Finance Committee on June 11th, 2020

[James Cumming, Conservative, Edmonton Centre, AB]

Given what has happened in the last three months with those private investments, are you starting to see interest in those companies, because there are liquidity issues, looking for additional investment from you, whether it be through debt instruments or equity instruments? Have you started to see that, and is it something you're going after if it looks like the right circumstance?

[Mark Machin]

Absolutely, we will go after it if it's the right circumstance. That's the key. We'll look at each of them based on the merits, the risk and return characteristics, and the opportunities. We also stress-test the portfolio across all the private assets and the significant public holdings we have to look at whether we will need to put more capital in and to make sure that we have reserved significant liquidity for that potential event.

We're very rigorous about it. We have a team for portfolio value creation that is working with the investment teams to go through the plans, the liquidity profiles and capital needs of those companies, working with partners where we have partners and working with the management teams to make sure that we've thought through exactly that: If there's a prolonged economic stress here, what do the companies do? We'll only put money in if we think there's a good opportunity on a risk-adjusted basis.

[The Chair, Liberal, Wayne Easter]

We will have to move on.

Mr. Fraser will be followed by Mr. Barsalou-Duval.

Sean.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you very much, Mr. Chair.

Thank you to our witnesses for being here. This has been very engaging testimony today.

I'll start with a question based on the place where I gained half of the lessons I've learned since I entered politics, and that's at a table in Tim Hortons in the town of Pictou, where a local resident who was interested in the CPP and in giving me political advice said that what the federal government ought to do if it wanted to try to win some votes—not that that's what it's about—is to bump up benefits for seniors. They pointed specifically to the CPP, because it had had a history for quite a few years of having higher earnings than payouts.

However, I have some concerns around Canada's demographics and the fact that in my home province, Nova Scotia, we have an aging population as significant as anywhere else, although it's a problem right across the world and certainly within Canada.

I'm curious as to whether our witness can shed some light on whether the Canada pension plan is sustainable in its current form, whether in fact the lessons I learned at Tim Hortons are valuable, and whether it's doing so well that we could actually afford an increase in the CPP to help seniors living in retirement.

[Mark Machin]

I'll say a couple of things, and I think this is one Michel Leduc may want to add a little bit on.

On demographics, yes, Canada has an aging population, somewhat offset by net immigration, but it is a challenge for the country and for the fund. The chief actuary models that in and models in expectations for demographics and the aging of the population—birth rates, death rates, longevity rates, etc.—and the fund is sustainable under the chief actuary's assumptions. That is all factored into the sustainability of the fund in the latest report.

If you, as the federal and provincial stewards of the fund, decide that you want to adjust benefits, it certainly is within your purview to do that. Our job is to invest the money we get and to make sure, ideally, that we give you that flexibility over time by making sure that the returns exceed the expectations set by the chief actuary. We work extremely hard every day to try to give you that flexibility over time.

[Sean Fraser, Liberal, Central Nova, NS]

I want to talk about one sector that I think does have potential to give that increased flexibility. One of the disappointments I have about some of the conversations that touch on the green economy is that they often turn into ideological battles about the energy industry. To me, there's a separate conversation to be had, separated from whatever climate ideology a person may have. I personally believe we need to be more and more aggressive in terms of our fight against climate change, but I'm actually curious from a purely economic perspective about what you think about the future in the green economy, which will certainly provide certain returns in terms of our emissions reductions.

If we're dealing with it in terms of crass economics, where do you see the future of the CPPIB in terms of its investment in the green economy, in terms of giving that kind of flexibility by capitalizing on a global opportunity in an emerging sector?

[Mark Machin]

We have a rapidly expanding investment portfolio in renewable energy. We've been investing in it, and we've had a dedicated team since 2018. We've invested around the world, whether it's in wind, in solar, in hydro, and we continue to do so. For example, in the last few months, we created a joint venture with Enbridge in Europe for offshore wind. We continue to put money into that. Importantly, we made our largest acquisition to date in renewables, in Pattern Energy, which is a $6-billion company focused on North American and Japanese wind and renewable assets. We bought that in the last couple of months.

We're substantially ramping up our investments in these areas, and we think they stand, in many cases—well, in all cases that we make—on their own two feet in terms of returns. We like the risk-adjusted returns in wind and solar. And it's not just wind and solar and hydro. We're also focused on innovative areas. We have a group that's dedicated to looking for innovation in the energy transition and has made a number of investments, for example in charging. There is a company called ChargePoint that is putting electric vehicle charge points in place around the world.

I might highlight one of the investments we made a couple of years ago, in Alberta, because it just came online. That's the Alberta Carbon Trunk Line. That is a carbon capture project, which was switched on in the last couple of days. Once it's up and running at full capacity, it will be extracting about 15 million tonnes of carbon a year, which is the equivalent of taking almost all of the cars in Alberta off the road. We're quite excited about that area and are looking for more opportunities.

