATDECEMBER31,2020
2020
2015
2010
32% 35% 14% 12% 4% 3%
46% 27% 14% 9% 1% 3%
64% 17% 11% 6% 1% 1%
CanadaUnitedStatesEuropeAsiaPacificLatinAmericaOtherregions
14%EUROPE
32%CANADA
12%ASIAPACIFIC
4%LATINAMERICA
overallportfo
liogeo
graphicalexposure
35%UNITEDSTATES
14%EUROPE
32%CANADA
12%ASIAPACIFIC
4%LATINAMERICA
Weareaglobalinvestmentgroupwith$365.5billioninassetsinvestedinallthemajormarketsonbehalfofmorethan40majorQuébecpublicandparapublicpensionandinsuranceplans.
Ourmissionistoensurethesustainabilityofdepositors’ fundsandsafeguardtheretirementsofmorethansixmillionQuebecerswhilehelpingtobuildadynamic,competitiveandsustainableeconomy.
Net assets
ASATDECEMBER31,2020
$365.5 B
FIGURE 1
Total portfolio geographic exposureASATDECEMBER31,2020
5CDPQ | 2020 SIR
Delivering optimal performanceOurglobalinfluenceandexperienceinallassetclassesallowustoseizeopportunitiesthatbenefitall Quebecers.
Overfiveyears,thevariousfundshavedeliveredreturnsthatmeetdepositors’ long-termneeds.
Main pillars of our investment strategy
Expo
sitio
ngé
ograph
ique
dupo
rtefeu
illeglob
al
35%UNITEDSTATES
Total portfolio geographic exposureASATDECEMBER31,2020
2020
2015
2010
32% 35% 14% 12% 4% 3%
46% 27% 14% 9% 1% 3%
64% 17% 11% 6% 1% 1%
CanadaUnitedStatesEuropeAsiaPacificLatinAmericaOtherregions
14%EUROPE
32%CANADA
12%ASIAPACIFIC
4%LATINAMERICA
overallportfo
liogeo
graphicalexposure
35%UNITEDSTATES
14%EUROPE
32%CANADA
12%ASIAPACIFIC
4%LATINAMERICA
7.8%
ANNUALIZED
Five-year return
8.6%
ANNUALIZED
Ten-year return
Technology trendsCreate value by capitalizing on the acceleration of technology trends, including the impact that a digitizing economy has on businesses and our operations.
Worldwide presenceIncrease our exposure to global markets by adopting an integrated approach across regions and partnering with the best.
Stewardship investingInvest in assets that support the transition toward a low-carbon economy while affirming our leadership on ESG matters.
Our major accomplishments for the year are in line with our strategic orientations, which evolved in 2020.
Optimal performanceBenefit from diversified sources of return, create value through post-investment management and assess risk thoroughly.
Québec economyLeverage our advantages in Québec to generate returns while helping build a dynamic, competitive and sustainable economy.
CDPQ | 2020 SIR6
Each of our depositors has distinct needs that we take into consideration when establishing our investment strategies. Our clients are the millions of Quebecers who contribute to or benefit from these plans. They belong to all generations—from those just entering the work force to those enjoying a well-earned retirement.
Acknowledging the reality our clients face
A LASTING RELATIONSHIP WITH DEPOSITORS
We build relationships that are based on collaboration,listening, transparency and a clear division of roles andresponsibilities.Thisisevenmoreessentialinthecrisisthatoccurredin2020;withunprecedentedmarkets,weintensifiedourdiscussions.
Byprovidingadvisoryservicestailoredtoourdepositors,wecontributetothefinancialsolidityofpensionandinsuranceplans.
Wesupportourdepositors in their investmentpolicyandchoiceoftailoredportfoliobyleveragingourmarketknowledgeandportfoliomanagementexpertise.
Our mission
Seize the best investment opportunities to generate optimal long-term returns.
Three types of depositors
Pension plansQuébec Pension Plan and the pension plans of hundreds of thousands of public and parapublic sector employees
Insurance plansInsurance plans such as the Société de l’assurance automobile du Québec, which indemnifies road accidents
Other organizationsOther organizations, such as the Office de la protection du consommateur and the Ministère des Finances du Québec
7CDPQ | 2020 SIR
In order to contribute to the economy over the long term, we have developed a stewardship investment strategy that applies to our total portfolio and activities.
OUR APPROACH
Wesupportportfoliocompaniesincreatinglastingvaluebyfocusingonpromisingbusinessopportunities thatdelivergrowthandlong-termperformance.
Werigorouslyusemultipleleversofinfluenceinastructuredwaytoboosttheirperformanceandsustainability.
Weoperateonanumberof fronts toexecuteourstrategy(Figure2).
Using our levers of influence
Our conviction
Stewardship investing is a fundamental driver of C D P Q’s long-term performance.
FIGURE 2
OURSTEWARDSHIPINVESTINGLEVERSOFINFLUENCE
1. STRATEGIC PROJECTS Deploystrategies,policiesandinitiativesreflectiveofthechangesinmajorE S G trends
2. LEADERSHIP Engageonlocalandinternationalcollaborativeplatforms,alongsideourpeersandthefinancialecosystemtomaximizeourabilitytoact
3. AWARENESS WorkwithourinvestmentteamsandnomineedirectorstorefinetheirunderstandingofE S G issues
4. E S G INTEGRATION AssessE S Gperformanceaspartoftheinvestmentandmanagementprocesses
5. SHAREHOLDER VOTE Exerciseourshareholdervotingrightsinkeepingwithourconvictionsandprioritiesforstewardshipinvesting
6. ENGAGEMENT ConductongoingdialoguewithourportfoliocompaniesandexternalmanagerstopromoteE S Gbestpractices
1.Strategicprojects
2.Leadership
3.Awareness
4.ESG integration
5.Shareholder
vote
6.Engagement
Portfolio companies
and external managers
CDPQ | 2020 SIR8
1. Our strategic projects
A MORE AMBITIOUS PROXY VOTING POLICY
We reviewed ourPolicy on the Principles Governing the Exercise of Voting Rights of Public Companies in2020 toinclude new diversity and inclusion elements as well asfurtherrefineourpositiononclimateissues.
Withrespecttodiversityandinclusionwithinourportfoliocompanies,wehave:
• Statedourdesiretoencourageanymeasurethatpromotesdiversityinthebroadersenseandthatallowsforarangeofviews tobeheardand included in thedecision-makingprocess
• Raisedourexpectations,mainlywithregardtodisclosure,policies,targetsandstatistics
• Adoptedatargetofhavingwomenrepresent30%ofBoardsofDirectorsby2022
• Included theoptionof abstainingor voting against thedirectors responsible for appointments if there are nomitigatingcircumstances
Withrespecttoclimateissues,we:
• Included the possibility of supporting shareholderproposals,suchasadoptinggreenhousegasemissions(G H G)reductiontargets,implementingscenarioanalysesandimprovingdisclosurequality
• Addedtheoptionofabstainingorvotingagainstthedirectorsinchargeoftheseissuesifnoprogressismade
USINGOURLEVERSOFINFLUENCE
A letter summarizing these principal changes has been provided to all public companies held in active management in nearly 30 countries.
FACTORING IN SUSTAINABLE DEVELOPMENT GOALS
Toadoptinternationalbestpractices,wehavereviewedtheUN’s Sustainable Development Goals (S D G) to align ourapproach,targetsandE S Griskmanagementwiththisframe-work.TheU N’s2030AgendaforSustainableDevelopmentfocusesonkeydevelopmentgoalsinvolvingpeople,theplanetandthesustainableeconomy.
In2020,webeganintegratingtheseS D Gsthroughoutourstewardshipinvestingstrategyinastructuredmanner.WehaveselectedthefourS D Gswherewebelievewecanhavethegreatestimpact.
9CDPQ | 2020 SIR
2. Our leadership in Québec and around the world
Tomaximizeourimpactandcontributetosocietalprogress,weuseourinfluencetobringtogethergroupsofinstitutionalinvestors in Québec and around the world for majorstewardshipinvestinginitiatives.
Weworkhardtoadvancemajorissues,notablyonclimateriskandE S Gfactorreporting,abusivetaxpracticesandaccele-ratingdiversity and inclusionwithinour industry andourportfoliocompanies.
We leverage our capital and expertise to encouragecompaniesandourpeersinallindustriestomobilizeandplaya role in the transition towardasustainableeconomy.Wefirmlybelievethatthisapproachwillhavealastingimpactthatwillbenefittheeconomyandsocietyasawhole.
3. Supporting our teams
Our investment teams evaluate a number of sustainabilitymetricswhenanalyzingandmonitoringportfolios.Havingamore comprehensive understanding of E S G factors has asignificantimpactonthiskeyaspectofthedecision-makingprocess.
OurstewardshipinvestingandE S Griskanalysisgroupsworktogether closely to structure our efforts and support ourinvestmentteams.
We also focus on professional development activities toexpandtheknowledgeandexpertiseofourteamsinachangingstewardshipinvestingcontext.
USINGOURLEVERSOFINFLUENCE
We implemented key initiatives in 2020 to raise awareness on diversity and inclusion. This included:• Providingtrainingtomorethan500investmentteammembersandnomineedirectors,incollaborationwithseniormanagementandexternalexperts
• Developingtoolsforourinvestmentteamstohelpthembetterconveyourconvictionstotheirpartners
CDPQ | 2020 SIR10
4. Integrating E S G factors into our business decisions
Beforemakinganinvestment,weperformadetailedanalysisof a company’s variousaspects suchas thestrategyandculture,currentandpreviousperformance,stability,growthpotential and team know-how.Moreover, given that E S G
factorsarecloselytiedtoanorganization’sperformance,wetakethesefactorsintoaccountthroughoutourinvestment,analysis,decision-making,andpost-investmentmanagementprocess.
5. Shareholder voting
Asashareholder,ourvotingrightsareapreferredtool forexpressingourpositionsasalong-terminvestor.Werelyonthemtoconveyourexpectationsandshareourconvictionsinavarietyofareasduringtheannualgeneralmeetingsofourportfoliocompanies(Charts3and4).
USINGOURLEVERSOFINFLUENCE
We voted on 58,032 proposals during 5,566 shareholder meetings in 2020 through our equity market holdings.
18.4%
0.4%
43.0%
5.0%
10.4%
14.8%
7.9%
• Directors
• Funding
• Routine
• Compensation
• Mergers and acquisitions
• Auditors
• Shareholder rights
CHART 3
TOPICSOFMANAGEMENTPROPOSALS
60.0%
7.2%
4.5%
4.2%
4.3%
2.5%
13.6%
3.7%
• Directors
• Governance
• Shareholder rights
• Compensation
• Environment
• Social
• Lobbying and political contributions
• Other
CHART 4
TOPICSOFSHAREHOLDERPROPOSALS
11CDPQ | 2020 SIR
6. Commitment to mobilize our portfolio companies
Weleverageourinfluencebybeinginregularcontactwithourportfoliocompanies.Weencouragethemtosetambitioussustainabilityobjectives,tobetransparentandrigorousinreporting results and to present the action taken tomeasureperformance.
