Canada-China Relations Committee on May 8th, 2023

[The Chair, Liberal, Ken Hardie]

I call the meeting to order.

Welcome to meeting number 20 of the House of Commons Special Committee on the Canada-People's Republic of China Relationship. Pursuant to the order of reference of May 16, 2022, the committee is meeting on its study of the Canada-People's Republic of China relations, with a focus on investment funds.

Today's meeting is taking place in a hybrid format, pursuant to the House order of June 23, 2022. Members are attending in person in the room and remotely by using the Zoom application.

There are a few comments to be made for the benefit of the witnesses and members.

Please wait until I recognize you by name before speaking. For those participating by video conference, click on the microphone icon to activate your mike, and please mute yourself when you're not speaking. There is interpretation for those on Zoom at the bottom of the screen. You can choose floor, English or French. Those in the room can use the earpiece and select the desired channel.

As a reminder, all comments should be addressed through the chair. For members in the room, if you wish to speak, please raise your hand. If you're on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as best we can. We appreciate your patience and understanding in this regard.

In accordance with the committee's routine motions concerning connection tests for witnesses, I'm informing the committee that Mr. Cormier has gone through the tests—all witnesses are here—so we're all good there.

For members here, we will be taking the last 15 minutes of tonight's session for committee business. Because of the number of people who are here to give us testimony, your help in keeping to time in your comments and questions would be appreciated. I of course will be helpful in that regard as necessary.

We have some guests who are joining us. We have Randy Hoback for MP Michael Chong, the Honourable Ed Fast for MP Tom Kmiec and MP Arnold Viersen for MP Raquel Dancho. Later on, Mr. Genuis will be joining us.

On the Liberal side, we have MP Majid Jowhari for MP Emmanuel Dubourg.

Now we'd like to welcome our witnesses for our first panel.

From the Canada Pension Plan Investment Board, we have Michel Leduc, senior managing director and global head, public and corporate affairs. For Caisse de dépôt et placement du Québec, we have Vincent Delisle, senior vice-president and head of liquid markets, and Philippe Batani, vice-president, communications and public affairs. From the Public Sector Pension Investment Board, we have Eduard van Gelderen, senior vice-president and chief investment officer.

Each organization will have up to five minutes to deliver opening remarks.

We'll start with you, Monsieur Leduc, for five minutes or less.

[Michel Leduc, Senior Managing Director and Global Head, Public and Corporate Affairs, Canada Pension Plan Investment Board]

Good evening, Mr. Chair and members of the committee.

I'd like to thank the committee for its invitation.

I'm pleased to have this opportunity to answer your questions about our investment strategy.

CPP Investments is the professional investment management organization that invests CPP funds not currently needed to pay benefits. Our purpose is to help provide a foundation upon which more than 21 million contributors and beneficiaries can build lifetime financial security.

Our enabling legislation has very clear objectives—to achieve a maximum rate of return without taking any excessive risk, while also considering the factors affecting the overall funding of the Canada pension plan. A professional board of directors oversees the management of the enterprise. Assets are segregated from government funds and managed with the singular goal of repaying our contributors with their earned benefits today and for many decades to come.

The fund is composed of only two things: payroll contributions and net investment income. Assets of the fund now exceed $500 billion. Of that total, over $370 billion is from our investment operations.

Canada stands out as one of the very few countries worldwide with a solvent national retirement fund. Our organization was set up to expose the fund to capital markets to achieve financial returns. Optimal diversification and a long-term focus on growth have achieved a level of financial performance few institutional investors worldwide have matched. Recent third party benchmarkers ranked CPP Investments number one in performance among global peers.

Diversification allows us to capture global growth and withstand periods of market uncertainty. It is a powerful way to enhance returns and also to prevent concentration risk. When liabilities extend so far into the future—to pension obligations beyond 75 years—growth and resilience from diversification are predicated on exposure to emerging markets. These markets are expected to account for more than half the world's annual GDP within the next 10 years.

Exposing the fund to the Chinese market gives us access to one of the world's largest and fastest-growing economies in such sectors as consumer discretionary spending, logistics and real estate. In addition to growth from this demographic opportunity, China often moves in ways uncorrelated to developed markets, thus adding balance to our portfolio, yet we do absolutely understand that there are very significant risks, particularly in the face of important social issues and evolving geopolitical risks.

We aim to always conduct ourselves as principled and prudent investors with a view to acting in the best interests of contributors and beneficiaries. As we pursue global opportunities, we seek to avoid investments in companies involved in wrongdoing, especially violations of human rights.

We do this in different ways. We incorporate human rights into our investment decision-making processes for all major transactions. Second, we do strong diligence, including assessing political, legal and regulatory risks. Third, we have tools and systems to monitor and assess both passive and active holdings that do not meet our expectations on such issues as human rights.