[Sean Fraser, Liberal, Central Nova, NS]

I may revisit this, but I expect I only have time for one quick question.

Is that fair, Mr. Chair?

[The Chair, Liberal, Wayne Easter]

You really don't, but we'll give it to you. We've been doing it for everybody else.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you.

I'll explore that another time.

I'll squeeze in one quick one. In response to Ms. Koutrakis, you highlighted some of the short-term concerns around the changing social circumstances in which we find ourselves. Are there longer-term trends that the organization is focusing on as a result of this pandemic, whether it's working from home, production of personal protective equipment, or any other significant social change in the way we live or work that you're targeting to maximize long-term returns for the money you hold for the benefit of Canadians' retirement security?

[Mark Machin]

Yes. It's a really important question. It's one that we have teams working on across the fund, trying to identify those trends, not just the shorter-term trends but the longer-term trends.

Before I give a few more examples, we think that some of these trends will come back over time. I don't think travel and hospitality are over. I don't think sporting events are over. Even things like movie theatres, which are in some ways somewhat irrational.... We're social beings. We've seen time and again that while people can comfortably watch movies at home, comfortably eat at home, we want to go out. We all want to go out to the noisy restaurant because it has buzz. We want to go and sit in a movie theatre and share an experience with a bunch of people we're never going to talk to, but because there's more buzz in doing that—or maybe there's a slightly better screen—I think a number of these things that rationally maybe shouldn't come back are going to come back, in my personal view.

There may be some terrific opportunities in those sectors, and there have been. We will see. The markets have anticipated a number of these. We've seen, for example, the cruise line companies come back incredibly strongly since March 31. However, it's going to take time for the traffic there to pick up.

There are a number of things that we think will pick up over time, other than data centres, telemedicine and fintech online. I think online grocery ordering is something that is really only limited by capacity. I think quite a few of us have tried to get capacity for online ordering of groceries and have been frustrated by the fact that you just can't get it. Where it has been available, it has increased up to capacity. I think it's likely going to continue. People will continue to try to order online.

I do think, to your point, that the flexibility on location of staff will continue to stick. There will be more flexibility for people who have particular skills and particular expertise. They don't need to keep flying in and out of places or participating via long commutes.

I do think there will be more flexibility, and I hope that's the case. It will bring a lot more people, smart people, who've moved away from the typical centre into the knowledge workforce. I hope that will happen as well.

[Sean Fraser, Liberal, Central Nova, NS]

.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

You're welcome.

I'll lay out the next questioners: Mr. Barsalou-Duval will have two minutes, Mr. Julian the same, and then we'll go on to Mr. Morantz and Ms. Dzerowicz.

Before I do that, I do have a question on the oil and gas industry that partly spins off Sean's question. I do see our oil and gas industry constantly under attack. I believe that what we're seeing happen in Canada is that we're driving capital investment out of the country. We're driving human resources out of the country. We're driving innovation and knowledge out of the country. At the same time, the oil and gas industry is expanding elsewhere. We're not using the benefits of our natural resource to transition to a green economy.

We had a meeting this morning with the oil and gas industry in Newfoundland. What they told us is that there are 17 new finds in Norway. The investment isn't coming in to the offshore industry in Newfoundland, and, as a result, the working vessels, etc., are leaving Newfoundland and going to Norway.

There is a lot of politics around this, I know, but my question for you is really this: What are you seeing in terms of the global investment in the oil and gas industry? Is it increasing in other parts of the world? Are we the only ones driving it away?

[Mark Machin]

As I said earlier, we're believers in climate change. Climate change is happening. We believe in the energy transition. The energy transition will be under way towards a low-carbon economy over time. However, even the most optimistic projections, whether we like it or not, see a significant role for traditional energy for quite a while yet. If I take, for example, the IEA's projections for the energy transition, the most optimistic projection they have is that by 2040 there is still 58% of the world's energy supply being provided by traditional energy.

That's probably not consistent with a great climate outcome, so there's going to have to be even more innovation there, whether it's carbon capture, other approaches or a more rapid transition. There's clearly a role for traditional energy: for airplanes to fly and for other things that it's very difficult to innovate around. We see that there will be investment in the traditional oil and gas industry for a period of time.

I'm not sure that there is a huge surge in investment right now. I think it is a challenged industry, given where prices went. It had a double whammy during COVID. There was not only the COVID pandemic and a complete dry-up in demand, but also this huge spat between Saudi Arabia and Russia that caused a massive crash in the price. It was under very significant stress at that point. I feel for the people who are in that industry, who've been really challenged during this time, but they have a long track record of battling back.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Barsalou-Duval, you have two minutes.

[Xavier Barsalou-Duval, Bloc, Pierre-Boucher—Les Patriotes—Verchères, QC]

Thank you very much, Mr. Chair.

