Finance Committee on June 11th, 2018

[The Chair, Liberal, Wayne Easter]

You have time for one short question.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Last time I asked specifically about the transition from a passively managed fund to an actively managed fund. You said there had been great strides with that. I believe the reference portfolio allows people to be able to understand the opportunity costs, or in some cases, gains. Could you explain that so that the public can know how their monies are being invested?

[Mark Machin]

Yes, certainly.

One of the ways we test how we are performing relative to what we could have done if we had stayed passively invested back in 2006 is, as you said, by measuring our performance versus the reference portfolio, which is a simple portfolio of equities and bonds. As of the fiscal year-end, our performance was about $19.3 billion, so that's $19.3 billion of extra money in a fund that wouldn't have been there if we hadn't gone into an active management organization.

[The Chair, Liberal, Wayne Easter]

Okay. Thank you both.

I have one clarification, Mr. Machin. You talked about size opportunities. What did you mean? Was that over $500 million? The question was on infrastructure.

[Mark Machin]

Yes, Mr. Chair, that would be correct. We typically look for opportunities over about $500 million around the world.

[The Chair, Liberal, Wayne Easter]

That's on infrastructure. Okay.

Thank you very much.

Mr. Dusseault is next.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you, Mr. Chair.

I'd like to thank the witnesses for being here today.

My first question has to do with the principles that inform your investment decisions.

In our briefing package, it says that the CPPIB's key engagement focus areas include climate change, water management, and human rights.

Do your investment decisions also take into account fiscal responsibility? Do you ensure compliance with the tax laws of the countries you invest in?

[Mark Machin]

Thank you for your question.

I think there were two parts to the question, if I understood correctly. The first part was on the areas that we look at for our ESG areas. There are four, and we're introducing a fifth area this year, so you're correct to cite climate change, which we've been focused on for about 10 years. As well, there are water and water conservation, human rights, and executive compensation. This year, we're also introducing board effectiveness.

The second part of your question was related to taxes and how we comply with tax around the world.

We comply with all of the tax requirements in the jurisdictions that we invest in. We are focused on doing that. Obviously, in Canada, we have a tax-exempt status, and that applies in several other countries around the world where there are tax exemption agreements in place or the country applies a specific exemption on organizations like ours, like CPPIB. They are often available to public pensions in countries around the world, and it protects the pensions from double taxation.

It's our fiduciary duty to the beneficiaries and contributors to build a diversified portfolio with minimal transaction costs, including taxes on investment returns. For sound public policy purposes, the investment income earned on behalf of beneficiaries by pension funds, such as CPPIB, is exempt from Canadian tax to ensure that CPP beneficiaries are not double-taxed, which is what would happen if the investment income were taxed when it was earned and then again as income in the hands of the beneficiaries.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

I wasn't so much asking about your 8% or 10% rate of return on investments in Canada, as I was about the practices of the companies in which you make major investments.

When you are considering making an investment, does fiscal responsibility factor into your assessment criteria? It is all well and good to say that the companies you have an interest in comply with tax laws, but some companies are clearly less responsible than others when it comes to taxes.

I am asking because CPPIB investments showed up in the Paradise Papers. For instance, you bought a 40% stake in Highway 407 and you routed funds through Bermuda. The board routed investments in London's high-speed rail line through Jersey Island, and it purchased its stake in one of Chile's largest electricity companies in a transaction routed through Bermuda.

Those are the kinds of investments Canadians see as fiscally irresponsible. I'm talking not about investments the board makes in Canada, but about those it makes in other jurisdictions. It is contributing to the problem of tax evasion and aggressive tax avoidance. It was with that in mind that I asked the question.

[Mark Machin]

Thank you. I better understand the question now.

We have a fiduciary duty to our beneficiaries and contributors to build a portfolio with minimal transaction costs, including taxes on investment returns. We honour our tax obligations around the world. We pay taxes due in the countries where we invest and operate.

We don't employ artificial structures that don't have a commercial basis to avoid tax, and the companies we invest in pay corporate income tax on the profits they earn. In jurisdictions where tax agreements don't exist, we do look at using investment structures that limit the tax cost to CPPIB, thereby limiting the double taxation on CPPIB beneficiaries.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

As the protector of Canadians' pensions, you seem to have no qualms taking advantage of tax structures or investing in countries with low to no taxes. You have no qualms using taxpayer money to get around tax rules, do you?

You said that you don't bypass tax laws and that you honour all your tax obligations. You also said, however, that you try to minimize the tax consequences of your investments, and to do that, you use jurisdictions with very low tax rates.

How can you justify that practice to Canadians, who are the shareholders of the investments you make?

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

Mr. Dusseault, I'd like to jump in, if I may.

On some of the transactions that you've indicated, we'd be more than happy, through the office of the clerk and the office of the chair, to share more specificity around those investments.

