Public Accounts Committee on Feb. 15th, 2022

[The Vice-Chair, Liberal, Jean Yip]

Thank you.

We are now ready to move to the second round of questioning for five minutes.

Mr. Cooper, go ahead, please.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Thank you very much, Madam Chair.

I will direct my questions to the PSP witnesses, whoever wishes to answer.

On page 2 of the report, it notes that there are PSP assets in which your investments are across 85 countries. There have been significant concerns raised about Canadian pension fund investment in Chinese state companies and Chinese state banks that have been complicit and have helped to facilitate egregious human rights abuses, including the ongoing genocide against Uighur Muslims and other very serious human rights abuses.

I would ask whoever wishes to answer to speak to PSP's investments in Chinese state enterprises and Chinese state-controlled banks.

[Neil Cunningham]

I can confirm that we don't have any investments in state-owned enterprises in China. I can refer to J.F. with respect to the Chinese banks. I don't believe we have any investments there.

One of the challenges we face as global investors is that very often we invest in indexes because we can't get the diversified risks we're looking for from direct investing. It often happens that there will be companies in indexes, and we—it's not inadvertently—automatically pick up that exposure on a completely passive basis when investing in that index in order to capture that risk-return.

It's not our practice to exclude...other than anything that is specifically excluded or on a sanctions list, or other such exclusions which would be automatic.

J.F., do you have anything you want to add to that?

[Jean-François Bureau]

No. You're absolutely correct, Neil.

If anything, that wouldn't be material for PSP if ever included in the index.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Okay.

So you could then confirm, at least in terms of any direct investments as far as the U.S. PLA list is concerned—which has, I think, at last count, 59 entities—that there is no direct investment from PSP in any of those sanctioned enterprises.

[Neil Cunningham]

That would be correct.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

You talked about indexes. Certainly, MSCI indexes are state-owned or state-directed enterprises. Many Chinese companies are included in these MSCI indexes. Essentially, what is your board doing to guard against funding or in any way supporting the very serious human rights concerns in China today?

[Neil Cunningham]

I think it's a technical question on whether something on the sanctions list could be included in the MSCI index. My understanding is that they would not be, but I'm not 100% sure what the process is there to keep them out of the index.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Is anyone else able to address the MSCI index?

[Jean-François Bureau]

If there was a restriction issued by the Canadian government, it would be respected and excluded from the index.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Okay.

Thank you. Those are my questions.

[The Vice-Chair, Liberal, Jean Yip]

Thank you.

Ms. Shanahan, you have five minutes, please.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Thank you very much, Chair.

I thank all the witnesses for being here this morning.

I'd like to thank you in particular, Mr. Cunningham. I don't know if this is the first time you have appeared before a parliamentary committee, but I guess one's career in public service would not be complete without doing so. Thank you very much for being here.

I want to follow up on an earlier line of questioning regarding risk in the portfolio. I can appreciate greatly that the checkmarks are there, and that the risk mitigation is in place and needs some fine tuning, but it's the risks that we don't take into account that are the most problematic.

Full disclosure: I was in client-facing investment counselling work in the 2000s. You'll recall ABCP, asset-backed commercial paper. I was at the McGill pension office at the time, and that was a big shock to all of us. Of course, we all considered it AAA. It was not.

What I'm getting to are things like stranded assets. Mr. Carney talks about that in his book. I think my colleague from the Bloc referenced it as well. They're assets that, because of climate change, have become either unusable or uninsurable or whatever. That represents a significant risk to the portfolio.

Can you talk to us about how you're identifying this risk in your portfolio?

[Neil Cunningham]

Thank you for the question. I can tell you that J-F can give you chapter and verse on the ABCP, because he was very much involved in that.

Specific to your question on how we protect against stranded assets, I'd say it's a financial filter that one puts on an investment when you're making it and when you're doing your analysis of the potential investment. By financial filter, I mean you would look at an asset to see not just what kind of cash flow you expect to get from this asset over your holding period, but also what your exit is going to look like, who the buyers will be and what you think the exit price might be. That's when you really get into the stranded asset issue.

Let's take the extreme example of a coal mine. If you were looking to invest in a coal mine, you might get a great return over a period of time, but at the end of your holding period, it may have a zero value. It may even have a negative value if you have to remediate the hole in the ground.

We take that into account in doing the full assessment of the asset. We find that we just become non-buyers or non-investors of things where we can identify a potential for it to become a stranded asset either for us or for the next buyer, who we think wouldn't pay value for it.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Thank you very much for that, because the costs, of course, of cleaning up environmental damage are astronomical. I think all of us know of a case in particular even in our own regions.

Moving on from there, the PIB has been calculating its portfolio's carbon emissions since 2017.

Have you reduced your weighted carbon intensity?

[Neil Cunningham]

We have.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Yes, okay.

[Neil Cunningham]

It may take me a minute to find the specific reference in my notes, but since we started measuring it in 2016 or 2017 to 2021, the reduction in the emissions is in the magnitude of 20%, but we'll get the exact number for you. I think J.-F. is looking at the notes right now. It's also continuing to reduce over time.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

That's very much appreciated.

I'd just like to get your views, Mr. Cunningham, especially as you will be leaving us.

What are your views on the government's policy that requires climate-related financial disclosures in the development of net-zero plans for federally regulated institutions, including financial institutions, pension funds and government agencies? Could you give us your views on that policy?

[Neil Cunningham]

We are very strongly in favour of all policies towards disclosure of exposures. We made a joint statement with the other—we call ourselves the “Maple Eight”—big Canadian pension plans, roughly a year ago, strongly encouraging all issuers to be aligned with TCFD standards and disclosure standards.

I really don't think I should be commenting on public policy with respect to government Crown corporations and whether that's an appropriate policy or not. I don't think it's up to me or PSP to opine on that.

[The Vice-Chair, Liberal, Jean Yip]

Thank you.

We move to Ms. Sinclair-Desgagné for two and a half minutes.

[Nathalie Sinclair-Desgagné, Bloc, Terrebonne, QC]

Thank you, Madam Chair.

Mr. Cunningham, you were saying that one of the ways to facilitate the transition to climate change mitigation is to help companies redirect their operations.

My question is very simple, and I'd like a brief response given the little time I have.

Knowing that the businesses you fund are subsidized by public funds, do you think you're going to hold them accountable and check that the money they receive is actually being used to facilitate this transition?

[Neil Cunningham]

I'm not sure I fully understood your question, but I will say that, as far as investing in companies to transition to a greener economy is concerned, it's pretty early days for us, and we're taking the lead from others, including Mr. Carney and the work he's doing at Brookfield, and others in terms of learning what is the best way to do this.

I hope that answered your question. I don't have metrics.

[Nathalie Sinclair-Desgagné, Bloc, Terrebonne, QC]

My question was really about accountability. It's important to ensure that our assets, once invested, are well properly and that the carbon footprint is well recorded.

In terms of measures, I read in the annual report that the Scope 3 parameter on greenhouse gas emissions was not included in the greenhouse gas emissions report.

Once those assets are invested, it's important to ensure that they are used to facilitate the transition.

[Neil Cunningham]

My apologies for not understanding earlier.

I will say that there will be measures when we invest in a transitional asset. When I said it's early days, it's because we haven't done it yet, but that use of proceeds that you're talking about is extremely important. In fact, when we invest in a climate change envelope, the use of proceeds will probably be the most important aspect of whether we make the investment in those transitions.