Sustainable assets are becoming such a hot market that valuations are “through the roof,” according to Charles Emond, chief executive officer of Canada’s second-largest pension fund.

It’s a sign investors can help businesses that have yet to transition to a green economy pursue more rigorous environmental, social and governance standards, Emond, who heads Caisse de Depot et Placement du Quebec, said in a meeting with Bloomberg reporters and editors.

“ESG is very inflationary,” he said Wednesday. “If you look at existing renewable assets, you’re going to pay through the roof.” 

Emond, 49, is well known in Canadian financial circles, having spent almost two decades climbing the ranks at Bank of Nova Scotia, where he was head of global investment banking, executive vice president of finance and head of Canadian corporate banking. 

He took the helm at Caisse in early 2020, and the pandemic gave him an immediate opportunity to prove himself in a crisis, as Emond turned a 2.3 per cent first-half loss into a 7.7 per cent return by year-end. In the first six months of 2021, the pension fund has advanced 5.6 per cent, buoyed by a rising stock market and private-equity gains.

“I wouldn’t say it was a blessing given the cost of lives and the impact on so many people, but from an organizational standpoint, when you’re faced with something like this, it is a validation test,” Emond said.

The interview has been edited and condensed:

With green assets becoming harder to find, where do you see opportunities?

You got to really work on the transition to the new economy. People tend to lose sight of the fact that if you do a renewable deal, where I get that standing ovation -- turbine and a wind farm type of deal -- but what gets into a turbine? Cement, steel, copper, plastic. And so what I’m going to try to really do is roll up our sleeves and work on these areas, focus on the improvement of carbon intensity of the sector, because that’s what’s going to move the needle much more. We have to go into the highest emission sectors and help them transition. That is a necessary path to reach our ultimate objectives. 

Can you provide color on the upcoming announcement on your sustainability plan?

It will relate to the transition of the real economy. That is a key element because if you look at our new targets, they’ll actually be much higher. We have a team of 35 people in ESG, but the important thing is the asset class managers and that they have annual carbon budget reductions. And what we tell them is, “No matter how you get there, you’ve got to meet that. That is your responsibility.” And we are the only investor in the world that tied variable compensation to these goals.

Are there examples of this green transformation you’ve helped happen?

In the U.S., if you look at AES Indiana, we’re replacing coal plants with renewables. So once we get into a company that is actually serious about transition, we help them getting greener. There’s going to be a differentiator and a competitive advantage in the industry. And there’s an even better risk-reward proposition for investors in this transition. It actually has a real impact in the real economy. 

There is so much greenwashing out there. How do you approach that? 

We’re trying to start with just seeing how we can find companies that are actually serious about transition and being progressive. There’s so much regulation focused exclusively right now on public companies. In a couple of years, you might say all these public companies divested, the public markets will actually look pretty good from an ESG standpoint, but people will look at the overall greenhouse-gas emissions and see they’re at the same place we are now, or even worse. If you just start shifting ownership of these assets, you’re not really tackling it.

But does your plan include divesting from companies that are not making this transition?

Clearly, after a while, if we see that interests are not aligned and there are no real efforts in that transition, we might say there’s no point in continuing the relationship. But the goal is that both the pension fund and the company come out stronger and more intelligent about it. And in every sector, if there’s a seriousness about transition, there will be capital there.

How do you approach China from an ESG standpoint, including on global rights?

We clearly apply strong filters there as well. What we try to do in China -- and we do that in every country that we go -- we try to probably stay away from some sectors where there’s been more regulation lately, but there are also the lines in the sand that we won’t cross from an ESG standpoint.

How would you rate the market access that Canadian financial investors have to China? 

Having the right partners locally is key for us. We don’t go there alone ourselves. China will represent about 4 per cent of our total asset base. Most of it, two-thirds, would be in public equities. So the key question there is can you actually ignore China? The answer is obviously no.

Do you anticipate keeping that exposure at 4 per cent? It is underweight.

The goal is to grow it. We haven’t sort of pinpointed a number yet. Are we going to get to 15 per cent? Probably not. I’d rather look at Asia. If you ask me are we underweight to the whole Asia complex, the answer would be yes. Is there a good chance that we might increase our exposure to China then indirectly? Most likely.

Caisse is spearheading a large light-rail project in Montreal that’s run into delays. Does it still hope to sell that infrastructure model overseas?

That’s the intent. That will be the blueprint to something. On the back of the pandemic and all the infrastructure spending that governments want to do, that is probably the topic that I get most interest from all governments around the world. We want to certainly walk before we run, that is finish off the project so we can actually show we can deliver.