Finance Committee on Nov. 1st, 2016

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

That's been with the pay-as-you-go and you also mentioned that with Bill C-26 we would actually see the fund become self-sustaining and therefore have less tolerance for risk. The question I would have, then, is, do you foresee that this active management strategy, which has doubled in its cost, roughly, over the past seven years, by going from a half a point of assets to now $2 billion of assets...? Will the same approach increase similar costs or will we see marginal returns because there will be less capacity for risk?

[Mark Machin]

If I understand the question, I think that as the assets will grow under management we believe that we should be able to see more economies of scale as each of the strategies build out. We should be able to manage costs effectively over time as we continue to grow the assets. Again, we think the active management strategy will work well for both the base and the additional CPP. It's something that will add value over and above any passive alternative.

[The Chair, Liberal, Wayne Easter]

You have two minutes, Mr. Albas.

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

Okay. I would like to hear Mr. Leduc address many of the criticisms in those two articles.

[Michel Leduc]

Thank you for the question.

I will tell you that interest in CPPIB has grown significantly with the fund itself and our activities. Canadians are paying more and more attention to what we're doing. You see that broadly with reporters, columnists, and bloggers. What I will say is that when we receive information that might be more negative, we welcome that. We're a public trust. We have to be able to tell our story. We need to continue to work even harder to tell our story. I'll tell you quite frankly that we have a good story, and when we take time to speak with people who understand our story, the reaction is quite positive. Whether engaging with—

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

External management fees have gone up from $25 million to $782 million.

[The Chair, Liberal, Wayne Easter]

Dan, you're well over. Mr. Leduc gets the floor.

[Michel Leduc]

I would like to answer the question on the costs and fees as well.

I think it's very important to look at the trajectory of our costs in the context of what I would say is unprecedented growth for an organization in a very short time, which I believe is unprecedented in the Canadian financial sector. Absolutely, we started as a very small office, and of course the costs reflected a tiny office, but in a very short time this organization has transformed into a truly global powerhouse that is able to buy prized assets for Canadians, and that takes teams.

Of course, in referring to some of our operating expenses, we had at the time one or two investment programs and now have 25. The key question is, what are Canadians getting for that? Are they getting value for those additional costs? We produce all of our performance net of all costs. We also put a lot of disclosure in a very granular level of detail as to what those cost. To be as blunt as I can be, the fund would shrink by $17 billion if it wasn't for active management.

[The Chair, Liberal, Wayne Easter]

We're going to have to leave that discussion there.

Ms. O'Connell.

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

Thank you very much.

Thanks to all of you for being here.

In terms of the declines, I'm assuming that you have a copy of the chart that the Library of Parliament provided in terms of your rates of return. I'm sure you know them. For example, you mentioned that 2015 was one of your best years at 18.7%, and 2016 is looking at, you said, 3.9%, but here we have 3.7%. I'm assuming it's just that not all the final facts and figures are in for the year.

Is it the case that the significant decline is related to the oil and gas sector in investments, in commodity prices, or is it something else?

[Mark Machin]

To clarify, our return year to date so far, which we will formally announce week, net of all costs, is 6.3%. That's not annualized. That's the return year to date.

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

Okay.

[Mark Machin]

This year, it's so far so good.

The next year after that was a lower return year than the previous year. Our reporting is from April 1 through to March 31, so when you compare us, you need to look at our performance relative to other funds over those periods. Part of that performance would be a sell-off in commodities in other public markets over that period, which weighed on the results over that period in the last year. It would be one of the factors that's in there for last year.

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

Thank you.

The point of that question is similar to what some of my colleagues have already talked about in terms of your ability to adjust and change as markets are changing. I realize that one of the reasons for this is that, according to “World Energy Investment” for 2016, oil and gas is still the number one investment despite a drop in returns. They're projecting a further 24% drop for 2016.

I'm just wondering if you have the ability or the if the focus is.... When you see numbers like that and you're dealing with pensioners' money, are you able to adjust quickly enough? Also, what is your focus on things like renewables? My understanding is that this is where you're getting returns at all, and it's a shorter return window versus oil and gas. Those tend to be longer windows of opportunity and payback. What is your ability to really adjust? How quickly can you deal with the markets?

I guess my very long three-point question is really this: what is your focus when it comes to renewables and climate change, especially taking into account our government's recent policy positions?

[Mark Machin]

Thanks for the question.

To addressing climate change in particular, earlier I mentioned our ESG focus, our environmental, social, and governance responsibilities. Climate change has been one of those focuses for the last 10 years and is something that we take seriously. We think it's a risk factor that we need to understand across our portfolio and need to factor into all of our direct investments, which we do, and then understand how it might impact our portfolio overall and respond to that.

