By Donald M. Raymond, Senior Vice President, Public Market Investments, CPP Investment Board
The Citizen series that appeared on Nov. 4 and 5 regarding the Canada Pension Plan fund and the CPP Investment Board incorrectly implies that screening or divestment are the only ways to deal with environmental, social or governance (ESG) factors in investment decision-making.
Consistent with its "Policy on Responsible Investing," the CPP Investment Board does take ESG factors into account in investing the $100-billion CPP fund because, as our policy states, "we believe that responsible corporate behaviour with respect to environmental, social and governance (ESG) factors can generally have a positive influence on long-term financial performance." But it is important to understand that the CPP Investment Board looks at ESG factors only as they affect the potential risk and return of investments. We have a legislated and fiduciary duty to apply only investment criteria to our investment decisions.
In the last five years, the CPP Investment Board has generated almost $31 billion in investment income to help fulfill this goal. By earning investment returns, we can help to sustain the future of the CPP, one of Canada's most important social programs with 16 million members.
The CPP Investment Board has committed to a three-part program to improve the disclosure of and performance on ESG factors in the companies in which it invests. First, engagement with those companies through proxy voting, working with investor coalitions and direct contact; second, helping fund research into the long-term materiality of ESG factors; and third, integrating ESG factors into the investment process.
The "Policy on Responsible Investing" is based on leading-edge thinking on this topic among institutional investors globally, especially in Europe. Engagement is a proven strategy, particularly for large institutional investors with a long investment time horizon such as the CPP Investment Board.
With regard to questions raised about the effectiveness of engagement, as one example, the CPP Investment Board is a sponsor and signatory to the Carbon Disclosure Project, a coalition of 225 investors globally, managing more than $31 trillion in assets and designed to encourage companies around the world to disclose the implications of climate change to their businesses. When an investor group like this speaks out, corporations take note and take action.
Engagement in the last year has included voting on 12,400 proxy resolutions at shareholder meetings (Canadians can see how we voted at www.cppib.ca), participating in investor coalitions like the Enhanced Analytics Initiative and direct communication with companies in a number of industries including mining, retailing, tobacco and energy to encourage the improvement of disclosure and performance on ESG factors.
It is worth noting that if we were to divest, we would give up the opportunity to have ongoing influence on company performance.
In April 2006, the CPP Investment Board helped develop and was an early signatory to the "Principles for Responsible Investing" published by the UN Environmental Program Finance Initiative. The principles are now endorsed by institutional investors from around the world that collectively manage more than $4 trillion U.S.
The public equity portion of the CPP fund is invested in 600 Canadian and 2,000 international public companies as part of our strategy to broadly diversify the portfolio. (A comprehensive list of holdings is available on our website.) About 90 per cent of the $57.7 billion in public equities is invested passively by an internal team that broadly replicates major stock market indexes and reflects our outlook as a very long-term shareholder investing the fund for decades and generations.
Screening may be effective for smaller pools of capital representing investors who make specific investment choices but can significantly limit choice, increase risk and reduce returns in a pool of capital as large as $100 billion. This investment challenge will grow with the size of the CPP fund, estimated by the chief actuary of Canada to increase to $250 billion in 2016.
Lastly, our approach to these issues is consistent with the legislated direction given to us by the federal and provincial finance ministers when they successfully reformed the CPP in 1997. At that time, policy-makers engaged in widespread discussion and a series of cross-Canada consultations with Canadians on the nature of the reforms. As a result, it was decided that the CPP Investment Board should have an "investment only" mandate and was not to pursue any other agenda.
We stand by our investment record, as well as our policy on responsible investing. There will always be debate and disagreement over the merits of certain investments, companies and even industries. We respect the diverse range of opinions on these topics, and remain committed to fulfilling our mission to help sustain the future pension benefits of the 16 million Canadians who participate in the CPP.