Through theseconversations,webuilda transparentandconstructivedialoguewiththemanagementteamsandBoardmembersofthesecompaniestomakecollaborativestridesinthe areas identified. This allows us to understand theirstrategiesandprovidebettersupport.
OurteamsactivelycontinuedtheirworkduringtheCOVID-19pandemic.Weengagedin143discussionsregardingvariousE S G-relatedmatterswith112portfoliocompanies(Chart5)duringtheyear.
WealsouseourinfluenceasBoardmemberstoencouragevariouscompaniestoadoptbestpractices.
USINGOURLEVERSOFINFLUENCE
Executive compensationEffectivemanagement of the compensation of theportfoliocompanies’executivesisoneofthefactorsconsideredinouranalyses.Wepayspecialattentiontotransparencyofdisclosuresandhowthisinformationistiedtocompanyperformance.Ifneithercriteriameetourexpectations,wewillnothesitatetoexerciseourrightandvoteagainstmanagement. In2020,wedidthisin30%ofcases.
New elements were added to our proxy voting policy in the fall of 2020 to set out our expectations regarding diversity, inclusion and climate change. They will be priority topics for discussion in 2021.
14%
22%
21%
12%
7%
7%
3%
3%
• ESG strategy
• Climate change
• Board composition
• Executive compensation
• Management/impacts of COVID-19
• Employee relations on workplace health and safety
• Diversity and inclusion
• Cybersecurity
• Other
12%
CHART 5
KEYTOPICSADDRESSED
CDPQ | 2020 SIR12
We believe that it is our duty to support Québec companies and the various stakeholders in our economy, especially in turbulent times.
We support companies in their growth and international expansion plans. We encourage technological innovation while helping create more sustainable communities.
Making the growth of Québec’s economy and companies a priority
$4 billion to recover and build for the long term
C D P Qmobilizedatthebeginningofthepandemic,creatinga$4-billionenvelopetosupportQuébeccompaniestemporarilyaffectedbythecrisis.Thissupport,whichcomplementsthemeasuresannouncedbyotherfinancialandgovernmentalinstitutions,wasaccompaniedbypersonalizedsupportthatdrewonthefinancial,strategicandoperationalexpertiseofourteams.
This initiativealsomakes itpossible todrive therecoveryand growth initiatives of the selected businesses. As atDecember31,2020,halfoftheamountshadbeenorwereintheprocessofbeingallocated.
Our goal
Help to build a dynamic, competitive and sustainable economy over the long term by combining our teams’ know-how, our investment expertise and our vast business network.
13CDPQ | 2020 SIR
Fostering diversity within companies
ThelaunchoftheEquity253fundinOctober2020isoneofthetangibleresultsofC D P Q’scommitmenttodiversityandinclusion.WeaimtoencouragegrowingS M Esandsuccessfultechnologycompanies inQuébecandCanadato increasediversity and inclusion in their teamswithin five years ofbeingselected.
Companiesmust ensure thatpeople fromdifferentback-grounds (women, visibleminorities, Indigenous peoples)representatleast25%of:
• Boardmembers
• Managementteammembers
• Shareholders
Thefundoffers$5to$30millionininvestmentsaswellasoperationalguidancetoimplementandexecuteacustomizeddiversityandinclusionplan.Withatotalof$250milliontodeployoverfouryears,Equity253isthelargestfundcreatednationally that directly targets diversity as a lever fordevelopmentandexpansion.
Wefirmlybelievethatthereshouldbemorewomenattheheadofcompanies,whichiswhyweareactivelypursuingCheffesdefile,aninitiativelaunched2018.Itbringstogether76womenentrepreneursfrom11regionsofQuébecwhoareleadingcompanieswithsalesofbetween$5and$20million.
Thegoalistofosterjointdevelopmentandthesharingofbestpracticestofuelthestrategicthinkingofthesewomenentre-preneurswhileallowingthemtoleverageC D P Q’snetworkofpartnersandacceleratecompanygrowth.Issuesaddressedin 2020 included planning for post-pandemic growth,improving their customer experience and building theiremployerbrand.
Support measures tailored to the COVID-19 crisis
IvanhoéCambridge,C D P Q’srealestatesubsidiary,workedwiththevariouslevelsofgovernmentandtookintoaccounttheneedsof its tenants toofferexceptional recoveryandsupportsolutions,suchasrentdeferrals.
IvanhoéCambridgealsopartneredwithLightspeed,aleaderincloud-basedsalesservices.TenantsinitsCanadianshoppingcentresreceivedfreeaccesstoLightspeed’sintegratedsalessoftware for one year, in addition to real-time inventory
managementanddeliveryserviceoptimizationmodules.Thisallowedthemtobetteradapttothelockdownmeasuresandprovideonlinesalesplatformstotheirclients.
Topromotethewell-beingofmerchantsandcustomersandtoprovidethemwithasafeenvironment,IvanhoéCambridgealsoofferedavirtualqueuemanagementsystemfreeofchargetoitstenants.
CDPQ | 2020 SIR14
In 2020, C D P Q exceeded the targets we set when unveiling our climate strategy, significantly increasing our low-carbon investments and substantially reducing the portfolio’s carbon intensity compared to 2017.
CLIMATE CHANGE
Investing in the transition
15CDPQ | 2020 SIR
The four pillars of our strategy
1.Factorclimatechangeintoeveryinvestmentdecision
2.Increaseourlow-carbon investmentsby80%between2017and2020
3.Reduceourcarbonintensityperdollarinvestedby25%between2017and2025
4.Exercisestrongerclimateleadershipwithintheindustryandwithourportfoliocompanies
TheCOVID-19pandemicandtheensuingglobaleconomicslowdownhavehighlightedwhyurgentactionisneededtoaddresssustainabilityissuesfacingourcommunitiesandwhyinvestinginthetransitionisofparamountimportance.
These are two key convictions for C D P Q. The resultsgeneratedbyourfirstclimatestrategyareatestamenttoourdesire tobeproactiveand remainat the forefrontamonglarge,globalinstitutionalinvestorsinfightingclimatechange.Toachievethis,ourtargetsmustbebasedonclearprinciplesandmeasurableandachievableactions, therebyallowingrigorousdisclosureonwhatweaccomplished.
Wearenowoneoftheworld’sleadinginvestorsinrenewableenergy.Wewillcontinuethismomentumtofosteratransitiontoanincreasinglysustainableeconomy.Wewillbeupdatingourclimatestrategy in2021toshowcaseourambitions inthisarea.
CLIMATECHANGE
Our goal
Continue to contribute to the decarbonization of the real economy and achieve a carbon-neutral portfolio by 2050.
CDPQ | 2020 SIR16
1. Our investment process
Since2018,theclimatefactorhasbeenanintegralpartofourinvestmentprocess (Figure6)and the focusof sustainedeffortsbyallofourteams.
Aclimateambassadorhasbeenidentifiedforeachspecializedportfolio.Thisreferencepersonhasthenecessaryskillstoensurethatclimatefactorsareconsideredwhenanalyzinginvestmentopportunities.
Allpotential investmentsarecarefullyanalyzedbyvariouscommitteeswhich includeC D P Qexecutives, notably theInvestment-RiskCommittee.Thisprocessallowsustoconti-nuously monitor our climate targets and identify newlow-carboninvestmentopportunitieswithanacceptablelevelofrisk.
DEVELOPING SPECIALIZED TOOLS
Wehaveputinplacedifferentwaystofactorclimateriskintoour investment process. In addition to systematicallyconsideringacompany’scarbonfootprintdata,wedevelopspecializedtoolstomanagethephysicalandtransitionrisks.
Carbon budget
Toensure thatweachieveourcarbon intensity reductiontargets,weuse“carbonbudgets”foreachofourportfolios.Ourmanagerstakethesebudgetsintoaccountintheirannualstrategicplanningandensure that theyare respectedbymeasuringthecarbonfootprintoftheirinvestmentdecisions
throughout the year. This tool promotes low-carboninvestmentsaswellasinvestmentsthatarebetterpositionedforanenergytransition.
Variable compensation tied to climate targets
C D P Qsentastrongmessagebydirectlytyingemployees’ variablecompensationtotheachievementofclimatetargets.Weareoneofthefirstglobalinstitutionalinvestorstodothis.
Physical risks
Weareworkingwithourpeersandexpertadvisorstodevelopaninnovativesolutionthatwillenableconductingaqualitativeand quantitative assessment of events that could have asignificantimpactonourassets.Itwillbepossibletorefineouranalysesaccording todifferentclimatescenariosandtimehorizonstodeterminetheimplicationsforacompany’svaluechain.Ultimately,thiswillhelpustobetteranticipatephysical climate risks, to engage in discussions withcompanies onhow tomitigate risks and to improve totalportfolioresilience.
Transition risks
We have also developed qualitative tools to improve theintegrationof transition risks.Thesescalable toolsaimtoguidedecision-makingaccordingtoregulatory,technologicalandsocio-economicdevelopmentsaroundtheworld.Theyalsoallowteamstoasktherightquestionswhenanalyzinginvestmentandpost-investmentopportunities.
CLIMATECHANGE
Insitutionalresearch, prioritiesandstrategies
OVERALL OBJECTIVE AND TARGETS
Targetsquantifiedbygroupandsector
DETAILED TARGETS BY PORTFOLIO
Detailedanalysisofinvestmentrisksandopportunities
SPECIFIC ANALYSIS OF INVESTMENTS
Metrics,analysis,internalmonitoring andpublicand privateengagement
MONITORING AND ENGAGEMENT
Publicationofourtargetsandourperformance
REPORTING
FIGURE 6
FACTORINGCLIMATECHANGEINTOOURINVESTMENTPROCESSES
17CDPQ | 2020 SIR
2. Our low-carbon investments
AsatDecember31,2020,ourportfoliooflow-carbonassetstotalled$36billion(Chart7),whichisdoublethevalueofourinvestmentscomparedto2017.Wehavethereforeexceededourtargetof$32billionfor2020.Inthecomingmonths,wewillsetanewtargetforlow-carboninvestments.
PLATFORM FOR INNOVATION IN STEWARDSHIP INVESTING
C D P Qrecognizesthatkeyinnovationsthatwillhaveamajorimpact on G H G emissions are needed to successfullytransitiontoalow-carboneconomy.Tobettertargetthistypeofinvestment,in2020wecreatedaplatformforinnovationinstewardship investing (I S I) in keepingwith our desire todevelopnewpartnershipsleadingtobusinessopportunities.ThesenewcollaborativeinitiativeswillallowC D P Qtodevelopour internal expertise in certain areas relating to thesustainableeconomyaswellasidentifynewmarketsegments.
GROWING DEMAND FOR LOW-CARBON ASSETS
Asanindustryleader,wehavemanagedtodoublethevalueofour low-carbon assets in recent years. However, highlyavailablecapital,coupledwithincreasedcompetitionbetweenagrowingnumberofinvestorsinterestedinacquiringgreenassets,maymakegrowingtheseassetsmorecomplexinthecomingyears.
