Finance Committee on June 9th, 2022

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you, Mr. Chair.

Congratulations, Mr. Graham.

Congratulations to both of you for running a first-class organization. I had the opportunity, when I was on public accounts, to study your organization and the great things coming. In fact, my advice to you would be to continue being staunch advocates for your own independence. It's my personal belief that the road to poverty is paved with politicians' good intentions, so I would encourage that.

This will be the line of my question.

I think most folks know this, but it's important to put it on the record. What happens if your fund dramatically underperforms? Not that it will, but what would happen if it dramatically underperformed?

[Michel Leduc]

It's important for us to be humble. What I mean by that is that investment income is only one of the components that drive sustainability, which is measured on a 75-year horizon. Historically, not to get too technical, if I think of the different accounts, there's the base CPP and, after recent reforms about four or five years ago, there's the additional CPP. They're structured differently.

The base CPP is largely dependent on economic and demographic factors, such as immigration rates, fertility rates, mortality and, obviously, net income. With the additional CPP, because it's fully funded, a greater part of that account is dependent on net income. What that means is that we're working really hard, under John's strategy and leadership. It's very important for us to lean in on those important words created by parliamentarians around maximizing returns. The more returns we produce, the more we create additional buffers against those other factors outside of our control.

It would be difficult for us to make a promise to Canadians and say the fund will continue to be sustainable forever. There are a number of factors we don't control.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

I'll simplify it, because I'm just a simple politician and lawyer.

If, in fact, the fund underperforms, contributions have to go up or benefits will go down. Would I be incorrect in saying that?

[Michel Leduc]

If that were to happen.... At the end of this year, the chief actuary of Canada will release its triennial report—it's every three years—after a deep dive looking at all the factors, including inflation and all of those demographics. If, for example, down the road in the future, the chief actuary were to say—as they did, in fact, in the mid-1990s—the fund was going to go bankrupt, which was one reason we were established.... If that were to be the case, the 10 finance ministers representing the jurisdictions would need to come together to make those very difficult decisions.

If they can't come to an agreement, there's actually an autopilot. There's a default mechanism that would fix...in looking at whether the contribution rates would need to go up.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

If, in fact, politicians started to corrupt your focus on maximizing returns, and if those returns were to be eroded, it would hurt workers and seniors going forward. Would that be correct?

[Michel Leduc]

It would be a disaster for the 21 million contributors and beneficiaries.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you for that.

As one last note, we look at the oil and gas sector, and clearly we want to invest in renewables and to be sustainable, but when we look at pulling funds from sectors like oil and gas, it often has unintentional consequences, more than what politicians started thinking. In this case, by underfunding oil and gas, if that were to ever be done by pensions or by any funding, you're empowering countries like Russia.

We'll just get your comments on that. Are we invested in Canadian oil and gas, and what would be the return rate we have received from that, year to date?

[John Graham]

We are invested in Canadian oil and gas. We don't disclose the specifics down into the sector level. As part of our net-zero commitment, we are very clear that we're not going down a path of blanket divestment. We think it's counterproductive to the transition to net zero.

As we think about the oil and gas sector, we think about investing in energy companies and investing in energy companies that have engineering and scientific know-how to produce energy and to get it into people's homes on an industrial scale. That's going to be required for this transition.

We've been quoted as saying that blanket divestment is a short on human ingenuity. It's essentially excluding part of the economy from what has to be an economic transition.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Lawrence.

Now we'll hear from the Liberals.

We have MP Dzerowicz for five minutes.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you, Mr. Chair.

I want to thank both of our guests for being here, and thank you so much for the important service you provide to Canadians.

I'm always thinking about the residents of my riding of Davenport. Maybe you could start off by talking about the value that the Canada Pension Plan Investment Board offers in comparison to options for self-managing a retirement.

[John Graham]

As Michel started to introduce, there's the base CPP and the additional CPP. The base CPP is the plan that has been around since the 1960s. It was always designed to be one of the three legs of the stool for Canadian retirement, along with workplace pensions and savings. With workplace pensions moving away from defined benefits to defined contribution, the CPP is increasingly important. That's part of the rationale for moving to the additional CPP.

Going forward, I personally believe that the CPP's relevance for retirement in the decades to come will only increase with the additional CPP. It's one of the reasons we are really trying to continue to educate on what the CPP provides and its importance in decades to come to the retirement of Canadians.

Maybe, Michel, you would like to add something.

[Michel Leduc]

I would just say that, probably for all of us, the single biggest financial risk we all face is outliving our assets. As John indicated, with the majority of Canadians not having a workplace pension, the erosion of defined benefits versus defined contribution, and even your own personal saving through tax incentives like the TFSA or RRSP, none of those provide longevity risk. For most Canadians, the only source of longevity risk is the CPP.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much.

The next question might sound a little odd. There is a rise of misinformation and disinformation that has infiltrated, not only our lexicon but also how people report information and what is reported. Is that something that is of concern to CPPIB as you're researching and determining who you're investing in? Is that a consideration?