As a long-term investor, we actively engage with and influence companies with human rights as a long-standing focus area. If that fails, we will exit or avoid making an investment in the first place.

All these processes apply to our investments in China. We recognize that any investment in China needs to be handled with care, sophistication and an acute understanding of the current political and geopolitical environment.

I'd like to thank the committee for inviting me.

I'd be happy to answer any questions you may have.

Thank you.

[The Chair, Liberal, Ken Hardie]

Thank you, Mr. Leduc.

We'll now go to Caisse de dépôt et placement du Québec.

Mr. Delisle, you have five minutes or less.

[Vincent Delisle, Senior Vice-President and Head, Liquid Markets, Caisse de dépôt et placement du Québec]

Mr. Chair, members of the committee, my name is Vincent Delisle, and I’m Executive Vice-President and Head of Liquid Markets at Caisse de dépôt et placement du Québec. Joining me is Philippe Batani, Vice-President, Public Affairs and Communications at CDPQ.

We’re here to represent Caisse de dépôt et placement du Québec, which was created in 1965 by an act of Quebec's National Assembly. We have net assets of $402 billion and manage the funds of 48 depositors—primarily public and parapublic pension and insurance funds in Quebec.

Tonight, to further the objectives of the committee, we’ll provide an overview of CDPQ’s international activities, including our activities in the People’s Republic of China. We’ll also talk about the measures we’ve adopted to conduct the most rigorous environmental, social and governance, or ESG, assessments possible.

So if we take a closer look at our total portfolio’s international activities, the breakdown is as follows: Canada, 25%; United States, 40%; Europe, 16%; Asia Pacific, including Australia, 12%; and Latin America and other regions, 7%.

At the end of February 2023, our exposure to the PRC represented 2% of our total portfolio.

We invest more in liquid markets than private markets, which is a trend we expect to continue. Indeed, liquid markets—as the name suggests—give us more flexibility and agility to adjust our holdings based on the market environment and risks that may emerge over time.

Taking a more granular look at our exposure to the PRC, we have around 60% of our portfolio in liquid markets and 40% in less-liquid markets, particularly in real estate. Ultimately, we focus on Chinese companies that mainly serve their domestic market.

With total GDP of close to 20%, we see China as a market that contributes to our diversification and our depositors’ long-term performance. Its economy also generated a quarter of global growth over the last 10 years.

As a global investment group, we take the same financial, geopolitical and legal risks into consideration in all the markets we invest in, as well as to ESG-related risks.

We believe that sustainable investing is necessary in terms of our responsibility toward communities and that it is also an important factor for the long-term viability of the companies in which we invest. These companies generate returns for our depositors, which represent over six million Quebeckers.

We know that the environment investors must navigate is complex and involves significant geopolitical tensions, so we take a cautious and measured approach.

Wherever we invest around the world, including in the PRC, we comply with all Canadian sanctions under all circumstances.

In terms of risks related to ESG criteria, including social factors, we follow a rigorous approach based on a sustainable investment policy that defines the framework under which we integrate them into our assets management process. The policy also sets out the primary tools available to our teams for them to achieve our objectives.

When making investment decisions, our teams use a variety of tools that emphasize applying ESG criteria, including background checks and a review of partners involved in the companies, thorough analyses based on the targeted ownership stakes, and a review of the ESG processes of all our external managers.

To conclude, we hope that this overview has been helpful in understanding CDPQ’s approach to international markets and the vigilance we apply to ESG risks.

We'd be happy to answer any questions committee members might have.

Thank you.

[The Chair, Liberal, Ken Hardie]

Thank you very much, sir. I appreciate your timing.

We'll now go to the Public Sector Pension Investment Board.

Mr. van Gelderen, you have five minutes or less.

[Eduard van Gelderen, Senior Vice-President and Chief Investment Officer, Public Sector Pension Investment Board]

Thank you very much.

Good evening everyone.

I've been living in Canada for five years now and am very proud to have recently become a permanent resident. One of the commitments I have made is to learn French, and I hope to be able to speak with you in French on a future occasion.

I am Eduard van Gelderen, senior vice-president and chief investment officer at PSP Investments. In this capacity, I am responsible for overseeing PSP's total portfolio of over $230 billion and establishing our long-term investment portfolio strategy. My responsibilities also include government relations, sustainable investments, the complementary portfolio and PSP's internal and external communications.

I am pleased to appear before the committee today to discuss the nature and extent of our investments in the People's Republic of China.

PSP is a Crown corporation that operates at arm's length from the Government of Canada. It was established in 1999 to invest the amounts transferred by the Government of Canada for the funding of the post-2000 obligations of the following pension plans: the federal public service of Canada; the Canadian Forces; the Royal Canadian Mounted Police; and, since March 1, 2007, the reserve force pension plan.

