Canada-China Relations Committee on Nov. 29th, 2022

[The Chair, Liberal, Ken Hardie]

I'm going to have to ask both of our witnesses to maybe work some of that messaging into some of their answers to subsequent questions, because, Ms. Dancho, you are out of time.

We'd like to go to Ms. Yip now for six minutes or less.

[Jean Yip, Liberal, Scarborough—Agincourt, ON]

I'd like to hear the answer to Ms. Dancho's comments.

[Sam Goodman]

I would start by saying that these pension funds actually should already be investing, really, on the basis of Canadian values. That was the whole point behind the ESG criteria—upholding the climate, upholding human rights and social values, upholding good governance and the rule of law. The reality is that they're not doing that, because ESG just isn't properly regulated. I think lots of the pension fund managers don't take it seriously. They consider it just to be a vehicle to make more money. That is why, ultimately, I think you need proper legislation and regulation that defines clearly what the ESG criteria are, and hold these Canadian pension funds to task when it comes to some of the investments that don't meet those criteria, particularly in China.

[Aileen Calverley]

I think it must be very shocking. Often we hear that in the supply chain there's cotton made by Uighurs and they're in concentration camps. We never look into our pensions.

I think politicians on this committee work very hard to defend our values, defend Canada's values and also defend human rights. Investors, especially fund managers, are very busy investing in China. They don't need to go there. They just need to buy the stocks. They just buy the bonds.

Canada pension plan investments are huge. This is really related to our pensions. When we open the list of its stock holdings, there are 189 Chinese stocks. It's the second-largest holding after U.S. stocks, so that is quite striking.

Of course, when we talk about ESG, we single out quite a long list of companies that violate human rights. Canada's pension fund should not invest in these companies. Then, when we look into the Indo-Pacific strategy, we need to be prepared. We need to have a contingency plan. When something happens in Taiwan, not even a war, just a blockade, or this spills into the South China Sea, or even because of the crackdown on protests in China and pro-democracy, like-minded countries put sanctions on China, then what happens to Chinese stocks and Chinese bonds? Definitely they will collapse. Then we will see our pension fund lose value.

I think this is the area where the committee needs to push the government. It needs to have a proper country analysis. The government needs to work on that. What's the risk with some kind of confrontation in the Indo-Pacific region? Will that affect our pensions? Also, what sort of relationship should we have under this special risk?

Two or three years ago, nobody would think about that. At that time, it was quite fashionable to invest in China. Two or three years ago, the return was one of the highest. Then, when you look at the average return on Chinese stocks for the last two decades, it's almost zero, because it collapsed so much in the last year. The Chinese market is not the best place to put our investments.

[Jean Yip, Liberal, Scarborough—Agincourt, ON]

How can ordinary investors, just regular Canadians, keep track of which companies are problematic?

[Sam Goodman]

I think this is where a blacklist would come into play, as some of the earlier witnesses mentioned. I think, to be honest, it's not a negative concept. Some of the investors we speak to think a blacklist would be very helpful for them. It would be a road map of the companies to avoid. I think there's a general, larger problem when it comes to ESG in China that, in all conscience, you probably can't invest in most Chinese stocks without there being some level of risk.

Of course, there are going to be private investors who are happy to wear that risk and go in with their eyes open, which is fine, but I think the issue we're talking about today is gambling with other people's money, gambling with Canadian pensioners' money. At that point, the aversion to risk should be quite high.

[Aileen Calverley]

I think that ESG investment is quite fashionable right now. We can, in fact, buy ESG funds. The problem is that they focus on E only. When you buy ESG funds, usually they're environmentally friendly, so you don't get this oil company or any company that creates pollution back into the environment, or you don't have a black coal company. I don't really see many ESG funds looking at the S and G.

If there's some kind of encouragement to fund managers so they could possibly come up with more ESG funds and focus on the S in the fund, they would have a list of companies that they would not invest in, like they do not invest in tobacco companies or oil companies.

[The Chair, Liberal, Ken Hardie]

All right, Ms. Calverley, thank you for that.

Ms. Yip, you are out of time.

