Finance Committee on May 30th, 2019

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Can I just interrupt you, sir? I'm sorry, but I got the two-minute warning I had asked for.

I'll switch subjects. The CPPIB—and Mr. Leduc, I think you were quoted on this—has started a human rights review specifically on China, and this is what I want to ask you a question on now.

The Chinese government has interned between 800,000 and 1.2 million Uighurs, Muslim Uighurs, in its westernmost province. I have constituents who've come to see me over the past few weeks because they have family members who've been interned. The CPPIB has invested in the Hangzhou Hikvision Digital Technology Company and the Zhejiang Dahua Technology Company. One of those companies is owned directly by the Chinese military, China Electronics Technology Group. Why is the CPPIB still investing? If you have divested yourselves, please let me know. This is a major human rights violation against the Uighur population, the Muslim Uighur population, in China.

These two companies I mentioned, which you have invested in, are also heavily involved in the manufacture of camera equipment, combining video surveillance and advanced computer recognition technology involving gait, which is the speed of your walk, and facial recognition. They are directly involved in the repression of Muslim Uighurs in western China.

If you are not involved anymore, please put it on the record that you've divested yourselves. If you're still involved in this, why are you?

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

That's a very important question. Thank you for that.

If you think of CPPIB, we have more than two dozen investment programs. In the way they are classified, there are those that fall into the broad category of fundamental investments. For those, we look at the details of a specific company, asset or stock, and that's really taking a larger position in fewer companies.

Then there are the broad quantitative ones, and quantitative means taking relatively tiny positions across the potential 10,000 companies of securities around the world. Two of our programs fall into this quantitative category, and for those our investment programs look at factors, as generated by computers and algorithms, that may or may not read what the particular operations of a particular company are. The two assets or companies that you've cited fall into that category. That just gives you context in terms of how they end up in our portfolio.

That being said, we're responsible for anything that's in our portfolio. With regard to human rights, it's not only recently that we have factored in human rights. We've been factoring in human rights for more than a decade and integrating them into our investment decision-making. We've been able to do that in a very deliberate way, fundamentally because those human rights factors and our ESG factors as well, our reputation factors, and our political risks are part of due diligence in that fundamental analysis.

Until recently, it hasn't been practical and it has been very cost-prohibitive to apply that type of assessment across a potential 10,000 holdings. Recently—and this predated the coming to light of those two assets—we found a tool that will allow us to identify red flags, including human rights. We've just recently put in that tool, and it allows us to continue with our integrity of risk-adjusted return. What I can tell you is that we are looking at those specific positions today related to the issues that you've identified in terms of human rights.

We disclose our investments on the fundamental side, or dispositions, in the same way that a publicly listed company would do, in a timely and continuous manner. Because of the nature of potentially 10,000 holdings, we disclose the holdings annually, so we will be updating those lists at year-end once we've made the investment decisions.

I can tell you that those two assets have been red-flagged, and we're applying our ESG, reputation, human rights and political risk associated with that.

[The Chair, Liberal, Wayne Easter]

Thank you. We're well over time.

I'll go to Mr. Dusseault, unless you have an absolutely necessary....

Mr. Dusseault, I'd better go to you. We're three minutes over.

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

Thank you, Mr. Chair.

Mr. Leduc and Mr. Machin, thank you for being here today.

We're discussing an extremely important subject. This committee has an important role to play, since it reviews your results each year in order to be accountable to Canadians. Basically, you're taking Canadians' savings and investing them. Hopefully, you're getting a return that will satisfy the investors, meaning Canadians. This discussion must take place.

I was wondering about the board's investments in agricultural land in Saskatchewan, a subject that attracted attention from 2013 to 2015. I know that the matter has sparked some discussion and that, in your organization, you've started to review the whole issue of the purchase of agricultural land.

In Quebec, foreigners are purchasing huge amounts of agricultural land, which is driving up prices and raising serious concerns. It's becoming extremely difficult for local farmers and family farms to grow in this ecosystem.

However, you seem to be involved in this in Canada, but even more so abroad. I'd like an update on the practices used to take control of huge amounts of agricultural land in Canada and abroad and the factors that you consider in your assessment of these practices.

[Mark Machin]

Let me address that question. It's a good question.

When I sat in the seat and took over as CEO, we reviewed again the programs that we had, the different investment strategies we had. We looked at that particular strategy of acquiring agricultural land around the world, which seemed theoretically to be a very good idea for a long-term investor. It's one that's aligned with population growth and people's improving wealth and ability to buy food around the world. It seemed something that would be aligned with a long-term investor and less subject to sort of short-term market movement. It seemed like a good strategy.