PSP's statutory mandate is to manage the funds in the best interests of the contributors and beneficiaries and to maximize investment returns without undue risk of loss, having regard for the funding policies and requirements of the plans and their ability to meet their financial obligations. The government communicates its risk tolerance for the pension plans to PSP annually, and our task is to design and implement the most suitable investment strategy.

We take our job to support the long-term financial sustainability of the pension plans very seriously. Over our 22-year history, PSP has succeeded in its mandate and has supported the Canadian government in delivering on the pension promise. I am proud to report that over the last 10 years, PSP has achieved a return of 9.8%, which compares favourably with our benchmark. The difference amounts to an additional return of almost $26 billion.

The strong investment performance is based on our ability to invest globally via public and private markets. This allows us to allocate funds to regions with the highest economic growth and find the individual investment opportunities matching our long-term risk-return criteria.

Our geographical allocation is as follows: North America is 57%, which includes 10% in Canada; Europe is 19%; Asia and Oceania are 20%, of which 3% is in China; and Central America, South America and Africa are another 4%. We manage these investments from our four investment centres around the world: Montreal, where most of our staff is located; New York, with 57 employees; London, with 89; and Hong Kong, with 13.

PSP's sustainability activities are a key pillar of the CIO group's strategy and total fund approach. We believe ESG is not just about doing the right thing but also a financial reality. We became a signatory of the UN-supported Principles for Responsible Investment in August 2014. Since then, we have built a strong sustainability foundation and a robust ESG policy framework. Our sustainability and climate innovation group works intensively with the asset classes to oversee and implement activities across the total fund. They provide guidance on ESG themes and trends, build internal capacity through ESG knowledge sharing and collaborate with industry peers to drive systemic change on key ESG issues. We expect the same rigorous approach among the external managers and general partners with whom we work.

In closing, PSP's objective as a long-term investor is to be an insightful global investor focused on maximizing risk-adjusted sustainable value and keeping abreast of societal norms and values through active management.

This concludes my remarks today, and I look forward to your questions.

Thank you.

[The Chair, Liberal, Ken Hardie]

Thank you very much, and we'll get to those questions now in our first round.

We'll begin with the Honourable Mr. Fast for six minutes or less.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you very much to all of our witnesses. Thank you for appearing at our study.

Could each one of you tell me if you are aware of an executive order that was made in the United States by President Biden that prohibits American companies from investing in 59 Chinese companies? Are you all aware of that executive order?

I don't know if you were told that today we'd be broadly discussing investment in China, which doesn't only include ESG factors but also includes national security as an issue. I think all three of you mentioned ESG factors as a significant concern and as one that you have factored into your investment decisions. You didn't say much about national security concerns, as articulated perhaps a little more aggressively and assertively in the United States.

Perhaps I could ask each one of you to very quickly comment on whether those concerns are factored into your investment decisions.

[Michel Leduc]

Thank you.

Absolutely, we're aware of.... I believe it's called a U.S. entities list. One of the changing dynamics around being a global investor is that in the broad brush of geopolitics, it doesn't just surface in a particular country. We think about investing in China and what decisions the government may make that could change the rules of the game in that country. Over the last seven years, what we've seen is an erosion of predictability in global trade rules. That has also resulted in various countries, including the United States, thinking through their own relationships with other global trade powers.

National security has really risen to the top of the agenda among public policy-makers in Washington. It's an area that we're following very closely. One of the reasons we're following it very closely is that CPP Investments has been deemed to be an independent pension plan in the U.S. What that means is that we have a special status. There are some very rigorous rules when a foreign investor enters a market like the U.S., rules that could make it much more difficult and more costly to make investments. With the U.S. being the largest economy, it's very important for us to efficiently acquire assets. For example, we recently made an investment in a significant port system in the U.S. That would be very difficult to do without the status that we have. That status means that we have to engage with Washington and with policy-makers so that they understand our approach to China.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you.

Mr. Delisle, would you comment?

[Vincent Delisle]

Mr. Chair, diversification is our main emphasis in building our portfolio. Needless to say, when the geopolitical situation changes, so does the risk and performance profile for these investments. Our intention is to be a world leader in ESG criteria and investment, whether environmental, social or governance. When new situations arise, such as sanctions or tensions, we build these into our portfolio structure.

As I mentioned in my introduction, most of our investments in China, about 60%, are in liquid and public markets, mainly stock markets. When the situation changes, or if sanctions are in place, we comply and can adapt the portfolio or even withdraw because we can sell a position.

[Ed Fast, Conservative, Abbotsford, BC]

Go ahead, Mr. van Gelderen.