We will now turn to Mr. Bergeron for six minutes or less.

[Stéphane Bergeron, Bloc, Montarville, QC]

Thank you, Mr. Chair. I also thank the witnesses.

Mr. Goodman, I'd like to come back to the concept of blacklisting. Some of the witnesses on the previous panel were telling us that pension funds and investment funds claimed that they were not investing in the Chinese government, but rather in Chinese companies. According to these witnesses, this is a completely spurious argument, as Chinese companies are owned by the government and must respond to its directives.

Would it be simpler to state on this blacklist that you should not invest in any Chinese company?

[Sam Goodman]

I think it would certainly be simpler, although there might be an argument that for some sectors of the Chinese economy, investments would be low risk, such as perhaps investing in a food company or in real estate.

I certainly take the point that when it comes to other sectors, such as agriculture, technology, or the fashion industry, they're so exposed to forced labour. There's no distinction, as you've pointed out, between private companies and the government. Therefore, I certainly think that you probably wouldn't or shouldn't countenance investing in Chinese companies in those sectors of the economy.

[Stéphane Bergeron, Bloc, Montarville, QC]

In the November 2022 report “Passively Funding Crimes Against Humanity: How Your Savings May Be Financing Internment Camps and Forced Labor in China,” which you co‑authored, you comment on the Uyghur Forced Labor Prevention Act, which prohibits the importation into the United States of products mined or manufactured in the Xinjiang Uyghur Autonomous Region. The report points out that this law does not require a ban on investment in Uyghur Autonomous Region businesses. You recommend that the United States enforce this ban through executive order 14032.

I find this very interesting, because the Canadian government has done it differently. Instead, it has done it through an order in council, to ban products from the Xinjiang region that were probably produced using forced labour.

The problem is that we are not in a position to implement this order. Obviously, in this one, there is absolutely no mention of investments in the Uyghur Autonomous Region. So we're banning the entry into Canada of products made in the Xinjiang region, which were probably made using forced labour, but we're not banning investment in companies that produce goods that will be exported elsewhere if we don't import them here. Isn't that a contradiction?

I will then come back to what you are proposing in relation to decree 14032.

[Sam Goodman]

Yes, I certainly think there needs to be parity when it comes to legislation looking at supply chains. They should also look at finance. I think you're right that we can't really talk about banning the import of goods from Xinjiang while at the same time we allow the financing of companies that have direct links to forced labour in Xinjiang. There is a clear inconsistency.

[Stéphane Bergeron, Bloc, Montarville, QC]

Therefore, you are saying that it is not enough to ban the entry into our territory of products coming from the Xinjiang Autonomous Region that have probably been manufactured using forced labour; we must ban the investments that contribute to the production of these goods, which will be exported elsewhere in the world if they cannot be exported to us because of this ban.

[Sam Goodman]

Yes, I would support that recommendation.

[Stéphane Bergeron, Bloc, Montarville, QC]

So I'll return to one of the conclusions of your November 2022 report. In it, you point out that the Uyghur Forced Labor Prevention Act does not prohibit investment in Uyghur Autonomous Region businesses, but that such a prohibition could be implemented through executive order 14032.

Can you tell us more about this?

[Sam Goodman]

I think the regime the U.S. government is setting up would allow a provision that could apply to investment as well as goods. I think it might be a good example of something that Canada might be able to replicate as well. I recognize that the approach the Americans have taken is quite aggressive. It recognizes that there simply isn't a test to meet for due diligence as well, in that you can't verify, a lot of the times, whether goods have been made by forced labour. I think similar tests could apply, in some cases, to investment where I think there's a sizable amount of evidence linking some of the companies in the region to the camps and some of the forced labour programs.

[The Chair, Liberal, Ken Hardie]

Thank you, Mr. Bergeron.

Mr. Goodman, we need one more microphone adjustment. If you could move your microphone out a little bit, just bend it out a little bit, but again between your nose and your lip, that would be good. We're just getting a little pea-popping. For the benefit of our interpreters, we want to make sure that the sound is not distorted. Thank you.

