Canadian pension fund invests $20m in partnership to generate carbon credits

The Canada Pension Plan Investment Board (CPPIB) is to invest $20m in forest protection schemes in South America to generate certified carbon credits that can be traded on voluntary carbon markets.

The project will be developed jointly with US-based nonprofit Conservation International (CI), which has committed $0.5m of its own funds, in what is billed as a first-of-its-kind initiative by a global asset owner.

The partnership will initially fund efforts to protect and restore forests in Brazil, Chile, Peru and Colombia, providing a source of income for local communities and generating investment returns through the sale of carbon credits to the private sector. This will later be broadened out to investments in “other innovations in the field of ‘nature-based’ climate solutions” which are yet to be decided. 

Unlike compliance carbon markets, which aim to limit overall emissions by introducing either a tax or quota on the emissions a company can produce via regulatory regime, voluntary carbon markets allow companies to offset their emissions to meet self-imposed decarbonisation goals by funding projects which absorb atmospheric carbon – typically nature-based solutions such as forest reserves – which theoretically cancels out their own emissions.

According to World Bank data, the compliance market was valued at $44bn in 2019, significantly dwarfing the voluntary market – sized at $300m in 2018 by Ecosystems Marketplace.

However, CPPIB has confirmed to RI that the partnership is solely a financial investment for the fund and will not be used to offset its own portfolio emissions. The $417bn scheme is among five Canadian pension funds to have boosted their exposure to oil sands producers in 2021, with newly-appointed CPPIB CEO John Graham declaring that the fund will not divest oil and gas assets during his tenure.

According to a CPPIB spokesperson, the fund increased its exposure to renewables from C$34m in 2017 to C$7.7bn in 2021, which includes investments in wind, solar, hydro, and early-stage energy technology businesses. He noted that the fund had also updated its proxy voting policies in 2021, resulting in 36 votes against directors on the basis of climate issues.

In the same period between 2017 and 2021, CPPIB’s fossil fuel holdings increased in value from C$14.5bn to C$17.6bn – driven mainly by share price gains, said the fund. While CPPIB’s portfolio companies will not be asked to purchase carbon credits from the partnership, the fund “has the potential to directly source nature-based climate solutions” if required.

The first project identified for investment by the CPPIB partnership is the Amarakaeri Communal Reserve in Peru, which includes over 600,000 hectares of biodiversity-rich forests, and is expected to average annual emissions reductions of approximately 220,000 to 360,000 metric tons of CO2.

Funding will go towards addressing illegal deforestation – estimated at 755 hectares a year between 2010 and 2019, despite the area’s protected status – by strengthening local governance and the policing of threats. The success of these measures are key to ensuring that the project can prove ‘additionality’, or that carbon reductions or removals would not have happened without the project.

According to CI, the partnership will also address longstanding concerns that offset programmes commonly overstate their impact by meeting “rigorous quality standards” – particularly on ‘leakages’, which can occur when the creation of forest reserves prompt increased deforestation in unprotected areas, and ‘permanence’, by making sure that emissions are kept out of the atmosphere for a reasonable length of time.

The projects will be accredited by Verra, a US nonprofit that administers the Verified Carbon Standard, which is the most widely used offset standard globally, and the Climate, Community & Biodiversity Standards. Projects will also be verified under the Reduced Emission from Deforestation and Forest Degradation (REDD+) program, a United Nations-backed framework that aims to curb climate change by stopping the destruction of forests.

But the REDD+ framework also has its detractors. Margaret Kim, the CEO of Gold Standard, another organisation that certifies carbon offsets, said that REDD+ projects had a “tendency to over-estimate their carbon benefits” due to the use of a baseline scenario which predicts the the levels of potential deforestation that have been avoided through the creation of a project. Such information is “very difficult to predict with any certainty, and almost impossible to do at the standalone project level”, she said.

In addition, she noted that the CPPIB project cycle was only 30 years, while carbon emissions remained in the atmosphere for hundreds of years.

However, Kim said she “emphatically endorsed” CPPIB’s efforts to invest in “climate security and natural conservation” with a trusted environmental group, and the project’s broader aims.

CPPIB’s partnership comes as governments are weighing up the benefits of introducing a price on carbon to limit emissions, either through compliance markets or other measures. In July, trading began on China’s national emissions trading scheme – now the world’s largest carbon market by volume – while the Austrian government recently introduced a new carbon tax which will fund tax breaks and lump-sum ‘climate bonus’ payments to residents.