[Eduard van Gelderen]

Thank you.

When we think about our investment process, there might be an idea that portfolio managers are making decisions by themselves. That is actually not the case. Almost every single investment, especially in private markets, has to go through a committee—what we call the risk and investment committee—which means that once a proposal is on the table, the risk team will look at it and our legal team will look at it and our responsible investment team will look at it. We really dice and slice an investment proposal in many different ways, including with regard to geopolitical risk and national security risk.

This is actually becoming, as my neighbour said as well, more and more important in our process. Before an investment decision is made, it has been looked at from many different angles, including national security and geopolitical risk.

[The Chair, Liberal, Ken Hardie]

You have about 40 seconds left, Mr. Fast, if you want a quick question.

[Ed Fast, Conservative, Abbotsford, BC]

Great. I'll go back to Mr. Leduc.

Canadians will want to know what percentage of their investments are invested in China.

[Michel Leduc]

It's 9.8%.

[Ed Fast, Conservative, Abbotsford, BC]

Do you also have to divest yourself at times when you realize that the ESG risk, or the moral risk, of that investment is much too high?

[Michel Leduc]

Investments are made of three things: buying, holding and selling. On any given day, we do all three. If we're not satisfied with the level of risk or the information, we will absolutely invoke any one of those. In that case, it would be selling.

[The Chair, Liberal, Ken Hardie]

Thank you very much, Mr. Fast.

We'll now go to Mr. Fragiskatos for six minutes or less.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you, Mr. Chair. I'll begin with Mr. Leduc.

Thank you, by the way, to all of you for being here tonight. It is appreciated.

To pick up on this point of 9.8% exposure, how has that evolved in, let's say, the past 10 years? Where were you a decade ago?

[Michel Leduc]

I don't have the precise figures in terms of how that has gradually increased. I will put it into some context.

For example, we're invested in the U.S. at about 35%. We're invested in Canada at above 14%. Again, to put it into more perspective, currently today, as my peers mentioned, China is around 20% of global GDP and Canada is just above 2%, so that gives you a sense of....

We don't invest based on country-specific exposure. We think about things more on a factor basis. What that means is that we look at developed markets and we look at emerging markets. What would be the types of exposure that we want so that the fund doesn't always move in the same direction? There are some areas of the fund that are not correlated.

I'm more than happy to give you the specific data in terms of how exposure to China has increased in the last decade.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Perhaps you could table that with the committee at another time, after the meeting or in the coming days.

This question will go to each of you.

I take the points that you've raised on human rights. It sounds like each of the funds places a focus on that value. My question is on how attention to human rights is filtered down within each organization. How is that woven into the culture of each fund, so that when decisions are being made or analysis is being taken...?

For example, Mr. van Gelderen, you talked about the risk committee that exists. My question relates to precisely that. How is a culture of human rights put forward within each organization so that it is a key lens in decision-making?

We can begin with Mr. Leduc again, and then Monsieur Delisle and Mr. van Gelderen.

[Michel Leduc]

We—all of the professionals and practitioners who join CPP Investments—begin with a risk culture. It's important in our corporate culture and our guiding principles of high performance, integrity and partnership.

Human rights are increasingly an investment consideration. They are how we see the world. We strongly believe that any business, any asset, any company that does not take human rights seriously will just not be around. It's a destruction in value, especially given our very long investment holding. If we're going to hold a business for 10 years, we just don't think it's going to create value unless it takes....

Our perspective is that it's built into the professionalism of being a global investor.

[Philippe Batani, Vice-President, Communications and Public Affairs, Caisse de dépôt et placement du Québec]

Mr. Chair, the Caisse de dépôt et placement du Québec was very quick to incorporate ESG culture—environmental, social and governance—into its investment processes. This culture takes the form of a highly structured and rigorous approach to dealing with these ESG factors.

It begins with a sustainable investment policy that describes the organization's convictions, together with the approach, factors, and tools employed by our teams to implement the organization's decisions. This policy also describes the risks to be factored in, whether financial, operational, ESG or geopolitical, and that could be harmful to the Caisse's reputation. The policy applies to all the portfolios, teams and sectors in which we invest. It's a highly systematic approach that affects all of our investment activities, no matter what the geographical region in which we are investing. That includes China.

I'd now like to say a word about the process introduced by the Caisse, to help you understand what it all means concretely. To begin with, systematic filters are applied to our portfolios. That includes sanctions and sectoral exclusion, one example of which would be tobacco. It also applies to sectors which do not respect human rights…

[Peter Fragiskatos, Liberal, London North Centre, ON]

I'm sorry, Mr. Batani. I only have about 45 seconds left. I would like to get Mr. van Gelderen on the record.