[John Graham]

Maybe I'll make a couple of comments first on diligence and then how we think about CPP Investments and how we present CPP Investments to the Canadian public.

On the diligence side, this gets back to the importance of active management and the importance of building out capabilities to be able to do deep diligence on the opportunities we see. It's why we think it's also important to have a global footprint, to not be a suitcase investor and to be able to have those local relationships. We use our internal teams. We complement that with experts, when needed, to do due diligence into the different areas.

With respect to CPP Investments, it's also one of the reasons why we feel it's important to be sharing our results and to be as transparent as we are. Again, I mentioned in the opening remarks the importance of transparency. I, Michel and other senior members of the team are continually sharing the CPP Investments story.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

The next question I have is around net zero. I know there's been a conversation around standards. To what extent does CPPIB say we're only investing in companies that are moving to net zero and that have some sort of a plan on mitigating the risk due to climate change?

[John Graham]

Yes.

As we talked about a little bit, we view the transition to net zero as an economy-wide transition. The whole economy has to move to net zero. It's not going to be a linear path. In industries like steel, aviation, transportation and concrete, barring really dramatic changes in consumer behaviour, there are opportunities to make these industries more green.

We've developed an internal framework called our abatement capacity framework to look at an opportunity, look at a company, and think about how much carbon we can take out of that company and how much can be removed with very little cost today, and then look at escalating prices of carbon and how much can be removed. Then there are often some that can't remove carbon without some technological innovation.

I think what's important here is that when we think about our investing in the companies—we call it our decarbonization strategy—we don't take a binary view that it's either all or nothing. Let's start going down the path and removing what we can, and what's economical today, and move as far as we can, but let's actually start going down the path.

We're looking at one investment recently where we could get 86% of the way there. We couldn't get the remaining 14% of the way there without some technological innovation, but the important thing is to actually start moving there today, as opposed to divesting because we can't get 100%.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Dzerowicz.

Now, we go to the Bloc, and we have MP Ste-Marie for two and a half minutes, please.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

I will continue along the same lines as my colleague, Ms. Dzerowicz.

In terms of your commitment to make your portfolio investments and operations carbon neutral by 2050, why did you choose the year 2050 rather than 2040 or 2060?

What would be the expected impact on your average annual portfolio return?

[John Graham]

We set our net zero for 2050 to be aligned with global standards. Maybe I'll share a little bit about how we think about the near term, and how we think about investing in decarbonization in the near term.

As we mentioned, we believe the whole economy needs to transition. We actually believe at CPP Investments that this represents a generational investment opportunity. Whether the number is $2.5 trillion, $3.5 trillion, $4 trillion or $5 trillion, the global economy needs a lot of capital to transition. What it needs is patient capital, partnership-driven capital, to transition. That's the type of capital that CPP Investments has.

We've been building out a real competency for investing in this economy transition. What that means is that, as we invest in companies and work with them to decarbonize, the actual carbon intensity of our portfolio may increase in the near term, but it will actually have the bigger impact of working with these companies to decarbonize.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Yes, thank you.

How do you manage climate change risks in your portfolio, exactly?

[John Graham]

It's a good question. I think this is where we've spent a lot of time over the past 10 years thinking about climate and really looking through the portfolio, looking through new investments and actually thinking about the climate risk with respect to physical risk and transition risk. We're putting in the appropriate risk management to look at the portfolio and to look at exposure in the portfolio. Every new investment that comes in goes through this risk assessment.

Coming back a little bit to our decarbonization strategy, I think this was the real step forward for the organization in transitioning from thinking of this just as a risk to an opportunity, and a real opportunity for the organization.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste-Marie.

Now we go to MP Blaikie, from the NDP, for two and a half minutes.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much.

I note that between 2006 and 2022 real estate as a percentage of your total asset mix went up from 4.2% to about 9%. There has obviously been a lot of talk about the housing market. One of the things at play in the housing market is institutional investors acquiring buildings with affordable units and renovicting tenants and jacking up rents. While it seems to produce a good return, it's not a good strategy from the point of view of ensuring that Canadians are housed. It's not a good strategy from the point of view of ensuring that employers can find employees, because of course housing is one of the real pressure points for employers when they're trying to attract talent.

I'm wondering if CPPIB has any policies in that respect to make sure that it's not one of the investors in the housing space that is evicting tenants out of affordable units.

[John Graham]

Residential housing is not a focus for us. We will have some small exposures in our real estate portfolio. Our focus, especially over the past few years, has been building out logistics, with the transition to e-commerce, and data centres, with the transition to digital. The residential side has not been a real focus for us, and we don't have a lot of exposures. It's not an area that we've spent a lot of time on.

That being said, for every company, every investment we have within the organization, we have an expectation of how the companies will operate. We use our influence, as an owner, with respect to that.