We nonetheless believe that interesting opportunities toinvest in the transition canbe seized to provide tangibleimpactsintermsofG H Gemissionsreduction.
CLIMATECHANGE
CHART 7
LOW-CARBONINVESTMENTS(inbillionsofdollars)
• Renewable electricity
• Real estate • Transportation and industrials
+80%
+100%
2017 2018 2019 2020 2020 target0
40
15
20
25
30
5
10
35
18
28
3436
32
Some portfolio companies are developing and building solar power or wind farms that are then sold to third parties. In these situations, our constructive capital is used to create assets that make an active contribution to the energy transition, even if they do not always remain in our portfolio.
CDPQ | 2020 SIR18
CLIMATECHANGE
Case study C D P QpartnerswithC R E OFamilyOfficeSyndicate(C R E O),anorganizationthataimstodirectmorecapitaltoinvest-mentsinclimatechangeinitiatives,throughtheworkdonebytheinnovationplatformforstewardshipinvesting.
ThiscollaborationwithC R E OhasledtoajointinvestmentagreementwithS2GVenturestoinvestuptoUS$125millionover thenext threeyears inventurecapitalcompanieswhoseobjectiveistohaveamoresustainableagri-foodindustry.
An initial investment was made in a food technologycompany,BensonHill,in2020.
Low-carbon investments in the portfolio
$18 B 2017STARTINGPOINT
$32 B 2020TARGET
$36 B 2020VALUE
AsatDecember31,2020,ourportfoliooflow-carbonassetstotalled$36billion,doublethevalueofinvestmentscomparedto2017,exceedingour2020targetof$32billion.
19CDPQ | 2020 SIR
CLIMATECHANGE
A number of investments and reinvestments were added to our low-carbon portfolio around the world in 2020, making us one of the largest investors in this area.
1. Greater Changhua 1• Newinvestment
• OffshorewindfarmprojectinTaiwan
• Willprovidecleanenergytomorethan650,000homes
2.C D P Q Renovables Iberia• Newinvestment
• Totalof73solarpowerfacilities
• Suppliesmorethan115,000householdsinSpain
3. Azure Power• Reinvestment
• LeaderinthedevelopmentandoperationofsolarenergyprojectsinIndia
• Participatesinthegrowthoftherenewableenergymarket
4.AddÉnergie• Reinvestment
• LeaderinelectricvehiclechargingsolutionsinCanada
• OperatesanetworkofchargingstationsacrossNorthAmerica
5. Invenergy Renewables• Reinvestment
• GrowthprojectforoneofthelargestrenewableenergyproducersinNorthAmerica
• Willprovidetotalcapacityofapproximately2,300MWinwindfarmsintheUnitedStatesandCanada
51 3
2 4
CDPQ | 2020 SIR20
3. Our carbon intensity per dollar invested
Thecarbonintensityofourtotalportfoliodecreasedby38%comparedtoour2017startingpoint.Itwas49t C O2e/M$asatDecember31,2020,comparedto79t C O2e/M$onthesamedatein2017(Chart8).Weachievedthisreductionbyrigorouslyusing carbon budgets, acquiring low-carbon assets anddisposingofhighercarbon-intensityassets.
Giventhatwehaveexceededourreductiontargetof25%,in2021wewillbesettinganewtargetfor2025.Weexpecttocontinueoureffortstowardachievingacarbon-neutralportfolioby2050.
AsatDecember31,2020,thecarbonfootprintofourportfoliowasmainlyattributabletoelectricityproductionandcertainhigh-intensitysectors(Chart9).
CLIMATECHANGE
The proportion of low-carbon assets (6%) and renewable electricity generating assets (4%) is 10% of the value of C D P Q’s portfolio.
CHART 8
PORTFOLIOCARBONINTENSITY(int C O2e/M$)
0
20
40
60
8079
6372
4959
2017 2018 2019 2020 2025 target
-38% -25%
CHART 9
PORTFOLIOCOMPOSITION: DOLLARSANDCARBONFOOTPRINT
• Low-carbon assets
• Renewable electricity
• Low-intensity sectors
• Industrials
• Energy
• Materials
• Non-renewable electricity
2020 (tCO2e)2020 ($B)
4%3%4%
12%
66%
6%4%
36%
13%
15%
7%
28%
1%
21CDPQ | 2020 SIR
Case study PlaceVilleMarie, abuilding indowntownMontréalowned by our subsidiary, Ivanhoé Cambridge, iscurrently participating in amajor energy recoveryprojectthatwillhaveasignificantimpactonG H Gemis-sions.Thisinitiativeaimstouseheatpumpstoreducesteamconsumption inheating.Theheatingandairconditioningsystemswillbe interconnectedsothatresidualenergyistransferredbetweenthem.Thisisexpectedtodecreaseenergyconsumptionbyapproxi-mately15%aswellasreduceG H Gemissionsbymorethan3,000t C O2eperyear,foratotalreductionofmorethan40%.
CLIMATECHANGE
Total portfolio carbon intensity
79 t C O2e/M$ invested
2017STARTINGPOINT
59 t C O2e/M$ invested
2025TARGET
49 t C O2e/M$ invested
2020VALUE
Ourportfolio’scarbonintensityisdown38%fromthestartingpointin2017:itwas49t C O2e/M$asatDecember31,2020,comparedto79t C O2e/M$onthesamedatein2017.
CDPQ | 2020 SIR22
CLIMATECHANGE
REDUCING OUR EXPOSURE TO THE MOST POLLUTING FOSSIL FUELS
Throughoutourinvestmentprocess,weanalyzetherolethatall energy value chain componentsplay in the transition,therebycloselymonitoringourhydrocarbonexposure.Wewill demandthatthehighestemittersinthissectorinitiateareal transition for theirbusinessmodelwhenmakingourinvestmentdecisions.
Infall2020,wepledged,togetherwiththemembersoftheUN-convenedNet-ZeroAssetOwnerAlliance,tonolongerfinanceanynewthermalcoalprojectsinadditiontograduallyphasingmostcoal-poweredassetsinindustrializedcountriesoutofourportfolioby2030,eliminatingthemfullyworldwidebetweennowand2040.
Case study Tomakebetterchoicesinourclimatebudgetsandmanageourhydrocarbonexposure,in2020ourinvestmentteamsdecidedtosellourdirectholdingsinExxonMobilCorp.ThisfollowedanumberofcommitmentsmadetoExxoninconnectionwithoursupportfortheClimateAction100+initiative,whichencouragescompaniestoimprovetheirclimateperformanceandbemoretransparentregardingclimateissues.Whilewehaveseensomeprogressovertime,sellingoffthisassetbecamethebestoptionsincethe energylandscapeandtheclimatechangesituationareevolvingquickly.Thistransactionrepresentsareductionofaround190,000t C O2einourportfolio.
We pay especially close attention to the most polluting forms of energy and have set an objective of eliminating our exposure to these forms of energy in the coming years.
23CDPQ | 2020 SIR
4. Our climate leadership
WebelievethattherecoveryneededtooffsettheeconomicimpactsoftheCOVID-19pandemicisanopportunitytohelpbuildmoresustainablebusinessesandcommunities.C D P Qtakesclimatechangeintoaccountandthisapproachmustbeextendedtoincludeallindustrystakeholders.
In addition to our own climate targets, we endeavour toinfluenceallinvestmentandfinancesectorstakeholders.Thismeansthatweplayanactiveroleinpromotinganumberoflocal and international initiatives tomobilize our portfoliocompanies,ourpeersandthebusinesscommunityinthefightagainstclimatechange.
STRUCTURING INITIATIVES
In2020,wecontinuedourcommitmenttoanumberofmajorinternational initiatives, notably the Investor LeadershipNetwork(ILN)andtheUN-convenedNet-ZeroAssetOwnerAlliance(seepages24–25).
Wehavealsocontinuedtouseourinfluenceandshareourexpertisewithmanyassociations,groupsandtaskforces.
Maple 8
InNovember2020,wesentastrongmessageinfavourofasustainable,equitableandinclusiveeconomicrecoverybyissuingajointstatementwithsevenofthelargestpensionfundinvestmentmanagersinCanada.ThisstatementcallsforbetterintegrationofE S Gcriteriaforgreatertransparencyandfor recognized protocols to be adopted facilitating thedisclosure of comparable financial information useful indecision-making,suchastheTaskForceonClimate-relatedFinancialDisclosures(T C F D)aswellasstandardsissuedbytheSustainabilityAccountingStandardsBoard(SASB).
Montreal Climate Partnership
Inlate2020,wejoinedthesteeringcommitteeoftheMontrealClimatePartnership,an independent initiative thatbringstogetherrecognizedeconomic,community,philanthropicandinstitutionalorganizations.Thegoal is tomobilize thekeyplayers in theMontréal community to help reduceG H Gemissionsby55%by2030andbecomecarbonneutralby2050.ThisinitiativeledbycivilsocietycomesinthewakeoftheCityofMontréal’sClimatePlanlaunchedinDecember2020.
Climate Action 100+
In2020,weco-ledthreeinitiativesinconnectionwithClimateAction100+,whichwehavebeenamemberofsince2017.TheseinitiativesaimedtoinfluenceSouthernCompany,W E C EnergyGroupandDukeEnergy.Asaresultoftheseefforts,thesethree largeemittersmadeacommitmenttobecomecarbonneutralby2050, representingareductionofmorethan200milliont C O2eperyear.
CLIMATECHANGE
CDPQ | 2020 SIR24
Investor Leadership Network (ILN)
C D P QcofoundedtheInvestorLeadershipNetworkagainstthebackdropofCanada’spresidencyoftheG7in2018.TheILNcurrentlybringstogether14globalinstitutionalinvestors.
TheILN’sobjectiveistofacilitatecollaborationamongpeersandworkcollectivelyonconcreteinitiativesrelatingtothreestrategicissues:
• Promote a mutual understanding between emergingmarketpublic-sectorofficialsresponsibleforinfrastructureplanning and developedmarket investors by way of asustainableinfrastructurefellowshipprogram
• Enableperformancebyunleashingtalentinglobalcapitalmarketsthroughdiversity,withaninitialfocusonwomen
• Speeduptheimplementationofuniformandcomparableclimate-relateddisclosures
C D P Qalsoco-leadsseveralbodieswithintheILN,suchastheCEO Council, the Board of Directors and the advisorycommittees for each initiative and the communica-tionscommittee.
PROMOTING BEST PRACTICES
Diversity in investment
TheILN’s14membersheldtheirsecondC E OCouncilinJune2020, where they pledged to increase diversity in theinvestmentandfinancesector.Toachievethis,theywillsetmeasurabletargetsandpromotethemwithintheirrespectiveorganizationsaswellaswiththeirportfoliocompaniesandexternal managers. A particular focus will be on seniorleadershippositionsandinvestmentroles.
