Investing in the interests of Canadians

As CPP Investments winds down our 2020 public meetings in each province, we welcome perspectives on one of society’s greatest challenges, climate change. A recent column by Cynthia Williams on this website addresses this theme — one that is top of mind both within our investment strategy and among attendees of our public engagements in October.

CPP Investments shares common ground with the author. We believe climate change is real, serious and happening now. However, we differ on several suggestions in her column.

First, the title itself, “Troubling Incrementalism: how the CPPIB is failing the environment,” is inaccurate. Rather than incremental, our exposure to the energy sector is rapidly evolving.

Second, divestment from the fossil fuels sector is counterproductive.

Third, the idea that CPP Investments should become a political instrument, carrying out distinct objectives of governments unrelated to our investment mandate, is not in the best interests of contributors and beneficiaries.

Our exposure to conventional energy as a percentage of our investment portfolio has dropped precipitously from 4.6 per cent three years ago to 2.6 per cent today. Over this same period, our investments in renewable energy have increased exponentially, by nearly ten thousand percent, to $6.6 billion.

Ms. Williams urges us to set publicly reported targets for increasing our investments in low-carbon technologies and reducing the carbon in our portfolio. Yet setting such targets (committed to by our federal government under the Paris Agreement, for example) is a political and not an investment decision, especially when set against the objectives enshrined in our enabling legislation, section 5 of the Canada Pension Plan Investment Board Act. As we are equally accountable to the provinces, this would also involve administering the policies of ten governments, all with different perspectives and approaches.

Changes to our investment mix stem from real-time analysis of powerful climate-related trends in household and corporate consumption, technology and innovation, and global regulatory developments. Combined, these insights orient our compass and momentum. The question is whether our approach is in the best interests of contributors and beneficiaries.

This question was foremost in the minds of federal and provincial governments in 1997. The clarity of the CPPIB Act they promulgated is rooted in the looming crisis the legislation sought to avert. Simply put, the Canada Pension Plan was running out of money.

The CPP Fund was composed exclusively of low-yield government bonds at that time. Exposing it to global capital markets was viewed as part of the solution, and an independent organization of investment professionals was established to manage the Fund to achieve a maximum rate of return without taking excessive risk, recognizing that having a multitude of objectives would hamstring the Fund. The Right Honourable Paul Martin, Canada’s finance minister at the time, emphasized this:

“By placing the focus on maximizing returns, all other potential distractions are eliminated. Markets don’t need to fret that investments are being guided by political considerations. Managers are liberated to pursue the best possible financial strategies. And pensioners can be reassured by the fact that the CPP will be used to benefit retirees – and only retirees.”

Consequently, the CPPlB Act sets no ancillary policy requirements. Yet from our perspective, climate change is not only an existential threat but a long-term investment risk. It affects our analysis and actions on virtually every sector of the global economy, beyond fossil fuels. Our approach is well-documented in our Report on Sustainable Investing, published in September.

Since its inception 21 years ago, our investment strategy has evolved considerably to reflect global best practices, emerging risks and opportunities, and trends described above. Governments, investors and other organizations around the world uphold our framework as the gold standard for pension funds. Our financial performance — a ten-year annualized rate of return of 10.7 per cent — is the fruit of a framework determined by Canada’s policymakers who collectively understood the severity of the challenges associated with sustaining a national fund over many generations.

Sustainability unquestionably involves addressing climate risk. But that is only part of the definition.

Sustainability also applies to the solvency of a fund that promises to provide benefits to workers whose financial future is undeniably more challenging than it is for Baby Boomers. Young Canadians today will retire into an economy with far fewer workers contributing to the CPP. In 2006, there were over five Canadians aged 15 to 64 years for each person aged 65 years and over. By 2056, there will be an estimated 2.2 working-age persons for each person aged 65 years or over. This is why CPP Investments exists in the first place.

Maintaining a solvent national fund is a perpetually difficult challenge and one that requires laser focus, without interference. Politicians make policy, the CPPIB makes investments, and 20 million Canadians sleep more soundly knowing their financial security in retirement is our purpose.

Shackling our investment framework to targets imposed by external pressure is precisely what the CPPIB Act sought to avoid. Meanwhile, we firmly believe there is a way to align the pursuit of a cleaner planet and meeting our investment goals. Divestment from the fossil fuels sector, external pressure and arbitrary targets are excluded from our investment process. They simply do not work.

Divestment is attractively simple, but it also means walking away from the opportunity to bring about change. Engaging with and demanding greater transparency of investees on the measurable progress of their climate strategies is constructive. Working with energy companies to accelerate the transition to cleaner energy sources is productive. Divesting from companies that are making a real difference in how we generate energy is counterproductive.

We do not downplay the severity of climate change by any means. It is among the most significant challenges of our time, and the actions we are taking today to address both the risks and the opportunities are in the best interests of contributors and beneficiaries.