Finance Committee on June 9th, 2022

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Do you have any particular policies on renovictions and similar kinds of acquisitions that end up displacing existing tenants?

[Michel Leduc]

Probably the single most important decision we make when we invest in real estate is the partner. Where the team would spend most of their time would be on exactly that.

Let's say we're partnering with a particular Acme Inc. that owns 50% and is 100% the operator. We will look at their policies. We will understand how they treat their tenants. That's probably the single biggest risk management, because the brand is important, both for the operating company but also upstream, for the organization as well.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Blaikie. That's the time.

We'll now hear from MP Stewart for the Conservatives for five minutes.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

Thank you, Mr. Chair.

Thanks to the two of you for being here today. I did some research before I came. I'm not an expert in what you do for a living, and I have great respect for that.

I'm curious with respect to your benchmark. I looked into it a little bit. I read the words “mid-cap European” at some point, and it seems that some people with a little more knowledge than I have feel that your benchmark is not used by many others.

Could you explain anything and everything about the benchmark so that I can understand it?

[John Graham]

I'm not actually familiar with the reference to mid-cap European, but I think the benchmark that we report against is the reference portfolio. The reference portfolio is a risk-equivalent mix of global equities and fixed income. It represents a very simple, passive alternative that's at the same risk level as our portfolio.

If you think about the global equities component, it would be a large mid-cap. It will capture all of the big global companies across all of the big major geographies. It actually represents a very challenging benchmark because it really represents global economic growth.

Michel, do you have anything to add?

[Michel Leduc]

Yes, I'll just say that one way to think about it is that 85% of the reference portfolio—our benchmark that John referred to—is composed of the S&P Global large mid-cap, which, as John referred to, is broadly.... It actually represents an investable portfolio.

When we talk about active management, this particular portfolio is one that is the low-cost, passive alternative. When we talk about dollar of value add, it's the money that we make over and above what we would have had we invested in this portfolio. It is an investable index that anyone could invest in.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

Thank you for that.

Can you list other countries or jurisdictions that use a similar benchmark or exact same benchmark?

[John Graham]

I can't list ones that use the exact same benchmark, because benchmarks are set to represent the risk level of the organization. Even if we look across the other Canadian peers, they will have different benchmarks based on the risk level they take.

In our annual report, we actually provided quite a bit of information on our attribution and the different sources of returns, starting with the reference portfolio and how we break it down. That provides a lot of disclosure in how we think about the sources of return in a portfolio.

[Michel Leduc]

I'll just add very quickly, one of the reasons we picked that is that it's very transparent and accessible. For Canadians to be able to hold our feet to the fire on whether we are really adding value, they could immediately see very clearly....

One criteria as to why we picked it was that it's transparent. It's available, and people can go online to look at how it's doing.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

Thank you. I appreciate those answers. That gives me a lot of things to think about.

Another question I have is with respect to the real returns to the Standard and Poor's 500. What does it look like this year, and how does it relate to other years? Give me a little background on how those are going and what it looks like.

[John Graham]

Do you mean the actual markets right now?

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

Yes.

[John Graham]

We have a March 31 year-end, but I think what you're asking is more around the calendar year and how the markets are performing over the calendar year.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

Yes.

[John Graham]

I think it's fair to say that this calendar year has been a challenging year for global capital markets. U.S. markets are down 10% to 15% depending on the market. Technology is down 20+%, so I think global capital markets have had a challenging first part of the year.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

Thank you, Mr. Chair.

Thank you for the answer as well.

I have one last question. Could you explain to the committee how you, in your position, would define equities? What does it mean to the pension fund when you're managing day to day? Can you give us an explanation?

[John Graham]

Yes, as we define equities, it's essentially being a shareholder in a company. It's owning shares in a company.

[Jake Stewart, Conservative, Miramichi—Grand Lake, NB]

I appreciate that. Thank you.

I have no further questions, Mr. Chair.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Stewart.

We are going to our last questioner and this will conclude this second round but also our opportunity here with CPPIB.

We have MP Chatel for the Liberals for five minutes.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much, Mr. Chair.

Thank you, Mr. Graham and Mr. Leduc, for being here with us today, and congratulations, Mr. Graham, on the appointment. It's very important work, indeed, that you do.

I will continue with the line of questions that my colleague Mr. Blaikie had about your net-zero investment strategy. I'm very interested in green finance and very happy to hear that you were involved with the TCFD's work, so well done. It's very important work.

I want to talk about what we call the ISSB, the International Sustainability Standards Board. One branch will be in Montreal. That's very big news for Montreal and for Quebec. I'm very happy about that, but it's a game-changer—isn't it?—because for you and for the companies, this will allow companies to provide strategic information about their environmental impact and that's really what you're looking at to define what would be a green portfolio.

Could you tell us more about what the impact would be of having very good, robust standards on green finance?

[John Graham]

I'll say a few words and then maybe I'll ask Michel to talk a little bit about ISSB. He's been quite involved, and it is important. It's important for an investor to have consistent reproducible measurements. Think about the carbon intensity in different companies and, as we've talked about already, the ability to compare companies across geographies, across industries. It's critically important. Just as an example, in our portfolio we do publish, in our annual report, the carbon intensity of our portfolio, but of that, only around 30% to 35% of the numbers we have are actually reported by companies. For 60% to 70% of the numbers in there, we are using industry averages. We're proxying to get to what we believe is a representation of our portfolio, and it moves around. It's volatile, because every quarter—and this is a good thing—more companies come out and disclose more information and there are restatements and people refine the methodology, but it adds volatility.

As we think about the transition to net zero when we have stable, consistent, comparable measures, it will be really important, which is one of the reasons that as a firm we're actually dedicating time to being involved and trying to be part of this process.

[Michel Leduc]

Now I'll just say, look, it is absolutely a big deal that Canada will host one of the offices around the international standards board. This is by far one of the most important accounting dimensions that we will see going forward. As John has indicated, climate change is a significant risk and significant opportunity for institutional investors to have better data and better information. Also, as we challenge boards of directors, in terms of the companies and overseeing their management teams, it gives us additional information to be able to track and measure whether they're meeting their own targets and their own progress.

The fact that the international standards body selected Canada, I think, says a lot about the reputation this country has around this information. It's a very big deal for the country and for climate change risk analysis.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you so much.

If I may, I will continue in French.

Can you tell us about the value you offer compared to self-directed retirement options?

I’m very interested in comparing what you do in investments and what self-directed retirement options have to offer.

[The Chair, Liberal, Peter Fonseca]

Madame Chatel, can you repeat your question?

[Sophie Chatel, Liberal, Pontiac, QC]

I asked about the value you offer in comparison to the option of self-managed retirement plans for pensioners.