ThelettersignedbyCouncilmembersisavailableat:www.investorleadershipnetwork.org/wp-content/uploads/2020/06/ILN-Diversity-Joint-Engagement-Letter_Signatures-June-2020.pdf
Climate change
InSeptember2020,theILNpublishedapracticalguideforinvestors titled: “Climate Change Mitigation and Your Portfolio: Practical Tools for Investors.”
This reportprovidesaclearoutlookon the transition toacarbon-neutraleconomyby2050.Itpresentstenkeyleversfortheindustriesmostaffectedbythetransition,inadditiontoincludingdetailedtipsallowingforabetterinterpretationofthescenariosanalyzedbyportfoliocompanies.
Thereportisavailableat:https://www.investorleadership-network.org/wp-content/uploads/2020/09/ILN_Climate-Change-Mitigation-and-Your-Portfolio.pdf
Sustainable infrastructure
TheSustainableInfrastructureFellowshipProgramisofferedto senior-level public sector officials responsible forinfrastructureplanninginemergingmarkets.Itallowsthemtobuild theirexpertise, learnbestpracticesanddiscuss theconditions for developing infrastructure projects withILN members.In2020,26participantswererecruitedandarecurrently takingpart in remote trainingactivities throughYork University’sSchulichSchoolofBusiness, includingacomponentprovidedbyILNmembers.
Supporting sustainable growth through two major international initiatives
25CDPQ | 2020 SIR
UN-convened Net-Zero Asset Owner Alliance
C D P QisoneofthefoundingmembersoftheUN-convenedNet-ZeroAssetOwnerAlliance,aUNinitiativethatcurrentlybrings together 35 large global investors with a sharedobjectiveofachievingcarbon-neutralportfoliosby2050whilefocusingontheimpactontherealeconomy.
By focusing on the climate issues and tapping into eachmember’sexpertise,theAllianceassertsstrongleadershipandprovidesgreatpotentialforchange.Members’economicinfluenceisleveragedtoencourageinvestorstosupporttheirportfoliocompaniesindecarbonization.
Memberswork together todevelop frameworksand toolsthroughvarioustaskforcestohelporganizationsdesignatransitionstrategybasedonathoroughassessmentofthesituation.C D P Q’steamsworkonthesecommitteesandarehelpingtosteertheAlliance.
ENCOURAGING INVESTORS TO TRANSITION TO A SUSTAINABLE ECONOMY
Twokeyreportswerepublishedinthewakeoftheseconsulta-tionsin2020:
Inaugural 2025 Target Setting Protocol
Settingscience-basedinterimtargetsisacomplexchallenge.Assuch,theAlliancehaspublishedaprotocolclearlysettingouttheapproachtobetakenbymembersinordertosetacarbonfootprintreductiontargetfortheirportfolioswithinthenextfiveyears.
ThisprotocolisavailableonthewebsiteoftheUnitedNationsEnvironment Programme Finance Initiative (U N E P F I) at:www.unepfi.org/wordpress/wp-content/uploads/2021/01/Alliance-Target-Setting-Protocol-2021.pdf
Thermal Coal Position
Toachievetheircarbonneutralitytarget,Alliancemembersalsopublishedapositiononthermalcoal,whichrecommendscancelling all new thermal coal projects. The report alsorecommendsprohibitingfinancingfornewplantsandcallsupongovernmentstodeveloprenewableenergyinitiatives.
This document is available on thewebsite of theUnitedNationsEnvironmentProgrammeFinanceInitiativeat:https://www.unepfi.org/wordpress/wp-content/uploads/2020/11/Net-Zero-Asset-Owner-Alliance-Thermal-Coal-Position.pdf
CDPQ | 2020 SIR26
DIVERSITY AND INCLUSION
Promoting diversity and inclusion at all levelsThe COVID-19 crisis has accelerated economic and social inequality around the globe, making us even more determined to promote gender, ethnocultural and generational diversity as well as diversity of different backgrounds within our organization and in society as a whole.
27CDPQ | 2020 SIR
OurgoalistoensurethatC D P Qprovidesaninclusiveworkenvironmentthatvaluesrespect,trust,listeningandopennessto differences. We want our people to grow as well ascontributefullytoourbusinessobjectives.
Sinceourconvictionsextendtothecompaniesweinvestinas wellasexternalmanagerswhoworkwithus,weencouragethemtoplacemore importanceon this, tostructure theirapproachandtomobilizeinatangibleway.
Ourcommitmentgoesevenfurther.Wearedeterminedtoexerciseourleadershiponthesematterswithinthefinancialindustry.Toachievethisobjective,wedevelopandparticipateinconcreteinitiatives,notablytoincreasethenumberofwomenandmembersofethnoculturalminoritygroupsinfinancialandinvestmentrolesbothinQuébecandinternationally.
DIVERSITYANDINCLUSION
Three pillars of our commitment
1.Implementinitiativesthatfosterinclusionandtheprofessionaldevelopmentofallofourtalent
2.Exercisestrongleadershipamongourportfoliocompaniesandexternalmanagers
3.Promotediversityandinclusiontopositivelyinfluencetheindustryandourpartners
Our conviction
A corporate culture based on equity, diversity and inclusion is fundamental to achieving our business objectives and building stronger communities.
CDPQ | 2020 SIR28
DIVERSITYANDINCLUSION
1. Focus on diversity and inclusion within our teams
C D P Qmakesasustainedefforttoattract,retainanddevelopmorewomen aswell as people of different origins, fromdifferent cultures andwith different backgrounds in ourtalentpool.
AN INCLUSIVE AND EQUITABLE RECRUITING PROCESS
Thereisnoquestionthatitisimportanttoattract,recruitanddevelop employeeswith different profiles. This diversityallowsustocultivateavarietyofperspectivesthatmakeusbetterineverythingthatwedo.
Inconcreteterms,thismeans:
• Promoting our professions and maintaining an activeapproachtorecruiting
• Periodically analyzing all of ourworkforce and settingmeasurabletargetstoensurethatdiversityisfairlyrepre-sentedatalllevels
• Regularlyreviewingourrecruitingandtalentmanagementpracticesandtools
EDGE ASSESS CERTIFICATION
We obtained EDGE Assess certification inMay 2020 inconnectionwithourworkwiththeILN,whichenabledustomeasureouractionsregardinggenderequalityatalllevelswithintheorganizationandmakeconcretecommitmentsinthisarea.Thisallowedusto:
• Settargetsforgenderbalanceatalllevelsoftheorgani-zation
• Clarifycareeradvancementcriteria
• Gather all of our statements, principles andguidelinesgoverningdiversityand inclusionwithinonepolicy thatreflectstheimportancethattheBoardofDirectorsandtheexecutivecommitteeplaceonthis.
WhileEDGEcertification focusesongenderdiversity, theactiontakenwillbenefitallofourtalent.Thisalsohelpsustobetterdefineourstrategiesandbuildourinfluencewithourpartnersandportfoliocompanies.
29CDPQ | 2020 SIR
DIVERSITYANDINCLUSION
Benefits of diverse and inclusive teams:• Broaderperspectivesonbusinessopportunities
• Betterdecisionquality
• Strongeremployeeengagement
• Amorecomprehensiveviewofrisks
Aligning performance and progress
Webelieveitisimportantforwomenandmembersofthefollowinggroupstoberepresented:visibleminorities,ethnicminoritiesandIndigenouspeoples.Weseethisascriticaltobuildingamorejustsocietyandtoachievingourbusinessobjectives.
43%
SHAREOFWOMEN
ONTHEBOARD
OFDIRECTORS
31%
SHAREOFWOMEN
ONOUREXECUTIVE
COMMITTEE
22%
SHAREOFWOMEN
ININVESTMENT
POSITIONS
23%
SHAREOFOUREMPLOYEES
INQUÉBECWHOIDENTIFYAS
AMEMBEROFONEOFTHE
FOLLOWINGGROUPS:VISIBLE
MINORITY,ETHNICMINORITY
ORINDIGENOUSPEOPLES
AsatDecember31,2020
CDPQ | 2020 SIR30
DIVERSITYANDINCLUSION
2. Exercise strong leadership among our portfolio companies and external managers
Asaninvestorandshareholder,wehaveclearexpectationsofour portfolio companies and externalmanagers.We payparticular attention to the adoption of policies and thedisclosureofdiversityandinclusiondata,andwetakeakeeninterestinprogressthatismade.
ENCOURAGING DIVERSITY AND INCLUSION
Wegenerallyencourageourportfoliocompaniesandexternalmanagerstoincreaserepresentationbywomenandmembersofminority groupson theirBoardofDirectors aswell asthroughout their organizations while also promoting adiversityofskillsandexperience.
In2020,wetookstockofthesituationtosettargetsandmakeconcrete commitments. This analysis showed that, as atDecember31,2020,59%of thepubliccompaniesheld inactivemanagementinourportfoliohadlessthan30%womenmembersontheirBoardsofDirectors.
Weproposetwotypesofactiontodealwiththesituation:
• Havingadirectandopendialoguewiththecompaniesinquestiontodiscussanydiversityandinclusionissuesthatmayarise
• Usingourshareholdervoteduringannualgeneralmeetingstostateourexpectationsandconvictions
Nominee directors
Genderrepresentationamongnomineedirectorsappointedby C D P Q and subsidiaries was also examined. As atDecember 31, 2020, 22% of these positions were heldbywomen.
Inlightofthiswork,C D P Qhasadoptedatargetofhaving30%ofBoardpositionsheldbywomenby2023.Anactionplanisbeingimplementedtoachievethis.
Theactionplanhasfourareasoffocus:
• Mappingpositionsthatarefilledandvacantandmonitoringtargetsregularly
• Reviewing selection and appointment processes and criteria
• Strengtheningthepoolofcandidateprofiles,notablybyleveraging our international networks and beingmoreproactiveinourtalentsearch
• Overseeing the role of Boardmember,which includesprofessionaldevelopmentforcurrentdirectors
Our goal
To encourage measures aimed at broadening the pool of candidates who are qualified to act as directors.
31CDPQ | 2020 SIR
3. Promoting industry-wide diversity
C D P Qadvancesdiversityandinclusionissues,togetherwithothermajoremployersandglobalinstitutionalinvestors.Bycollaboratingonsharedinitiatives,wemaximizetheimpactofouractions.Thisalsoallowsustohavemoreinfluenceinourindustry and bring more investors on board to supportthispriority.
MAKING A COMMITMENT TO OUR PEERS
BlackNorth Initiative
InSeptember2020,C D P Q’sPresidentandCEOjoinedmorethan300businessleadersinQuébecandacrossCanadatosigntheBlackNorthpledge.Thisinitiativecallsforconcreteactionandspecificgoalstoendsystemicracismandcreateadvancement opportunities for members of the Blackcommunity.
Canadian Investor Statement on Diversity and Inclusion
Asafoundingsignatory,inOctober2020C D P Qtookpartinan initiative coordinated by the Responsible InvestmentAssociation(RIA).Thegoalistoimprovetheannualpublicdisclosureofdiversitydata,toadoptpolicies,objectivesandtimelines and to expand and promote the organization’seffortstoeliminateobstaclestodiversityandinclusion.