Now we will go to Mr. Boulerice for six minutes or less.

[Alexandre Boulerice, NDP, Rosemont—La Petite-Patrie, QC]

Thank you very much, Mr. Chair.

I thank our witnesses for being with us tonight.

My question is for both witnesses. It relates to what Dr. Goodman said about environmental, social and governance criteria, or ESG criteria.

You suggested that these criteria were not taken seriously, kind of like jokes, and that there were no real consequences for not following them.

Can you elaborate on what you think, Mr. Goodman, about these so‑called ESG criteria and what they represent in real life?

Ms. Calverley can speak afterwards if she wishes.

[The Chair, Liberal, Ken Hardie]

Mr. Goodman, did you get that translation?

No, I'm sorry, for some reason the translation was not available. Maybe he pushed the wrong button.

Mr. Boulerice, could you just very briefly repeat your question.

[Alexandre Boulerice, NDP, Rosemont—La Petite-Patrie, QC]

My question is related to the fact that Mr. Goodman previously indicated that, in his opinion, ESG criteria were not taken that seriously and had no real application. In fact, they were almost a joke and not very serious. This is something that worries me a lot.

On this subject, I would like to hear from Mr. Goodman, as well as Ms. Calverley.

[Sam Goodman]

The process of ESG is that if there is a company that's suspected of being involved with forced labour, as an example, a Canadian pension fund would be expected to engage with that company to see how it could improve its record on forced labour—which, within the context of China and the Chinese state apparatus, is a non-starter, really. That process won't go anywhere. As other witnesses have pointed out, these companies are working hand-in-glove with the Chinese state and they're legally required by Chinese laws to do so. Therefore, the process itself is quite flawed. I think that increasingly, for a lot of pension funds, it's become a bit of a tick-box exercise.

As Ms. Calverley has already pointed out, it's heavily slanted towards focusing mainly on the environment, forgetting about human rights.

[Aileen Calverley]

For the Canada pension plan, we can see that Alibaba and Tencent are huge holdings. They are some of the biggest holdings in that pension plan, and both, actually, with violations of human rights in Xinjiang.

I don't know if the pension plans have any mandate to check their holdings for whether they comply with ESG? I'm not sure that, actually, is a mandate.

For a lot of fund managers now it's quite fashionable to check ESG, but I think there's no authority. For example, for country risk rating agencies we have Standard & Poor's and Moody's, but for companies we never get any ESG rating. For example if it rates a 10, that means it's very good, whereas a 1 shows bad environmental or human rights violations. We don't have that kind of rating. We only have ratings for risk. We get Moody's and Standard & Poor's to give ratings, for example, for Canada's country bonds. Our bonds are actually AAA, for example. We get that kind of rating, but for stocks we don't have that kind of rating yet. It's really up to our fund managers to make the decisions, especially if there's no regulation that our pension fund must follow for this sort of ESG standard.

[Alexandre Boulerice, NDP, Rosemont—La Petite-Patrie, QC]

I thank you both very much.

As I have just returned from COP27, the UN climate conference that took place in Egypt, I am quite aware of the concept of greenwashing.

By using ESG criteria, aren't we doing labour or human rights laundering?

How could the Canadian federal government ensure that this principle is more widely applied and not just a checkbox, as you said?

[Sam Goodman]

I think you have to mandate that all the components of ESG have equal weighting, and that includes the S as well as the E and the G.

I also think, in terms of social risk and social factors, that often companies think of gender diversity on their board. Do they celebrate LGBTQ+ month and things like that while they neglect basic human rights?

I think if you were to require companies to take human rights seriously, that would probably transform the emerging markets index over night, because China is not the only one that has human rights issues. There are many countries and there are many companies that are involved with states that have appalling human rights records.

[Aileen Calverley]

Canada is a leading country defending human rights and freedom in the world. I think actually that Canada can lead on ESG standards if the government gets serious about our pensions and our investments. I think that should be the starting point that we impose, some kind of regulation that our pension plan needs to look into ESG standards. That would be a very good start and a good example, a good model to other countries in the world. I'm sure Canada can do this.