CPP Investments' High-Carbon Approach?

Professor Cynthia Williams, chair of business law at Osgoode Hall Law School and co-principal investigator of the Canada Climate Law Initiative, wrote a comment for Corporate Knights arguing CPP Investments should be supporting the government’s low-carbon transition policies:

The Canada Pension Plan (CPP) is one of the world’s largest public pension funds, with $434.4 billion in assets under management as of June. The mandate of the investment board that runs it (CPPIB) has been to manage funds in the best interests of Canadian CPP contributors and beneficiaries (Canada’s retirees) and to maximize investment returns – all without undue risk of loss. As CPP Investments CEO and president Mark Machin recently observed, “Our investment mandate and professional governance insulate our decision-making from short-term distortions and gives us license to help shape the long-term future.”

However, our Canada Climate Law Initiative analysis of CPPIB’s disclosures calls into question the kind of future that it’s helping to create. In our report, Troubling Incrementalism, we found that CPPIB was heavily invested in six high-carbon, billion-dollar investments, both in Canadian oil sands and in hydraulic fracturing in the United States. In four of the six cases examined, CPPIB established the companies in question, investing billions of dollars and putting CPPIB employees and former employees on the boards of the companies it had created.

The report raises questions about whether CPP Investments should continue to support the resource-intensive Canadian economy as it is now – financially risky and inconsistent with the low-carbon economy – particularly now that the federal government has committed to net-zero emissions by 2050. CPPIB’s investments in oil sands and fracked gas lost 23% last year, making Energy and Resources its worst-performing asset class. If CPPIB is projecting losses for a decade or more in an investment class, shouldn’t it be making long-term investments in new technologies, companies and future prospects?

Legal research by CCLI found that Canadian courts, regulators and investors now recognize that climate change poses systemic financial risks and should be addressed accordingly. Pension trustees also have fiduciary obligations in terms of intergenerational equity; shouldn’t CPPIB’s investments support industries of the future that will create the jobs, infrastructure and growth today that Canada will need to become a thriving economy in the 21st century?

Addressing concerns raised by CPPIB’s carbon-intensive holdings is not simply a matter of divesting from high-carbon investments. It’s a question of asking CPPIB to stop its direct support of expanded oil sands development, and “fracking” in the U.S., and asking it to start putting its money and managerial expertise to work creating companies that will expedite Canada’s transition to a lower-carbon future.

Over the past months, a number of promising studies have shown that there are significant economic and environmental opportunities in Canada from investments in a low-carbon economy, from energy retrofits for existing buildings, to investments in electric vehicle infrastructure, to scaling up nature-based solutions. These are industries where CPPIB’s financial sophistication and dedicated assets could well be brought to bear in service of developing new opportunities while supporting the transition to a low-carbon economy. The recently launched Green New Bill campaign calculates that Canada could see $308 in returns to the economy over the next decade for every $20 the federal government invests today through existing arm’s-length institutions charged with a fiduciary duty to Canadians.

We contend that it is time to have a serious discussion about the role of a national public pension fund in its home country. We invite CPP Investments to engage with contributors to and beneficiaries of CPP in a careful discussion of what its responsibilities are to support the government’s transition policies. If CPP Investments contributes to the development of low-carbon solutions, it could help to unlock purely private capital through de-risking and co-investment strategies and could provide the kinds of venture capital long missing in the Canadian economy.

We urge CPPIB to take seriously its power to reshape the future into which Canadians will retire.

This article literally popped up late this afternoon on my radar and I couldn't resist but to tackle it head on.

First, and most importantly, the views expressed below are solely my own, and even though I suspect the folks at CPP Investments and other large Canadian pensions will privately agree with me, I have not contacted them or anyone else regarding this article and the issues raised above (I literally just read it).

I want to make that clear because I have very strong opinions on a lot of issues related to pensions and investments: well governed DB plans are much better than DC plans, diversity and inclusion are a must and it's high time to include people with disabilities, sound pension governance which keeps governments out of public pensions' investments and operations is absolutely critical, and I'm totally against divestment of any kind except if there is a real sound and legitimate case for it (like tobacco where radiation oncologist Dr Bronwyn King convinced me that divestment is the only real solution because it's futile engaging with tobacco companies).  

But even with tobacco, a friend of mine brought up a good point: "I hate cigarettes but as long as governments haven't made it illegal, why are we telling our public pensions struggling to find yield what they can and can't invest in?".

Anyway, back to professor Williams comment above. It really bugs me when people start with an ideological stance and then make an argument to support their ideology, presenting half-truths and misinformation.  

Let me be blunt, while I don't dispute her heart and mind are in the right place and that she's a very intelligent lady, she doesn't have a clue of what she's talking about in this comment which comes across as nothing more than another academic hatchet job full of lies and misinformation.  