The Prosperity Project’s Zero Report
C D P QhascontributedtotheProsperityProject’sZeroReport.Thisinitiativeassessestherepercussionsofthepandemiconwomen—particularlywomenfromdifferentminoritygroups—onthreeorganizationallevels,i.e.theBoardofDirectors,theexecutivecommitteeaswellascandidatesseekingexecutivepositionswithinlargepubliccompanies,Crown/governmentcorporationsandprivatecorporations.
The 30% Club
Since2017,C D P QhasbeenamemberoftheCanadianchapterof thisgroupoforganizationsadvocating forat least30%female representation on the Board of Directors andmanagementteamofS&P/TSXCompositeIndexcompanies.
In2020,wehelpedtodevelopEngagementTalkingPointsformembers of the 30% Club and their employees. Thisdocumentprovidesargumentstoanswerthemostfrequentlyasked questions about diversity and inclusion raised byBoardmembers.
DIVERSITYANDINCLUSION
CDPQ | 2020 SIR32
GOVERNANCE
The COVID-19 pandemic reiterated the importance of a company’s decision-making structure and processes. Effective risk management, an organizational culture that is based on collaboration and a sustained dialogue regarding best practices are key assets for companies as they face the challenges before them.
Requiring responsible governance practices
33CDPQ | 2020 SIR
GOVERNANCE
Our three priorities for supporting more responsible governance
1.AnalyzingE S Gfactorsinallofourinvestmentactivities
2.Anticipatingcybersecurityissues
3.Counteringabusivetaxplanning
Ourteamspromoteouroutlookandleveragetheirexpertiseregardingcompaniestoimproveorganizationalresilience.
In2020,ourteamsreviewedasetoffactorswhenanalyzingourtransactions.Boardcompositionandeffectiveness,share-holding structure, executive compensation, taxpractices,ethicsandbusinesspractices,aswellasriskmanagementandcybersecuritywereexamined.
Our belief
Sound corporate governance is a reflection of the solidity and durability of our portfolio companies.
CDPQ | 2020 SIR34
GOVERNANCE
1. Analyzing E S G factors in all of our investment activities
Ourteams’ E S Ganalysesareakeyelementinourinvestmentstrategy.TheyallowustoensurethatE S Gfactorsaretakenintoaccountbythecompaniesinwhichweinvest.
WeperformdetailedanalysestomapthepotentialE S Griskswemaybeexposedtoasaninvestor.Thegoalistoapplythenecessarymeasurestoensurethatourownteams—aswellasthoseofourportfoliocompanies—areabletoassessrisksappropriatelyandmakeoptimaldecisions.
SinceE S Gissueschange,weprovidetoolstoourmanagersto help them measure the potential impacts. We havethereforetakenastructuredapproachallowingustoidentifymoresensitivesectorsandtakethisanalysis intoaccountwhenmakingdecisions.
Case study Therehavebeenanumberofdiscussionsinrecentyears—particularly in 2020—with the Board of Directors andsenior management of a major Canadian industrialcompany.WeregularlysharedourE S Gprioritiesandviewsonthepracticesinplace.GivenitsrecentinvolvementinanE S Ginitiative,thecompanyleveragedourdiscussionstocontinueimprovingitsdisclosureframework.
Followingdiscussionswith its investmentpartners, thecompanyannouncedtheadoptionofanenhancedexper-tisematrix for directors and strengthened its climategovernanceanddisclosure.
355TOTALE S GANALYSES
PERFORMEDIN2020
35CDPQ | 2020 SIR
GOVERNANCE
Exercising international leadership
IFRS FOUNDATION’S PUBLIC CONSULTATIONS
We work closely with our peers to adopt a common,comparableandmoretransparentE S Greportingframework.InDecember2020,wesubmittedalettertotheInternationalFinancialReportingStandards(IFRS)FoundationinresponsetopublicconsultationsinconnectionwiththecreationofaSustainability Standards Board (SSB).We firmly supportthe implementation of a global reference framework forE S Greporting.
CFO LEADERSHIP NETWORK – ACCOUNTING FOR SUSTAINABILITY (A4S) INITIATIVE
WetookpartinworkdonebytheCFOLeadershipNetwork’sCanadianchapter,aspartoftheAccountingforSustainabilityinitiative to encourage economic, environmental andsocial issuestobefactoredintostrategies,processesanddecision-making.
TOBACCO-FREE FINANCE PLEDGE
Thetobaccoindustryrepresentsapublichealthissuewithseriousrepercussionsfortheenvironmentandsociety,whichiswhywebelievethatitisnotsustainableinthelongterm.BysigningtheTobacco-FreeFinancePledgeinDecember2020,weofficiallywithdrewfromthisindustry.Thispledgeunder-scorestheleadershipshownbyfinancialinstitutionsthathaveinstitutedtobacco-free financingpoliciesandencouragesotherinstitutionstofollowsuit.
We are determined to contribute to changing our industry, which is why we have become involved on different fronts to encourage the adoption of E S G best practices.
CDPQ | 2020 SIR36
GOVERNANCE
2. Anticipating cybersecurity issues
Thehealthcrisisin2020acceleratedconnectivityinsocietiesaroundtheglobe.Mostcompanies,institutionsandorganiza-tionsoperatedonline,whichexposedthemtoheightenedcybersecurity risks. Such risks were already rising veryquickly,withgreaterpotentialimpactsforstakeholders.
Thesethreatsareincreasinglysophisticatedtoday.Theycanhavemajor economic, political and social repercussions.Stakeholdersarequiterightfullydemandingthattheirconfi-dentialpersonalinformationbebetterprotected.
C D P Qpaysparticularlycloseattentiontoeffortsmadebycompanies to addresscybersecurity issuesandcarefullyassessesacompany’sresiliencetothisthreat.Giventhatthiscouldhaveasignificant impactonbusinessactivities,wemakethisapriorityissueinourdiscussions.
ONGOING RISK ASSESSMENT
Weplaceconsiderableimportanceonacompany’sexposuretocyber threats throughoutour investmentprocess.Thisallowsustoassessthecompany’slevelofmaturity,suggestimprovements,monitortherisksidentifiedandbuildmaturity(Figure10).
Cybersecurityanalysesareconductedbasedon:
› Publicinformation
› Externalevaluationreports
› Q&Asessionswiththecompany
Cybersecurityriskisassessedandrecommendationsaremadetoreduceresidualrisk
Post-investmentmonitoringisconductedtomonitorchangesforthecompany
FIGURE 10
CYBERSECURITYANALYSIS
A number of cybersecurity risk analyses were conducted by our teams in 2020 at all stages of the investment cycle, taking into account the following factors: governance, resources available, processes in place and cybersecurity technology.
37CDPQ | 2020 SIR
GOVERNANCE
3. Countering abusive tax planning
Wetookvariousactionin2020intheareaof internationaltaxation.Ourinvestmentprocesswasrefinedtoclarifythecriteria used by our teams in assessing shares of publiccompanies.Toreflectthesedevelopments,weupdatedourcommitment regarding international taxation in recentmonths(Appendix4).
C D P Qbelievesthattheabusiveuseoflow-taxjurisdictionsrepresentsamajorsocietalissue.Thenegativeimpacttheirusehasonpublicfinancesincountriesaroundtheworldand
ontheirability tomeet theneedsof theircitizens isclear.Sinceweopposeanyformoftaxevasionandsupportthefightagainst theaggressiveuseof tax rules,wearehelping toclarifyandimprovethetaxpracticesofcompaniesandinsti-tutionalinvestorsaroundtheglobe.Wearealsoplayingaroleinvariousrelatedinitiatives.
CDPQ | 2020 SIR38
GOVERNANCE
TOOL FOR ANALYZING TAX PRACTICES
Weanalyzethetaxpracticesofourportfoliocompaniesandreviewthesepracticesperiodicallytoensurethattheyadheretoourprinciplesgoverningtaxation.Thisallowsustoreactquicklyandhaveaconversationwithacompany’smanagementteam,whennecessary,toclarifyourexpectations.
FIGURE 11
TOOLFORANALYZINGTAXPRACTICES
188companies
8companies
86companies
Public companies held in active management
› Most recent effective tax rate below 15%, or
› Average effective tax rate over last five fiscal years below 15%, or
› Difference between effective tax rate and the weighted statutory rate based on the geographic allocation of income
Companies being monitored
Allofourpubliccompaniesheldinactivemanagementwerereviewedin2020(Figure11).Forthistypeofinvestment,wechosetoincludeonourlistofcompaniesbeingmonitoredthosewithaneffectivetaxrateoflessthan15%,agenerallyrecognized threshold under which companies may besuspected of employing abusive tax practices. Aftercompletingthisanalysis,eightcompanieswereidentifiedasrequiring monitoring since their tax practices could beconsideredabusive.
39CDPQ | 2020 SIR
GOVERNANCE
CONCERTED EFFORTS WITH OUR INTERNATIONAL PARTNERS
ThereisaconsensusamongOECDmembercountriesandinternationalexpertsthatcompaniesmustpayincometaxincountrieswheretheyhavesignificanteconomicactivityandwheretheyearnrevenues.
C D P Qalsotookpartintworound-tablediscussionsontaxtransparencyorganizedbyNorgesBank(Norway)andABP(theNetherlands).Theseeventswereanopportunitytoshareourexperienceanddiscussbestpracticesformanagingtaxriskswithotherglobalinvestors.
Case study An investment fund that successfully bid to acquire aEuropean infrastructure targetofferedCDPQaminoritystake.The fundplanned to invest throughasubsidiarybasedinLuxembourg.Toadheretoourtaxpolicies,weconvincedthefundtoletusinvestdirectlyintheparentcompanybasedinFrance,establishinggovernancethereratherthaninLuxembourg.
Working with our international peers, we have developed a joint tool that establishes and clarifies what is expected of external managers so they can have more influence in ensuring tax transparency.
CDPQ | 2020 SIR40
Inthiscontext,wepursuedphilanthropicendeavoursinfourpriorityareas:health,combattingclimatechange,supportforuniversitiesandcommunities,whichincludesfightingpoverty,schoolperseveranceandaccesstoculture(Chart12).
PROVIDING BENEFICIAL LONG-TERM SUPPORT
C D P QcontinuesourphilanthropicendeavoursinQuébecbyproviding concrete support to the community. Our newdonationsandsponsorshipspolicyfor2020–2022seekstoprovidebeneficiallong-termsupportinkeepingwithourcorevaluesofethicsandrigour.
The COVID-19 pandemic that struck the world in early 2020 quickly led to huge needs in communities. We therefore had to provide additional assistance to various organizations in order to support the people affected by this unprecedented crisis.
Incontributing todifferentorganizations,we leverageourteams’ know-howandcreativity, their commitment to thecommunityandtheirbusinessnetworkstobuildpartnerships.Thisallowsustohaveanimpactthatextendswellbeyondthefundsprovided.