The challenge was exactly as you've identified, which was that the local challenges of buying farmland were really challenging, not just in Canada but around the world. We'd identified several different markets where we thought we could buy a significant scale of agricultural land.

Everything we do has to be scalable; otherwise the costs we have don't make sense. We need to keep our costs under control and have programs in which we can have a few people and do very scalable investments. The challenge was that when we actually tried to come and accumulate a significant amount of land, there was a lot of resistance and different challenges in different markets, whether it was in Canada, Australia or Brazil.

In the U.S. we had managed to accumulate one very significant platform. At one point we were the largest owner of standing irrigated row crop land in the U.S. We owned a company called Agriculture Company of America. Given the challenges we had in the rest of the programming, and also where pricing had gone, we decided to divest that, so we sold that land program in the U.S. and we have scaled back. We no longer have that program of trying to buy and accumulate agricultural land around the world.

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

You've put a stop to these practices for the moment, and even disinvested in this area. That's good. Thank you for your answer.

This doesn't resolve the broader issue of other foreign funds in Canada. Small farmers are finding it increasingly difficult to access land to produce quality food grown in Canada. I'm more familiar with the situation in Quebec. However, I'm sure that the same thing is happening in the other provinces.

My other question is about ethical investments, monitoring and the practices of the companies in which you've invested. You spoke to my colleague about two systems. In the first system, which is more automated, it's harder to predict issues. In the second system, you make larger investments, so you have more influence.

How are you reassuring Canadians that their money isn't being invested in tax havens or in companies with questionable tax practices that aim to pay as little tax as possible in all countries? We all know about this issue. I'd like to know how you influence these companies to change their practices, either by sitting on their boards of directors or by other means.

[Mark Machin]

I think that when we engage on ESG matters and when we engage with companies that we have investments in, obviously one of the areas is making sure that they are complying with appropriate tax policies and the tax regimes in the countries where they operate. It would certainly be an issue for us if we found that the companies were not complying.

In particular, where we have large direct investments, we'd insist that those companies be compliant with all the relevant tax requirements in the countries in which they operate.

[The Chair, Liberal, Wayne Easter]

Thanks, all of you.

Mr. Sorbara is next.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair.

Welcome, gentlemen.

One of the things you get from door-knocking is that you always hear some feedback from residents. This past weekend, one resident was talking about retirement.

We want to ensure all Canadians have a secure and dignified retirement. We have the enhanced CPP, which we brought in and signed with all the provinces. It was great to work collaboratively with all our provincial partners at that time.

Also, there is an actuarial assessment of the CPP that happens. One was in September 2016—it's triennial—and one will happen in September 2019. For the wonderful Canadians listening or watching at home today, I want to make sure they understand that the CPP is going to be there today, 10 years from now and 30 years from now, and it's actuarially sound. Can you please speak to that, Mark?

[Mark Machin]

Yes, with pleasure. This is one of the messages that Michel and I and our organization are trying to get across in Canada, because there's a troublingly low awareness amongst Canadians about the robustness of the Canada pension plan.

I say, don't believe me; believe the Office of the Chief Actuary. That's where these reports and the analysis come from. As you said, the Office of the Chief Actuary, in 2016, in the last triennial review, and again at the time of the enhancement of the CPP, published reports confirming that the CPP is sustainable not just over 10 or 20 years, but over 75 years, based on their projections. Obviously, we'll have to wait for that triennial review toward the end of this year, but we anticipate that this will be confirmed again.

I think that robustness and sustainability of the plan are something that all Canadians should have confidence in. They should not be troubled either by the history of 20 years ago or when they look across the rest of the world where plans are not sustainable. Canada's plan is sustainable.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Yes. The unfunded liability that exists in countries around the world in terms of their pension or medicare obligations is huge.

Going to another topic, probably on the other side of this tangent, the CPPIB obviously entertains a lot of external managers and has contracts with them to manage and look at assets. On the operating expense side, I've just read through your statement for fiscal year-end. I just wanted to get a sense of your judgment in using external managers rather than bringing it in-house. Last year, you had $1.6 billion in external management fees on total operating costs of roughly $3.3 billion, when you add in transaction costs.

I understand that, but we need to hold organizations to account. You're here today at our committee, and I really want to understand and ensure that these investment management fees you're paying to external managers.... What's your decision-making in terms of not going in-house? You have the size to bring a lot of stuff in-house. I want to get your thoughts on that, please.