Worse still, it shows a lack of depth in understanding and appreciating CPP Investments and all its operations.

In a recent comment of mine going over why CPP Investments is reviewing its bond portfolio, I touched upon these increasing calls for the Fund to divest out of the fossil fuel industry:

Canada pension plan's fossil-fuel investments raise climate risks, study says:

Canada Pension Plan Investment Board (CPPIB), which manages the pensions of 20 million Canadians, is investing billions of dollars in fossil fuel companies, exposing it to significant climate-related risks, research by two universities said on Thursday.

The study was done by Canada Climate Law Initiative (CCLI), a project of the University of British Columbia and Toronto’s York University.

The research acknowledged the progress made by Canada’s biggest pension fund, including the doubling of its renewable energy holdings, but found the board’s continued fossil fuel investments revealed a “troubling incrementalism.”

Six of CPPIB’s 15 private transactions in the past six years were in fossil fuels, and an earlier analysis found the fund has invested in 79 of the world’s top 200 public oil, gas and coal companies.

The energy sector has “the strongest of motives to adapt, have the access to capital to do so and the technology know-how to innovate,” CPPIB spokesman Michel Leduc said. “The idea, through divestment, of starving them of capital, would... likely be harmful or counterproductive.”

The report says globally, climate risk is recognized as a material enterprise risk, impacting supply chains, future cash flows and disrupting business models across industries. CPPIB’s public and private investments raise questions about its ability to cope with sudden or unexpected changes in consumer and investor preferences or in government policy.

CCLI called for the fund, which had C$434 billion in funds under management as of end June, to set “transparent and aggressive” targets for a carbon-neutral portfolio.

Fossil fuel producers and services made up 2.8% of CPPIB’s investments as of March 31, from 4.6% two years earlier. CPPIB CEO Mark Machin told Reuters in May the fund is comfortable with its energy exposure.

I'll try to keep my cool and remain respectful to the Canada Climate Law Initiative (CCLI) and all the tree-hugging granolas who are highly critical of CPP Investments' fossil fuel investments.

These people simply don't know what they're talking about, they are dangerous critics who think the answer for all pensions is to divest from fossil fuel industry altogether.

I can't stand this Al Gore holier-than- thou sanctimonious nonsense! And this is me talking, not CPP Investments!!

I suggest all these environmental zealots stay out of pension investments, period.

Alright, let me regain my composure.

CPP Investments does take ESG investing seriously but that definitely doesn't mean divesting from oil & gas. To do so would be to contravene their fiduciary responsibility which is to maximize returns without taking undue risks.

I suggest all these environmental groups read my recent comments on the rise of constructive capital and Big Oil for the long run.  

If you ask me, at just less than 3% of its total portfolio, I'd say CPP Investments is under-invested in fossil fuel producers. If it were up to me, I'd increase that allocation to 6% and buy companies like Enbridge, Exxon and Chevron, all of which pay a great dividend yield.

I'd better stop there before I receive nasty emails from environmentalists who think they know more about pension investments than me or the folks at CPP Investments.

What these people need to realize is all of Canada's large pensions take climate risk seriously but they also have a fiduciary responsibility to their members and are better off engaging the fossil fuel industry rather than divesting from it. 

I literally spent the day re-reading CPP Investments' Fiscal 2020 Annual Report for a consulting mandate I'm working on and I'm really getting into the details of its total portfolio management, its strategy and how the Fund adds value across public and private markets and how it manages all sorts of risks, including climate change. 

Admittedly, there is a ton of information in this annual report and it's a bit overwhelming for anyone to read it cover to cover. Even I missed a lot of things the first time I read it because I skimmed through it quickly to write my comment covering their fiscal year results.

But if it's one thing I can assure you, CPP Investments is extremely transparent in its investments and process and it invests almost as much in power and renewable energy than it does in traditional "fossil fuel, high carbon" investments.

If you don't believe me, have a look at its asset mix:

As shown above, $8.7 billion or 2.1% is invested in Power and Renewable assets as opposed to 2.8% in fossil fuel investments.

And keep in mind, CPP Investments' green team is still very hard at work, so those "green investments" are growing a lot faster than traditional energy investments.

Also, CPP Investments just published its 2020 Report on Sustainable Investing:

Canada Pension Plan Investment Board (CPP Investments) has published its annual Report on Sustainable Investing, which outlines the organization’s approach to environmental, social and governance (ESG) factors. It includes:

  • New data showing investments in global renewable energy companies more than doubled to $6.6 billion in the year to June 30, 2020. Partners include Alberta’s Enbridge Inc. and Brazil’s Votorantim Energia;
  • A new section which formally sets out for the first time CPP Investments’ expectations of our portfolio companies;
  • Increased detail on how our investment teams assess the potential impact of climate change on our portfolio and new investment opportunities; and
  • The latest work of our Climate Change Opportunities strategy.