CHART 12
OURCOMMUNITYSUPPORTIN2020
24%
22%
10%
10%
17%
17%
• Access to culture
• Fighting poverty
• School perseverance
• Health
• Universities
• Climate change
Supporting communities in an unprecedented crisis
120+ ORGANIZATIONS
SUPPORTEDIN2020
FACING THE CRISIS TOGETHER
Inthistimeofgreateconomicandsocialuncertainty,weareveryawareofthechallengesfacingmanyorganizationsthatdirectlyprovideessential services to themostvulnerablemembersofsociety.Tohelpthemmaintaintheseservicesandbroadentheirofferings,C D P Qhascontributedanadditional$300,000dividedamongfivecharitableorganizations:
• CentraideofGreaterMontreal’semergencyfund,dedicatedtothemostvulnerablepeople
• LittleBrothers,whichworkswithseniorsinneed
• Alloprof,whichprovideseducationalsupporttochildrenandtheirparents
• Tel-Jeunes,whichsupportsyoungpeopleandtheirparentsthroughfreeandconfidentialcounsellingservices
• TheRedCrossanditscommunitysupportinitiatives
41CDPQ | 2020 SIR
HIGHLY ENGAGED EMPLOYEES
Our Causes and Effects program highlights employeecommitmenttocharitablecauses.C D P Qprovidesfinancialrecognition to non-profit organizations (N P Os) that ouremployeesbecomeinvolvedinasamemberoftheBoardofDirectors,thestrategiccommitteeorinfundraisingactivities:
150+ofouremployeesaremembersofN P OBoards
39+donationsmadetoorganizationsthatouremployeesareinvolvedwith,foratotalofnearly$35,000
200+youngC D P Qprofessionalsbetween20and35yearsofageareinvolvedintheImpact20–35initiative,whichprovidesexpertisetoselectNPOsonavoluntarybasis
6volunteermissionswereorganizedbyImpact20–35
2020 RED CROSS CAMPAIGN—WORKING AT THE CENTRE OF THE EMERGENCY
Thismajorfundraisingcampaignco-chairedbyC D P QandHydro-QuébecwasaimedatsupportingtheCanadianRedCrossemergencyfund.ThedonationsallowedtheRedCrosstocarryoutvarious initiatives insupportof themeasuresimplementedbygovernmentauthorities.Amongotherthings,amobilehospitalwassetupintheLaSalleboroughtohelptheCIUSSSdel’Ouest-de-l’Île-de-Montréalandincreaseitscapacityattheheightofthefirstwaveofthepandemic.
ETHICS AND COMPLIANCE CERTIFICATION
Working in partnership with HEC Montréal and Hydro-Québec, in2020C D P Qcreatedanewtypeofcertificationthataimstoprovideethicsandcompliancetrainingtoprofes-sionalsandmanagers.Thefirstclassof22participantshascompletedtheprogram,whichprovidesanoverviewofbestpracticesinthisarea.
A RECORD AMOUNT RAISED FOR THE 2020 CENTRAIDE CAMPAIGN
Centraide’svery firstvirtual fundraisingcampaign,whosethemewas “Six feet apart but close to the heart,”was asuccess.In2020,ouremployees’solidarityandengagementwasseenthroughtheirexceptionalparticipationinayearwhenneedsincreaseddramatically.
$513,276CONTRIBUTEDBYEMPLOYEESTO
THE2020CENTRAIDECAMPAIGN
$1,026,552TOTALCONTRIBUTIONTO
THE2020CENTRAIDECAMPAIGN
CDPQ | 2020 SIR44
APPENDIX 1
CALCULATION OF THE INTENSITY OF C D P Q’S PORTFOLIO
CalculationTotal C D P Q portfolio intensity = C D P Qemissions(t C O2e)oftheportfolioasatDecember31
C D P Qportfoliowithintheperimeter(millionsofCAD)
C D P Q emissions = asset-relatedemissions(t C O2e)x L TcapitalsuppliedbyC D P Q(millionsofCAD)
TotalL Tcapitaloftheasset(millionsofCAD)
L T Capital: Long-termcapitalusedbyacompanytofinanceitsproductionassets(fairmarketvalueofequity+long-termdebt).
Perimeter of calculation: C D P Qportfoliointheperimeter.
Type of investment: Investments, including those of non-consolidated subsidiaries, in the formof shares,corporateandCrowncorporationdebt,securitiesheldthroughmarketindexesorexchange-tradedfunds(ETFs),externallymanagedinvestments,securitieslendingandborrowing.Areexcluded:governmentbonds,cash,warrants,derivativefinancialinstrumentsandsecuritiespurchasedunderresaleagreements.
Specialized portfolios : EquityMarkets,FixedIncome,PrivateEquity,Infrastructure,RealEstate,certaininvestmentsinshares(includingshortpositions)heldinAssetAllocation
Value as at December 31, 2020: Includes$333billion,excludes$92billion(governmentbondsandother).
Emissions consideredThecarbonfootprintofanassetcorrespondstoitsdirectorindirectgreenhousegasemissions(scopes1and2)convertedintoequivalenttonsofC O2asdefinedbyG H GProtocol.
Data sources
A) Direct holdingsTheTrucostdatabaseisC D P Q’spreferredsourceforindividualissuers.CombinedwithdatafromtheCompustatandBloombergdatabase,theTrucostfigures(calendaryear2020)formthefoundationofourcalculationsofemissionsbyindividualsecuritiesandaveragesectorintensity.IntheabsenceofTrucostdata,ourapproachisasfollows:
LowIntensityAssets( 120t C O2e/M$)andintenseassetsunderthemethodologicalthreshold
Averagesectorintensity(G I C SLevel4classification)
Highintensityasset( 120t C O2e/M$)thatexceedthemethodologicalthreshold
IvanhoéCambridge’sassets
Inorderofpriority:• Footprintdisclosedbytheissuer(ifcredible)• Footprintestimatedbyacrediblesource• Useofspecificcomparablesoperatingfacilitiessimilartothoseoftheissuer
• Estimationbasedontechnicaldatafromemittingfacilitiesandcrediblesourcesofstandardizeddata
• Averageintensityofthesector• Averagecorporateintensityforcertainsectorsorassetsinemergingmarkets
Methodological thresholdsC D P Qhasestablishedthresholdsthatallowittoadjustitslevelofanalysisbysector:
Secteurs C D P Qexposurethreshold
Veryhighintensitysectors(≈5,000t C O2e/M$) $10 M
Highintensitysectors(≈2,000t C O2e/M$) $25 M
Averageintensitysectors(≈500t C O2e/M$) $100 M
B) Indirect holdingsWheredataisavailable,theintensityoffundsiscalculatedaccordingtotherulesapplicabletodirectholdings.Wheredataisnotavailable,C D P Qusestheintensityofthefunddisclosedbythemanageror,ifthedataisunsatisfactory,theaverageintensityofthesectororassetclassappropriatetothenatureofthefund.
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APPENDIX 2
INDEPENDENT PRACTITIONER’S LIMITED ASSURANCE REPORT ON THE CARBON INTENSITY OF THE PORTFOLIO WITHIN THE CALCULATION BOUNDARY OF THE CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC
TO THE BOARD OF DIRECTORS AND MANAGEMENT OF THE CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC
Scope
Wehaveundertakena limitedassuranceengagementof thecarbon intensityof theportfolioof theCaissedeDépôtetplacementduQuébec(“C D P Q”)asofDecember31,2020,comprisingthecarbonintensityoftheportfoliowithinthecalculationboundaryoftheC D P Qonpages20and44oftheStewardshipInvestingReport(the“SubjectMatter”).
Otherthanasdescribedintheprecedingparagraph,whichsetsoutthescopeofourengagement,wedidnotperformassuranceprocedureson the remaining information included in theReport, andaccordingly,wedonotexpressaconclusiononthisinformation.
Criteria applied by C D P Q
InpreparingthecarbonintensityoftheC D P Qportfolio,C D P Qappliedinternallydevelopedcriteria(Criteria).TheCriteriacanbeaccessedintheschedule“CalculationoftheIntensityoftheC D P QPortfolio”oftheStewardshipInvestingReport,whichispubliclyavailable.SuchCriteriawerespecificallydesignedfordeterminingthecarbonintensityoftheC D P QportfolioastherearecurrentlynolegislativeorregulatoryrequirementsrequiringtheC D P Qtoprepare,publishorhaveverifiedthecarbonintensityofanasset.Asaresult,thesubjectmatterinformationmaynotbesuitableforanotherpurpose.
C D P Q’s responsibilities
C D P Q’smanagementisresponsibleforselectingtheCriteria,andforpresentingthecarbonintensityoftheC D P QportfolioinaccordancewiththatCriteria, inallmaterialrespects.Thisresponsibility includesestablishingandmaintaining internalcontrols,maintainingadequaterecordsandmakingestimatesthatarerelevanttothepreparationoftheSubjectMatter,suchthatitisfreefrommaterialmisstatement,whetherduetofraudorerror.
EY’s responsibilities
OurresponsibilityistoexpressaconclusiononthepresentationoftheSubjectMatterbasedontheevidencewehaveobtained.
OurengagementwasconductedinaccordancewiththeCanadian Standard on Assurance Engagements 3410, Assurance Engagements on Greenhouse Gas Statements (CSAE 3410),issuedbytheAuditingandAssuranceStandardsBoard,andthetermsofreferenceforthisengagementasagreedwiththeC D P QonJanuary11,2021.Thosestandardsrequirethatweplanandperformourengagementtoobtainlimitedassuranceaboutwhether,inallmaterialrespects,theSubjectMatterispresentedinaccordancewiththeCriteria,andtoissueareport.Thenature,timing,andextentoftheproceduresselecteddependonourjudgment,includinganassessmentoftheriskofmaterialmisstatement,whetherduetofraudorerror.
Webelievethattheevidenceobtainedissufficientandappropriatetoprovideabasisforourlimitedassuranceconclusion.
Our Independence and Quality Control
WehavemaintainedourindependenceinaccordancewiththeethicalrequirementsthatarerelevantinCanada,andhavetherequiredcompetenciesandexperiencetoconductthisassurancereview.
EYalsoappliesInternationalStandardonQualityControl1,Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements,andaccordinglymaintainsacomprehensivesystemofqualitycontrolincludingdocumentedpoliciesandproceduresregardingcompliancewithethicalrequirements,professionalstandardsandapplicablelegalandregulatoryrequirements.
Description of procedures performed
Proceduresperformedinalimitedassuranceengagementvaryinnatureandtimingfrom,andarelessinextentthanforareasonableassuranceengagement.Consequentlythelevelofassuranceobtainedinalimitedassuranceengagementissubstantially lower than theassurance thatwouldhavebeenobtainedhada reasonableassuranceengagementbeenperformed.Ourproceduresweredesignedtoobtainalimitedlevelofassuranceonwhichtobaseourconclusionanddonotprovidealltheevidencethatwouldberequiredtoprovideareasonablelevelofassurance.
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Althoughweconsideredtheeffectivenessofmanagement’sinternalcontrolswhendeterminingthenatureandextentofourprocedures,ourassuranceengagementwasnotdesignedtoprovideassuranceoninternalcontrols.OurproceduresdidnotincludetestingcontrolsorperformingproceduresrelatingtocheckingaggregationorcalculationofdatawithinITsystems.