I mentioned that we publish an annual report on sustainable investing. Our head of sustainable investment is a member of the Financial Stability Board's task force on climate-related financial disclosure. This is the committee that is chaired by Michael Bloomberg, and it's one that we think is important for improving the disclosure on climate change across companies around the world, so that we can understand those risks better and factor them into what we're doing.

Specifically on renewables, we have a strategy on investing in renewable energy. We have a team that's focused on that. Again, it's in our report on sustainable investing, with a profile that team and their focus. We have a senior professional who we have hired from GE, who has lengthy experience in that area and is pursuing investments in that area. We agree, and we see great potential to invest in that area.

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

Speaking about—

[The Chair, Liberal, Wayne Easter]

Just a short one, Jen.

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

We were handed the annual report called “People. Purpose. Performance.”, and I quickly flipped through it and I'm curious. This is more of an operational question.

I looked at your senior management team and some of the photos of your investment teams. Does that really reflect the diversity of Canada? Out of 12 on your senior management team, you have three women. What is the focus? You are at arm's length from the government, but you're still part of the government and representing Canada. Even in looking at your board, I notice your chair is a woman and you do have fairly good representation of women and men on the board, but it's not necessarily a very diverse-looking board. What is that overall plan? It's more of an operational question than on the pension board itself.

[Mark Machin]

It's an important question. When we look at diversity across our organization, it has been a big focus of the organization. It's in all of our departments' annual objectives for this year to continue our focus on improving male-female diversity in particular. We have an objective that, by 2020, 40% of our new hires will be women. We've made improvements over the last couple of years, and we are on the way to achieving that objective. We particularly focus on the senior levels of the organization as well. We continue to have work to do, but it is a focus of our organization.

[The Chair, Liberal, Wayne Easter]

Mr. Liepert, go ahead.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Thank you, gentlemen, for being here.

I'd like to pursue a bit of what Ms. O'Connell was asking, but in a slightly different way. We hear a lot today that the jobs of the future are going to be in renewables—green infrastructure, green energy. Your organization invests, to a large extent, on the basis of long-range returns, not short-gain returns. If, in fact, what some of these organizations—like the two political parties in the room besides us—are advocating.... It would seem to me that if this is where all the jobs are going to be, and where all the investment is going to go, you should be jumping in with both feet. I suspect that's not the case.

I got the impression from your comments when you talked about climate change that it was more the ethical kind of investing, recognizing that political correctness is how you look at climate change for investments, not necessarily because it will be a good long-term financial return investment. I'd like you to comment a little about that, and if in fact I am not correct, give me some examples of what you are investing in today that you anticipate will have terrific above-average returns over the next 10 years in that green category.

[Mark Machin]

Thank you for the question.

To be clear, we have a very clear, singular mandate, which is to maximize the returns without undue risk of loss for our contributors and beneficiaries. That's the lens through which we look at everything. When we look at climate change, it's the same. We look at it through what it will do to returns and risks across our investments and across our portfolio.

When we look at climate change, we have to anticipate what regulatory developments could impact it; how demand for various sources of energy from consumers, corporates, and governments will evolve over time; how the shift in sources of energy supply will unfold over time; what the physical impact of climate change can be, and its impacts on our investments; what technological developments will happen that are related to climate change; and what the impacts will be on sectors other than energy, such as transportation, agriculture, retail manufacturing, or other areas that may be impacted by climate change. That's the lens through which we look at climate change.

Specifically, on your question about renewables and how we are looking at those investments, this is a relatively new effort. We hired the head of this team in April of this year, so the team is getting going and looking at how opportunities will emerge. I would say that within some of our infrastructure investments there have been expansions into the renewables area. Some of our North American infrastructure investments in power generation have moved more towards renewables, so that's something that's happening within our existing investments.

With regard to specific new investments in renewable energy, we are looking forward to finding those opportunities and making those investments in the coming months.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

I think if you look through that singular lens that you mentioned at the outset.... Everything I heard you say was that the climate change factor is a risk factor. It isn't a solid investment decision that's going to return average or higher-than-average returns over the longer term.

I'd like to focus strictly on whether or not green is a good investment, not factoring in the regulatory side of it. In other words, I understand that you are not going to invest in coal, because governments are making coal go away, but are there green investments that, setting aside all the regulatory requirements, stand alone? Are you seeing anything you can invest in?

[Mark Machin]

I'd say with respect to climate change that it's both a risk factor and also an opportunity for high returns as well. It's both risk and return. We evaluate everything through that lens. I'd say that when we look at solar projects, wind projects, or other renewable energy projects around the world, we will evaluate those based on the risk-and-return potential of those projects.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Do you have any investments today in solar, or do you plan in the near future to be investing in solar?