“This new century has fundamentally changed the nature of business, with the heightened expectations of stakeholders helping to bring ESG issues to the forefront. We believe that by fully considering ESG risks and opportunities, we become better investors and are able to enhance returns and reduce risk for the Fund’s more than 20 million contributors and beneficiaries,” said Mark Machin, President & CEO, CPP Investments. “Addressing sustainability is not just pressing for society and the planet – it is a business imperative.”

In the report, CPP Investments articulates its support of companies aligning reporting with the recommendations of the Sustainability Accounting Standards Board (SASB) and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

“We require that companies we invest in demonstrate that they have, or are working towards, effective and diverse boards of directors, have incentives aligned to long-term performance, effective disclosure of material climate change impacts and that they clearly articulate how integration of ESG factors has informed strategy and enhanced returns or reduced risk in the business,” said Richard Manley, Managing Director, Head of Sustainable Investing, CPP Investments. “Companies should also have a culture that proactively identifies emerging risks and opportunities and seeks solutions to reduce or capture their potential.”

Some other key highlights of the 2020 report include:

  • Climate Change: we provide greater clarity regarding our views on the energy industry’s evolution in the context of climate change, including our support of and partnership with companies in the development of solutions and strategies as we move to a lower-carbon world.
  • Engagement: we highlight the importance we place as an active manager on engagement with businesses on focus areas including climate change, water, human rights, executive compensation and board effectiveness. We believe engagement gives us a powerful influence with the Canadian and global companies in which we invest. Active ownership through constructive engagement can significantly reduce investment risks and enhance and sustain returns over time.
  • Partnerships: CPP Investments continues to leverage partnerships and collaborations globally to help improve transparency and standards on ESG, promoting governance best practices and advocating for long-term thinking in the investment and corporate worlds.

Produced during the COVID-19 pandemic, the report also cites how the pandemic has reaffirmed the organization’s belief in the importance of having a resilient long-term strategy and incorporating ESG issues into the investment process.

A summary of the report can be downloaded here and the full report can be downloaded here.

I'll admit, I have not read the full report yet but just by reading the highlights, I can tell Mark Machin and Richard Manley, Managing Director, Head of Sustainable Investing, take sustainable investing very seriously and they are looking to promote it throughout all their public and private investments.

But make no mistake, sustainable investing at CPP Investments and all of Canada's large public pensions complement and enhance their investment approach, it doesn't supersede their fiduciary duty which is to take risk and deliver the highest risk-adjusted returns across public and private markets.

What I'm getting at here is if the senior managers at CPP Investments and their very informed public and private market partners see opportunities in traditional energy, it is incumbent upon them to invest in this sector no matter what the Canada Climate Law Initiative or other environmental organizations think. 

Again, these people pushing their environmental agenda aren't bad people but they're severely ill-informed and they really don't have a clue of how about CPP Investments' governance and investment approach.

I cover public markets every Friday. Last Friday, I wrote a comment on preparing for rough waters ahead where I stated this:

[...] it was a choppy week with stocks getting slammed earlier this week.

For the week, here is the performance of major S&P market sectors: 


The first thing you will note is Energy (XLE) got slammed hard this week, down 8.6%.

Last week, I wrote a comment on Big Oil for the long run and told my readers while I like the prospects of giant oil companies over the long run, in the short run, we can get a final washout.

How low can these oil stocks go? That's anyone's guess but they're hitting multi-decade lows here:

What I think is happening is the quant/ momentum managers are still shorting the sector hard and the fundamental/ value managers are quietly accumulating energy shares here.

The other issue I have is ESG funds buying mega-cap tech shares, contributing to the tech bubble, and ignoring any stock in the energy index.

When will this silliness stop? Again, your guess is as good as mine but it's clear energy shares (XLE) are under immense pressure and we can see a retest of March lows or worse:

That's why it's critically important to always be disciplined and never invest more than a certain percentage of your portfolio in any stock (say 5%), you just never know how low prices can go.

If I were to hazard a guess, I'd say there's a major carry trade that has been going on for a few years, Long Tech/ Short Energy and this is still the trade large leveraged funds are betting on.

Thing with carry trades is when they blow up, they blow up spectacularly, especially in a zero-bound world.

We all know energy stocks are getting slammed hard over this year. So what? Does anyone really think we don't need oil & gas and that traditional energy is dead?

If any pension manager, mutual fund manager or hedge fund manager told me that, I'd fire them on the spot.

Importantly, there are incredible deals in the energy sector right now which in large part are due to the froth and misinformation being spread by ESG funds snapping up tech stocks and ignoring traditional energy companies.

Sure, ESG funds have outperformed over the last five years but I submit to you a big reason why is because they're loaded to the gills on tech stocks! No, it's not the only reason but a lot of these ESG funds are so full of crap and they're peddling nonsense to unsuspecting investors.