ThecarbonintensityoftheC D P QPortfolioquantificationprocessissubjecttoscientificuncertainty,whicharisesbecauseofincompletescientificknowledgeaboutthemeasurementofgreenhousegasemissions.Additionally,emissionsproceduresaresubjecttoestimation(ormeasurement)uncertaintyresultingfromthemeasurementandcalculationprocessesusedtoquantifyemissionswithintheboundsofexistingscientificknowledge.
Alimitedassuranceengagementconsistsofmakingenquiries,primarilyofpersonsresponsibleforpreparingthecarbonintensityoftheC D P Qportfolioandrelatedinformation,andapplyinganalyticalandotherrelevantprocedures.
Ourproceduresincluded:
• Conductedinterviewswithpersonneltounderstandthebusinessandreportingprocess
• Conductedinterviewswithkeypersonneltounderstandtheprocessforcollecting,collatingandreportingthesubjectmatterduringthereportingperiod
• CheckedthatthecalculationcriteriahavebeencorrectlyappliedinaccordancewiththemethodologiesoutlinedintheCriteria
• Undertookanalyticalreviewprocedurestosupportthereasonablenessofthedata
• Identifiedandtestingassumptionssupportingcalculations
• Tested,onasamplebasis,underlyingsourceinformationtochecktheaccuracyofthedata
Wealsoperformedsuchotherproceduresasweconsiderednecessaryinthecircumstances.
Ourproceduresdidnotincludeprovidingconclusionsinrelationto:
• ThecompletenessoraccuracyofdatasetsorinformationrelatingtoareasotherthantheCarbonIntensityoftheC D P QPortfolioincludedintheStewardshipInvestingReport.
• AnassessmentofthecurrentvalueoftheindividualoraggregateinterestsoftheC D P Qappearingintheschedule“CalculationoftheintensityoftheC D P QPortfolio.”
Conclusion
Basedonourproceduresandtheevidenceobtained,wearenotawareofanymaterialmodificationsthatshouldbemadetothecarbonintensityoftheC D P QportfolioasofDecember31,2020inorderforittobeinaccordancewiththeCriteria.
Restricted use
ThisreportisintendedsolelyfortheinformationanduseofC D P Qandisnotintendedtobeandshouldnotbeusedbyanyoneotherthanthosespecifiedparties.
April15,2021 Montreal,Canada
1F C P A,auditor,FCA,partner,publicaccountancypermit#A114960
1
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APPENDIX 3
TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (T C F D)
Issuedin2017,theT C F D’srecommendationsrepresenttoday’sglobalbenchmarkforfinancialdisclosuresrelatingtoclimateissues.SinceC D P Qwouldliketoseemoreandmorecompaniesandinvestorsadopttheserecommendations,itisleadingbyexampleandmeasuringourprogressagainstthisseriesofrecommendations.
APPLICATION OF THE RECOMMENDATIONS BY C D P Q
Governance
1. Board oversight of climate-related risks and opportunities
• Ourresponsibleinvestmentpolicyandclimatestrategyannouncedin2017requirethatclimateconsiderationsbefactoredintotheprocessforanalyzingandapprovinginvestments.Our integratedriskmanagementpolicyalsoencompassestherisksrelatedtoE S Gcriteria.ThesepoliciesareapprovedbytheBoardofDirectors,whichmonitorsprogresssemiannually.
• In 2018, the Board of Directors’ Human ResourcesCommitteeapprovedfactoringcarbonintothecalculationofemployees’variablecompensation.Thiscomponentisnowtakenintoconsiderationforvariablecompensation.
2. Describe management’s role in assessing and managing climate-related risks and opportunities
• Theassessmentandmanagementofclimate-relatedrisksandopportunitiesarefullyfactoredintoC D P Q’sinvestmentprocesses.Workingincollaborationwiththestrategy and investment teams, theclimate risk andissuesteamcloselymonitorstheannualcarbonbudgetsofourspecializedportfoliostoachievethetargetssetfor2025. These analyses are submitted to the variouscommitteesonwhichC D P Qexecutivessit,includingtheInvestment-RiskCommittee.
• Climate risks are discussed in specific sections ofinvestmentapprovalandreportingdocumentsandaresubjecttothesamegovernanceasotherrisks.
• TheClimateRiskandIssuesandStewardshipInvestingteamscalculatethecarbonintensityofinvestmentoppor-tunitiesaswellaswhenmonitoringC D P Q’scompaniesand portfolios. They also support the climateambassadorsforeachspecializedportfolioinfactoringclimateconsiderationsintotheanalysisofinvestmentopportunities.
Strategy and risk management
3. Describe the climate-related risks and opportunities identified over the short, medium and long term
• Ourteamsanalyzethedifferenttypesofphysicalrisksrelatingtoclimatechangeovertheshort,mediumandlong term. These risks are taken into account forinvestments located in areas that are vulnerable toextremeclimateeventsorwhentheresourceitselfisdependentontheclimateoverthelongterm.
• Thework done by theUnitedNations EnvironmentProgrammeFinanceInitiatives(UNEPFI)showedhowcomplexitistodevelopmodelsforphysicalrisks,particu-larlyforthetotalportfolio.Inlightoftheirconclusions,wehavepartneredwithourCanadianpeersaswellasTheClimateServices(TCS)todevelopatooltobetterunderstand,measure and report in financial termsphysicalrisksrelatingtoclimatechangethatcanimpactourportfolioassets.
• Our teams also analyze transition risks relating toclimatechange.Varioustypesoftransitionrisksexist,includingregulatoryorpoliticalaction(carbonpricingorsubsidies), technological innovations, market risks(changesindemandforcertainproducts),lawsuitsandreputationalrisks.Theyareassessedbywayofquanti-tativeandqualitativeanalyses.
• Intheshortterm,theserisksaremoderateandspecifictocertaincompaniesandjurisdictions.Theyareanalyzedcasebycase.Medium-termtransitionrisks(<5years)are of a technological, regulatory or market-relatednatureorpertaintocarbonpricing,potentiallyaffectingthecompetitivenessofcarbon-intensivecompanies.Long-termtransitionrisks(>5years)areassociatedwithhighcarbonintensitysectorsforwhichlowercarbonsubstitutesordisruptivetechnologiesexist.
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• Weremainabreastofmethodologiestoquantitativelyassessthetransitionriskforourportfolios.Wehavenotyet identified a serviceprovider using a sufficientlyrobustmethodologythatwouldallowustoeffectivelyquantifytheimpactsofthetransition.Themostcommonissuesarethelackofassumptionsforpassingcostsforapriceonemissionsontocustomersandthefailuretofactorintheimpactsonvaluechains.
• Therearemanyclimateopportunities.C D P Qhassetsometargetsforinvestinginlow-carbonassetsandisattentivetoanyopportunitytoinvestinanyotherareapromotingatransitiontoamoresustainableeconomy.
4. Describe and assess the impact of climate-related risks and opportunities on operations, strategy and financial planning and how they factor into investment portfolios and strategies
• Asalong-terminvestor,C D P Qadaptsourportfoliotoseizeopportunitiesandreduceourriskrelatingtoclimatechange.Climaterisksareevaluatedbytheinvestmentcommitteeswhentheinvestmentdecisionismadeandtheportfoliocompositionisreviewed.Thedegreeofanalysisdependsonthematerialityoftherisk.Therisksassessedincludephysicalandtransitionrisksandtakeinto account the company’s industry positioning,managementofE S Gissuesandtransitionstrategy.
• Scenariosareused,whennecessary, toanalyzetheimpactoftheenergytransitionorlong-termchangesinweatherpatternsbasedonkeyperformancemetrics.Theserisksareaddressedinspecificsectionsoftheinvestmentapprovalandreportingdocumentsandaresubjecttothesamegovernanceasotherrisks.
• Portfoliosarereviewedperiodicallytomonitorclimaterisksandanalyzethemitigationmeasuresimplementedbycompanies.
• Wethereforeinvestinlowcarboncompanies,projectsandassetsaswellascompaniesthatarewellpositionedtosurvivealong-termenergytransition.
• Duetoourlow-carboninvestmentandcarbonintensityreduction targets for theportfolio, climateopportu-nitiesformanintegralpartofourinvestmentstrategy.
• Wehavealsointroducedspecificguidancetooverseeenergyvaluechaininvestments.Thisguidanceclarifiestheroleofallvaluechaincomponents intheenergytransition.
• Lastly, in 2019,C D P Qcofounded theUN-convenedNet-ZeroAssetOwnerAlliance togetherwith otherglobalinvestors.Thisinitiativeseekstoensurethatourportfoliosarecarbonneutralby2050,whilesupportingthe decarbonization of the real economy.Workingtogetherwiththemembersofthisgroup,wehavebeguntoaddressthecomplexmatterofsettingintermediatescience-basedtargets.Wehavealsopublishedaninitialprotocol for setting objectives for 2025 to supportcompaniesinthisarea.
5. Management of physical risks
• Workingtogetherwithourpeersandexpertadvisors,wearedevelopinganinnovativesolutionthatwillallowustoperformaqualitativeandquantitativeassessmentofmaterialeventsfacingourassets.Wewillbeabletorefine our analyses according to different climatescenariosandtimehorizonstodeterminetheimplica-tions for a company’s value chain throughout ourinvestment process. Ultimately, thiswill help us tobetteranticipatephysicalclimaterisksandmakeourinvestment strategy more resilient throughout ourportfolio.
6. Management of transition risks
• Wehavedevelopedqualitativetoolstoimprovethewaythattransitionrisksarefactoredintoanalyses.Thesescalabletoolsareaimedatguidingdecision-makingaccordingtoregulatory,technologicalandsocio-eco-nomicdevelopmentsaroundtheworld.Theywillalsoallowteamstoasktherightquestionswhenanalyzinginvestmentopportunities.
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7. Long-term ambitions
• AsamemberoftheUN-convenedNet-ZeroAssetOwnerAlliance, we set interim targets every five years toencouragethedecarbonizationofourportfolios.
• Todecarbonizetherealeconomy,themembersofthisgroup pledged to work together in developing bestpractices,influencingportfoliocompaniesandcontinuingtodrivefinancingforexistingclimatesolutionswiththegoalofachievingportfoliodecarbonizationtargets.
• ThetargetsetbyC D P Qin2017(-25%incarbonintensitybetween2017and2025)coversallassetclasses,i.e.realestate,fixedincome,equitymarkets,privateequityandinfrastructure.
• Tosupportthemembersofthisinitiative,anInaugural2025AllianceTargetSettingProtocolwaspublished,settingouttheapproachtakenbytheAllianceanditsmembersforsettingcarbonintensityreductiontargetsthatcanbeachievedwithinthenextfiveyears.Additionalworkwillalsobegininordertoaddcertainassetclasses,notablyinfrastructure.