To answer your question specifically around representing Canadians, one thing to consider is that as we compete around the world for these assets, in many of those instances—and we'll get those specifics—when we invest in those transactions, a lot of the structures are already in place. For CPPIB to unwind them it could lead to a much higher cost of capital for the organization, and therefore we would be hampering and injuring the best interests of the CPP fund.

In a lot of the instances when we're investing and where we're competing against a lot of other institutional investors, we want to make sure that we have the same even, equal cost of capital as other institutional investors; otherwise, as we look to deploy capital internationally, we would be doing so with part of our hands tied behind our back. I think most Canadians would expect us to structure things in such a way that we would not be embarrassed, and at a minimum follow all of the laws and rules.

[The Chair, Liberal, Wayne Easter]

Okay. Thank you all.

Ms. O'Connell is next.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, Mr. Chair.

Thank you both for being here again.

I want to touch more on sustainable finance. Obviously Canada recently announced moving forward with the Expert Panel on Sustainable Finance. As well, I notice that Ontario moved forward in terms of signing on to disclosures of investments.

In terms of the CPP and CPPIB specifically, I'm curious about what you're doing in that regard.

I was part of Chatham House's Waddeson Club, and it really focused on sustainable finance. Europe is light years ahead of us in this area, and their investment boards are moving ahead significantly to ensure that investors, and in this case Canadians, know that their funds are being invested in sustainable finance and that it's being disclosed in that fashion.

Can you elaborate on what specifically you're doing to move ahead in this area?

[Mark Machin]

Certainly. It's a terrific question.

I'll address some aspects, and Mr. Leduc may want to add.

With respect to what we call “sustainable investing”, I referenced that we have four, and now five, areas we're particularly focused on. Climate change has been one that we've been focused on for the last 10 years.

Most recently our head of sustainable investment was a member of the FSB's task force on climate-related financial disclosures. That work was completed last summer and announced at the G20 last summer by Governor Carney. We have committed to implementing that ourselves by fiscal 2021. One of the reasons is that we need sufficient disclosure from all of our portfolio companies to build up so that we understand what we have and the risks we have. We need more and more of those companies to adopt those disclosure mechanisms.

In the meantime we're very focused on continuing to implement stronger understanding of the risks that we're taking on in climate change, first from the bottom up, so we're developing a tool kit. We go into a lot of detail on it in the annual report. There is a tool kit that we're developing for each investment team so that they can address and understand the risk they're taking on in the investments they're making.

We're also doing a top-down assessment of all the risks we're taking on. We have a carbon footprinting tool that we're developing. There is no perfect tool in the world to do that today, but we are working with best practices around the world to develop our own proprietary tool. We're developing our own model for energy transition and the speed of that transition, which is critical to understanding the risks we're taking on, and beyond I would highlight that we now have a dedicated team investing in renewable energy. We have made a number of renewable investments here in Canada, in Europe, in India, and in Brazil in the last year, and we continue to commit to growing that investment. We mentioned a $3-billion number for where we expect that portfolio to grow.

Today we announced that we're issuing a green bond. I think we're the first pension fund in the world to issue a green bond, which we'll use to partially finance those investments.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you. I think China is doing a green bond. They are looking at it, but you are probably right that you're the first investment fund.

Just before you jump in, Mr. Leduc, do you have targets for investment? I realize that on the investments you currently have and the disclosures and the climate risks, it will take some time to gather that information, but moving forward on anything new that you invest in, do you have a target in terms of percentages for how much risk can be associated in any new portfolio based on climate?

[Mark Machin]

First of all, we're believers in climate change. We think climate change is happening. Second, it's a very complicated risk, which affects many aspects, and one of the challenges is understanding all the risks. Whether it's the physical and geographical changes or regulatory changes or consumer behaviour changes, there are a whole variety of changes we have to assess for every investment we take on, so we look at every investment we make through that lens to understand all the risks. Our investment mandate is to maximize returns without undue risk of loss.

Everything we look at, we look at through that lens of risk and return. We have to make sure we're being sufficiently compensated for all of those risks we're taking on, that we have an adequate return on the investments.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you.

I don't know—

[The Chair, Liberal, Wayne Easter]

Mr. Leduc, would you comment?

[Michel Leduc]

Mr. Machin has been comprehensive, so I wasn't planning on adding anything.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Okay. Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Poilievre is next.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you, Mr. Machin, for your service to the country. Based on my reading of your bio, there's no one who would be more qualified to shoulder this enormous task. Thank you as well for being here today.

My first question relates to the Trans Mountain pipeline. Have you ever discussed this pipeline with the Minister of Finance or any member of the government?

[Mark Machin]

No, I have not. I've not discussed it. What I can say is that Greenhill, which is the financial adviser to the federal government, has approached us, but we have not taken on any confidential information. I believe they have approached a lot of funds domestically and internationally, but we have not taken on any confidential information and we have not had any detailed discussions.

[Pierre Poilievre, Conservative, Carleton, ON]

Pardon me; I had my earpiece out. Who did you say approached you?