[Mark Machin]

Most of the programs we do run in-house. When we can be competitive versus other investors around the world, net of costs, then we will do that. The example that I cited earlier in front of this committee, which still holds true, is our infrastructure program, which we manage entirely in-house. We estimate that if we did that externally, it would cost about 10 times as much money versus doing it internally. For this program, we believe we can have a small team that continues to be competitive versus the best talent and asset managers around the world who are competing for infrastructure.

We can't say that for every single asset class. Talent in investing is extremely scarce and expensive. There are top-decile managers in the world, whether in private equity or in public funds, who we think outperform in the long term even after all of the costs, but we're extremely conscious of the fact that when we're paying that money, we need those returns net of cost to exceed anything we can do in internally.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I'll just stop you there because I want to go to one more topic.

The Bank of Canada has identified climate change as a risk. You've spoken about it today.

In terms of your review of the companies you've invested in, both on the equity bond or the physical hard asset side, where are you folks in terms of that review of those companies that are exposed because of climate change? In fact, I don't mean just those companies directly, but also those that might be indirectly impacted by climate change.

[Mark Machin]

It's a massive issue and one that we think is a really important issue for long-term investors.

Climate change is happening, and we need to be able to understand all of the risks associated with it. Those risks are multi-faceted. They can be geographical change; they can be regulatory change; they can be customer preference change. There are a myriad of changes that are happening. We need to be able to anticipate where they are going and make sure that we're making investments at valuations with anticipated returns that compensate us for those risks we're taking on.

That's key when we look back at what we're charged to do by the acts of Parliament, which is to maximize returns without undue risk. We need to not just understand the returns but all the risks associated with the investment. We have both a top-down review of all the risks in our portfolio, and then every direct investment now has to go through a screen of the climate risks involved in that particular investment.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you to you both.

Mr. Poilievre is next.

[Pierre Poilievre, Conservative, Carleton, ON]

You mentioned the trouble the CPP was in 20 years ago. That trouble resulted from the fact that the CPP was then heavily influenced by politics. Politicians believed they could direct the CPP to lend to or buy assets that were politically convenient for the politicians. In the mid-1990s, the then Liberal government made an extremely wise decision, and that was to depoliticize the CPP and turn it into a true investment fund. They put professionals with real private sector track records in charge of the portfolio and let them invest it with a simple and clear mandate: maximize returns without undue risk.

The government, to its credit, has appointed you to this important task. You have an exceptional reputation and track record, so I commend them on that appointment. I am worried, however, that slowly but surely this government is trying to re-politicize the CPP to encourage, through public declarations by ministers, trendy investments that make for good headlines and talking points, to have you fund advertising in favour of political decisions, and to direct your investments based on the latest trendy causes that have captivated the present government's imagination.

As I see it, CPP exists for the sole purpose of the 20 million Canadians who are part of the fund. You have really only two stakeholders: workers and retirees. That's it. If you want to improve social justice, get a better return, as you have been, to your credit. That minimizes the cost to the worker and maximizes the benefit to the retiree. If you want to advance the cause of women and indigenous people, there are millions of them who are counting on you to turn their contribution into a secure and prosperous retirement. Stick to that basic mandate, and you will advance all the great social causes that politicians love to drone on about.

I want to get very specific here. In the most recent reporting period, in dollar value, how much bond issuance did the CPPIB perform?

[Mark Machin]

I'll probably have to get back to the clerk with the exact number of issuances over the last year, unless you have it at hand, Michel.

[Michel Leduc]

I don't.

Maybe I could just address one of the points that you made while we're looking, specifically the point around advertising and reaching out to Canadians.

The rationale is a CPPIB decision and had nothing to do with any of our stewards. The precise rationale is exactly what you've indicated: It's our own concern around the potential for the politicization of CPPIB in the future.

Any financial system requires public trust as its lifeblood. We see that around the world. If you look at our submission on page 6, you'll see a very worrisome, stubborn trend around low public trust in the system. In our view, good times are one thing, but during rough waters, that's when we will need that public trust that we are not politicized. I just wanted to address that point. It's to deal with—

[Pierre Poilievre, Conservative, Carleton, ON]

Okay, I'm sorry. I'm just on a very limited amount of time here.

How much money did CPPIB raise in bond issuances in the last reporting period?

[Mark Machin]

I'll get you that number through the clerk. We have about $30 billion outstanding as of today, so it was a few billion dollars.

[Pierre Poilievre, Conservative, Carleton, ON]

I understand why a pension fund buys bonds. What is the purpose of a pension fund selling bonds?

[Mark Machin]

That's a great question.

If I could just make one small correction to what you said earlier, I'm not appointed by the government; I'm appointed by the—

[Pierre Poilievre, Conservative, Carleton, ON]

By the board.

[Mark Machin]

—independent board of directors, so it was the board of directors that chose me.