• Inthefallof2020,wepledged,togetherwiththemembersoftheUN-convenedNet-ZeroAssetOwnerAlliance,tonolongerfinanceanynewthermalcoalprojectaswellastophaseoutfromourportfoliosmostcoal-firedassetsinindustrialized countries by 2030, eliminating themcompletelyonaglobalscaleby2040.
• Wearealsoexploringthemethodologiesunderlyingthecalculationofforward-lookingclimatemetrics,particu-larlytheclimatetrajectoryalignmentforcompaniesandportfolios.C D P Qcurrentlybelievesthattheseclimatechangemetricsincludeanumberofkeyissues,notablysomeconsiderabledifferencesbetweentheapproachesused for this calculation, significant variances in theresults generated and too limited coverage of theunderlyingdata.Forthesereasons,untilamorerobustmethodologyisdeveloped,wewillcontinuetousethecarbonintensitymetricofacompanyorportfolioandthevolumeoflow-carboninvestments,combinedwithourownqualitativetools.
8. Engage with portfolio companies to improve their climate-related practices and disclosures
• Thiscommitmentcantakedifferentforms.Wesupportshareholder proposals aimed at promoting betterdisclosureofclimate-relatedrisksandopportunities,inaccordancewith the T C F D’s recommendations, byexercisingourshareholdervotingrights.Moreover,wespeak with executives from select companies tounderstand their climate change strategy andencourage them to adopt best practices. In somecases, C D P Q pools our effortswith other peers tomaximizeourinfluencewithcompanies.
• Aspartofvariousinitiatives,includingClimateAction100+,weworkwithotherCanadianandinternationalinvestors to influence the practices of the largestemitters, raise awareness among investors andcompanies,andsharebestpracticesforaddressingclimateissues.
9. Seize opportunities
• Therearemanyclimateopportunities.C D P Qhassetsometargetsforinvestinginlow-carbonassetsandisattentive to any opportunity in areas promoting thetransitiontoamoresustainableeconomy.
• C D P Q partnerswith C R E O Family Office Syndicate(C R E O),anorganizationthataimstodirectmorecapitaltowardclimatechangesolutionsthroughtheworkdonebytheinnovationplatformforstewardshipinvesting.
• ThiscollaborationledtoajointinvestmentagreementwithS2GVentures,whichwillmakeitpossibletoinvestuptoUS$125millionoverthenextthreeyearsinventurecapitalcorporationswhosegoalistomaketheagri-foodindustrymoresustainable.
• In2020,C D P QmadeaninitialinvestmentinBensonHill,afoodtechnologycompanythatleveragesthenaturalgeneticdiversityofplants.
• Inouradvisorycapacityformanyportfoliocompanies,C D P Qencouragesthesecompaniestodeveloporadopttechnologysupportingatransitiontoagreenereconomy.
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10. Develop new investment guidelines
• Weanalyzetherolethateachcomponentoftheenergyvalue chain plays in the transition throughout ourinvestmentprocessand,therefore,closelymonitorourhydrocarbonexposure.
• In the fall of 2020, we pledged, together with themembersoftheUN-convenedNet-ZeroAssetOwnerAlliance, tono longer financeanynew thermalcoalproject aswell as to gradually phase out from ourportfoliosallcoal-firedplantsinindustrializedcountriesby2030,eliminatingthemcompletelyonaglobalscaleby2040.
Metrics and targets
11. Disclose the metrics used to assess and track climate-related risks and opportunities, according to portfolio and strategy, and changes in metrics
• Ourmainmetricsarethecarbonintensity(tCO2e/M$)ofacompanyorportfolioandthevolumeoflow-carboninvestments(inbillionsofdollars),basedonClimateBondsInitiativecriteria.
• C D P QputinplaceanITsystemin2018connectingourowninternaldatabasestothedatabasesofclimatedatasuppliers,making itpossible toestimate thecarbonintensity of our various portfolios in real time. Thissystemallowsustocloselymonitorprogressinachie-vingtargets.
• C D P Q has also taken part in the work led by theUN-convenedNet-ZeroAssetOwnerAlliancetofindsolutionsmakingitpossibletostrengthenthemethodo-logyusingforward-lookingclimatemetrics.Inourview,themetricmeasuring the implicit increase inglobaltemperaturesresultingfromG H Gemissionsandbyagroupofentitiesincludesseveralkeyissuesthatlimititsappropriatenessinmeasuringclimaterisksandoppor-tunitiesinourportfolios.
• C D P Q prefers to continue using themetric for thecarbon intensity of a company or portfolio and thevolumeoflow-carboninvestments,whichitconsiderstoprovideinformationthatiscredible,rigorous,easytounderstand,obtainedusingatransparentmethodologyandusefulindecision-making.
12. Disclose carbon intensity of the portfolio (types 1 and 2) and the associated risks
• In2020,thecarbonintensityofC D P Q’sportfoliowas49t C O2e/M$,down30t C O2e/M$from2017.
13. Disclose carbon intensity based on portfolios and strategies, along with relevant data and the methodology used
• Wedisclosethecarbonintensityofourtotalportfolioandprovideinformationonthecontributionofvarioussectorstoouroverallcarbonfootprint,inadditiontotheirweightinC D P Q’stotalportfolioinbillionsofdollars.
• Themethodologyusedtomeasureourcarbonfootprintisavailable inAppendix 1andhasbeencertifiedbyC D P Q’sexternalauditors(seeAppendix2).
14. Describe targets used to manage climate-related risks and opportunities and performance against targets
• Ourcarbonintensityreductiontargetsarebrokendownbyportfolio basedon asset class, timehorizon andinvestmentuniverse.In2020,wereducedthecarbonfootprintofourtotalportfolioby38%comparedtothe2017referencefootprint.Wealsoexceededourtargetforlowcarboninvestmentsinitiallysetfor2020reaching$36billion,ordoublethevalueofourinvestmentsin2017.
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C D P Q’S INTERNATIONAL TAXATION COMMITMENT
Theabusiveuseoflow-taxjurisdictionsandaggressivetaxplanningareasocietalissuethatC D P Qtakesveryseriously.Suchtaxstrategieshaveanegativeimpactonpublicfinancesforgovernmentsaroundtheworldaswellasontheirabilitytomeettheneedsoftheircitizens.C D P Qopposesallformsoftaxevasionandsupportsthefightagainsttheabusiveuseoftaxrules.Ittakespartininternationaleffortstoputanendtounfairtaxpracticesincertainjurisdictionsthatmakeiteasytocircumventtaxlaws.
ThestructureofourinvestmentsisconsistentwiththeletterandspiritoftaxlawsaswellasOECDrecommendationsinconnectionwiththebaseerosionandprofitsharing(BEPS)initiative—thekeyinternationalinitiativefocussingonlow-taxjurisdictions.Wethereforeworkwithourportfoliocompaniesandpartnerstopromoteactionthatsupportstheadoptionoftheserecommendations.
Asamanagerofpensionandinsurancefunds,C D P Qisnottaxedonthereturnsgeneratedbythevastmajorityofourassets.However,wheninvesting,wecarefullyexaminethetax rate for our investments in different jurisdictions. Byrelyingoninternalandexternalexpertise,bestpracticesthatareseenanddiscussedintheindustryaswellasstatementsbygovernmentsandinternationalorganizationssuchastheOECD,wehavedevelopedobjective,stringentandrobustcriteriathatweapplywhendoingourduediligence.
Thisanalysisallowsustoassesstheproposedtransactionstructureandinfluenceourpartnerstoavoidusinglow-taxjurisdictionswhenthere isno legitimatebusinessor legalreasonstodosoandtoensurethatnounduetaxbenefitsarederivedwhichcouldultimatelyleadtoC D P Q’sdecisionnottoinvest.
LOW-TAX JURISDICTIONS
There is currently no global consensus regarding whatdefinesalow-taxjurisdiction.Thatiswhytherecontinuetobesignificantdifferencesbetween the reference listsmadepublicbythevariousorganizationsandjurisdictions.
Given that there isnobroadlyacceptedor internationallyagreeduponlistoflow-taxjurisdictions,wehaveestablishedalistofjurisdictionsforwhichanynewinvestmentmustbecarefullyanalyzed.Thislistisupdatedperiodicallyinlightoflegislativedevelopmentsorpositionstakenbyvariousinterna-tional organizations recognized as having expertise inthisarea.
Alistofcountriesisnotanendinitself.Companiesdomiciledincountriesthatcouldbeconsideredlow-taxjurisdictionspay income taxes while other companies domiciled incountriesnotontheselistscanpayverylittletax.
That iswhyC D P Qconsiders it important tobroaden theanalytical framework to focus on overly aggressive taxplanningrather thanbeing limited toa listofcountries toensurethatassetsarebeingmanagedinasustainablemanner.
ANALYTICAL CRITERIA
ThecriteriadevelopedbyC D P Qwithregardtointernationaltaxationhavebeenincorporatedintotheinvestmentprocess,makingitpossibleforteamstouseastructuredapproach.
Investments must be subject to a consolidated tax rate of at least 15%, no matter where the investment is made. This rate isagenerallyrecognizedthresholdunderwhichcompaniesmay be suspected of employing abusive taxpractices.Mostcompaniesthatmeetthiscriteriongenerallypayincometaxinthecountrieswheretheycarryonmostoftheiroperations.
C D P Q ensures that the structure or partnership are consistent with the BEPS initiative guidelines,whentakingpartininvestmentfundsorplatformscreatedtosupporttherelationshipwithpartners. Inparticular, theseguidelinesprovidethataninvestmentstructureshouldnotconferontheinvestorataxbenefitthatwouldnothavebeenavailablehadtheinvestmentbeenmadedirectly.
APPENDIX 4
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C D P Qplacesconsiderableimportanceonthis,sincefundswithhundredsofinternationalinvestorsareoftenincorpo-ratedinlow-taxjurisdictions.Therearelegitimatebusinessreasonsforthesestructures.Mostnotably,theyareusedtosupport the relationshipandstructurebetween investorsratherthanbeingcreatedfortax-avoidancepurposes.Infact,the companies inwhich the fund invests pay income taxwheretheyoperatewhileinvestorsinthefundpayincometaxonthereturnsthattheyreceive.
When there is a limited number of investors, C D P Q may some times influence its partners, encouraging them toachievetheirbusinessobjectivesbysettingupstructuresoutsideofthelow-taxjurisdiction.
However,whenafundhasmanyco-investors,C D P Qgenerallyhasverylittleinfluenceintermsofthechoiceofjurisdictionwherethese investment fundsareoriginally incorporated.C D P Qderivesnotaxbenefitsinthesesituations.
Theissueofabusiveuseoflow-taxjurisdictionsoraggressivetaxplanningisimportanttomanypublicandprivatesectorstakeholdersand requiresconsiderablecollaboration.Byusingourinfluencetosupportinternationaleffortsandourinvestmentprocess,whichincludesbestpractices,wewanttotakeaclearleadershiproleandmeetallofourobligations.
Pageblanche
The2020StewardshipInvestingReportisavailableatwww.cdpq.com.
Le Rapport d’investissement durable 2020 est aussi accessible en français au www.cdpq.com.
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