Cattle graze near wind turbines in Paracuru on the coast of Ceara State in northeastern Brazil.Stuart Grudgings/Reuters
Canada Pension Plan Investment Board is creating a renewable-energy and power group, jump-starting its investment strategy with a deal for Brazilian wind assets.
The country's largest pension fund says it will contribute an initial $272-million to buy two operational wind parks in northeastern Brazil through a joint-venture with an energy subsidiary of industrial conglomerate Votorantim Group.
The partnership comes after years of CPPIB scouting from its Sao Paulo office for investment opportunities in Brazil's established renewable-energy sector. The country has been looking to diversify away from its traditional strength of building hydroelectric dams toward sources such as wind power, which has become more affordable. CPPIB's new partner, Votorantim Energia, is already among the largest hydro-power generators in the local market and, together, the investors will seek out other power generation deals in the country.
The deal also signifies the pension fund's increased focus on profiting from the global transition to an economy based on lower-carbon energy. CPPIB forecasts this shift could take as long as 20 years, but sees significant need for capital to build new sources of power generation now, particularly in the renewables area.
"What was higher-cost, and more being done to be environmentally conscious, is now mainstream and cost competitive, which is, frankly, very attractive from a climate-change point of view, but also from an investment point of view," said Bruce Hogg, who will head the new power and renewables group at CPPIB. He was head of infrastructure for the Americas. "We thought that, as a fund, it was important to [have] a dedicated team and portfolio focused on this space, given how important it's going to be in the future."
Other pension funds have increased their attentiveness to climate change and how environmental factors might shape their portfolios. Earlier this year, the Caisse de dépôt et placement du Québec said it would reduce the carbon footprint of the overall portfolio by 25 per cent by the year 2025. Other organizations are also promoting a move away from oil and gas. Earlier this month, the World Bank said it will drastically cut back on such financing in the developing world after 2019.
CPPIB stresses that it is making no sudden moves away from fossil fuels. The fund's natural-resources group invests directly in oil-and-gas assets, as well as some metals and mining, and was valued at $4.3-billion at the end of its 2017 fiscal year. The new power-and-renewables team is already working closely with both CPPIB's natural-resources and infrastructure groups.
"I think, globally, right now, 40 per cent of the world's power supply still comes from coal," Mr. Hogg said. "So there will be an evolution … from coal, to more gas, towards renewable. Ultimately, you look at a combined system that meets people's energy needs in the context of growing energy demand in emerging markets." He added that he would expect the fund's overall investment in the energy space will increase over time, reflecting the demand for power development, generation and technology improvements from rising middle-class populations in places such as Brazil and India.
In its latest partnership, CPPIB is accessing a growing population that is consuming more energy, creating a need for new capacity. The assets are in a consistently windy area of Brazil, giving them more efficiency than can be achieved in some other parts of the world. Combined, the two sites can generate up to 565 megawatts of power.
CPPIB expects to put more than $1-billion to work through the partnership with Votorantim, and will pursue power-generation investments and acquisitions across Brazil.
"We are very enthusiastic to partner with CPPIB, a reputable investor that shares our long-term vision for the sector and the prospects for the joint venture," Joao Miranda, CEO of Votorantim, said in a statement. "This reinforces our commitment to the power sector in Brazil, where we have been investors for almost 100 years."