Mr. Machin, if we look at the geographic distribution of investments made by the Canada Pension Plan Investment Board, we see that 64% of those investments were made in Canada in 2006, but that percentage falls to 15.6% in 2020. That is a very significant decrease. I understand that there is a desire to diversify assets. On the other hand, when you invest a lot of money abroad, you need to have a very good grasp of those markets.

First, I am concerned about the speed of this knowledge acquisition, given both the speed of this investment diversification, and the desire to limit risks.

Second, I'm concerned that there are almost no investments in Canada anymore. Of course, I am more concerned about Quebec, since I am a Quebecker and I want Quebec's economy to do well. How can you explain this decline in investment: is it because the Canadian economy is considered too risky or not diversified enough, or because you don't have confidence in it?

Could you explain how your investment strategy in Quebec differs from the one you apply in Canada, and give us an idea of the percentage of investments made in Quebec as compared to Canada?

[The Chair, Liberal, Wayne Easter]

Go ahead, Mr. Machin.

[Mark Machin]

I'm very happy to.

As of the fiscal year end, we have around 15.6% of the fund invested in Canada, or about $63.9 billion. One of the purposes of the fund, as originally set up, was to diversify the portfolio into a global portfolio. When we started, what we inherited from our predecessor was 100% domestic investment in Canada, and so we've been diversifying that gradually around the world where we have found good opportunities.

That being said, we have substantial investment in Canada, and we will continue to have substantial investment in Canada. It's our home market, and we understand the risks here, but we are massively overweight versus any measure of Canada's weight from a global GDP perspective, which is around 2%, and from a global equity market perspective, which I think is around 2.6% of global equity markets, etc. Having 15.6% versus two and something per cent in Canada is massively overweight. We are quite comfortable with that. We probably will remain overweight for quite a while.

In Quebec, we have over $4 billion invested across equities and real assets and bonds. We continue to look for great opportunities in Quebec and in other provinces. We continue to look at some of the really vibrant companies in Quebec.

[The Chair, Liberal, Wayne Easter]

Okay. Thank you.

Mr. Julian, go ahead for a couple of minutes.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thanks very much to our guests. I appreciate your frank answers.

I have two questions.

First, what is the sum total of the investments of CPPIB in tobacco companies, private prisons and weapons manufacturers? I know that's been an issue that has arisen in the past. You've divested of at least two private prisons. I'd like to know what the existing investments are.

Second, there has been a mention about the CPP pushing for more diversity on the boards of companies in which they have investments. I noticed the interesting phrase that the CPP will not vote for managing directors if the board has no women directors and where no exception is warranted. Could you explain what the exception is?

I don't see any reference to people of colour and indigenous people on corporate boards. That, of course, is a big problem in Canada. Is it the intent of the CPPIB to weigh in to ensure that Canada's corporations have more diversity on their boards of directors?

[Mark Machin]

Thank you.

I'm going to let Michel answer the first question, which is very much in his purview, and then I'll answer the second.

[The Chair, Liberal, Wayne Easter]

Mr. Leduc.

[Michel Leduc]

Thank you.

On our exposures to a wide variety of different types of companies, you mentioned, for example, tobacco. As well, in the U.S. some detention centres are privately run. As part of our efforts to widely diversify the fund, not only geographically but by asset, some segments of our businesses, some of our investment strategies, efficiently apply indices, which means that, to gain added exposures, we might put part of the fund in something that would mirror, say, the SNP500. In doing so, we would then capture some of these types of assets you referred to.

What's come to the fore for us is that.... Individually, these are very tiny exposures for the CPP fund in the context of $400 billion-plus; some of them may be one or two million dollars, because they're spread out across about 4,000 holdings. Even though we've had a very robust due diligence process on the wide variety of risks that would come our way when we make a direct investment in a specific company—a much larger position—we found there could be some exaggerated risks even if it's a small holding.

So we've applied the learning from the processes we've had in looking at large positions. We found tools that are able to identify where there could be exaggerated sources of risk, whether they're controversy risks, social or governance risks, or environmental risks. When those are flagged to us, even though there could be thousands, we're able to narrow them down to a few, and then we're able to apply a more rigorous, detailed assessment. In some of those cases, it's turned out we were not comfortable with the wide range of risk, and the example you provided around detention centres would be one of those cases.

In a situation where we've looked at tobacco companies.... By virtue of our mandate, we don't have broad, sectoral, broad-brush exclusions, so it is not consistent with the CPPIB Act to say we will not invest in tobacco, full stop. Having said that, it does allow us to take an idiosyncratic view if a particular tobacco company is behaving in a certain way that increases, for example, its legal risks. Then we are given the opportunity to do a deeper dive, and there have been instances where we were not comfortable.

At the end of all this process, the one thing that stands consistent is being true to the legislative mandate of making sure that when we are taking a position for the long-term returns we are also equally looking at the long-term risks associated with them.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Mr. Chair, I have a question on—

[The Chair, Liberal, Wayne Easter]

Peter, we're way over time.

Mr. Machin, please hold it down to about a minute, if you can. I have three other questioners.