There is an ESG mania going on out there and millennials are lapping it up hook, line and sinker.

Meanwhile, as traditional energy companies sink lower and lower in price, their valuations over the long run become a lot more compelling and I suspect once they cut cap-ex, their share prices will take off and explode up.

So, while I caution my friends who are loading up on Exxon (XOM) and Enbridge (ENB) right now that there could be more short-term pain, longer term, their investment could pay off.

And guess what? Pensions like CPP Investments which have a long investment horizon are thinking the exact same thing, they don't want to chase FAANG stocks at these ridiculous levels, they want to diversify and find compelling long-term investments across all sectors. That's their job, their fiduciary duty.

Is the Canada Climate Law Initiative right that CPP Investments lost money in energy across public and private markets? Yes but so what? They probably got involved with large private equity funds which got into fracking at the wrong time. It happens, they're not perfect at timing markets, nobody is.

Lastly, and most importantly, I do not give a damn if the federal government has committed to net-zero emissions by 2050 (good luck). This doesn't mean our large public pensions which by the way have been much more successful at lowering their carbon footprint than the federal government should be influenced in any way by our governments.

Obviously they are to a large extent because the entire world is going carbon neutral so if Amazon has set lofty goals to reduce its carbon footprint, you can bet our large pensions investing for the long run are paying attention!

But I don't want our governments -- federal or provincial -- to dictate what CPP Investments or any of our large public pensions can and can't invest in, that's a surefire recipe for disaster.

Oh, a final thought, as I discussed in my comment on the rise of constructive capital, I agree with a friend of mine, the most important thing we can do to combat climate change over the long run is close coal plants for good and switch over to nuclear power:

Of course, nobody wants to discuss the "nuclear option" even though it's really the best thing we can do over the long run.

That same friend told me something else: "Even if everyone in the world sold their cars to buy Teslas, we don't have the capacity to provide electricity to all these electric vehicles without burning more coal."

What else? He's not sold on wind farms: "They're heavily subsidized but if you talk to big hydro companies, they create all sorts of problems with electricity uptake and dams."

Alright, I'd better stop there, rambling on way too much. 

Suffice to say, I completely disagree with the Canada Climate Law Initiative's stance on this issue and I suggest they reach out to CPP Investments this October as it is holding virtual public meetings to provide an update on the CPP Fund’s performance and answer questions. Register for your region’s meeting here.

Below, after strong rhetoric from OPEC about compliance, the energy sector is one of the least favorable sectors lately. Boris Schlossberg and Bill Baruch share their views on CNBC. 

Also, Ted Mayer of Natixis was kind enough to share with me the webcast panel discussion on investing with a purpose. You can view it here. Take the time to watch this and you will learn exactly how and why all of Canada's large pensions take climate risk and sustainable investing very seriously

Update: I reached out to Michel Leduc, Senior Managing Director and Global Head of Public Affairs and Communications at CPP Investments to get their views on my comment and he shared this with me:

On these matters, we respect the legitimate act of people disagreeing with some of our investments. So, by choice, we always begin with finding common ground. There is always something to agree with. We agree that climate change is real, serious and happening now. We also agree about investing in the renewable sector. It is the smart thing to do. Like every other sector, we need to select opportunities carefully. Yet, we have found excellent renewable energy assets to add to the portfolio, achieving meaningful exposures in a relatively short period of time thanks to an exceptional internal team of experts. 

We disagree that divestment is a good option. We believe that a challenge of this global scope requires everything in our toolkit: understanding the forces of change such as technology & innovation; global, national and sub-national policies that will affect the pace of the evolution; and household/corporate purchasing trends. All this data and insights to help us shape our portfolio in step with the evolution from traditional to renewable sources over the next decades. Importantly, some of significant oil & gas companies are among powerful forces, as agents of change, because they have the financial incentives/motives; technical know-how and capital to be instrumental players and integral to the evolution taking place. Starving them of capital takes out a critical part of the toolkit. As noted, every part of the toolkit has a role to play on this. Then, there is the value of engagement influence by strong knowledgeable investors. If not us, then who? 

 Divestment simply does not work. In fact, it is counter-productive to the very cause of the authors.

I thank Michel for sharing this and it is stated very clearly why divesting from fossil fuels isn't a good option.

Also, Sam Boskey contacted me to tell me that I usually you speak respectfully of others with contrary opinions and that I shouldn't stoop down to criticize "tree-hugging granolas, holier-than- thou sanctimonious nonsense from environmental zealots who think they know more about pension investments than me or the folks at CPP Investments."

Fair enough, perhaps I'm a little harsh and can tone it down but I'm truly exasperated reading the barrage of negative comments which are misinforming people and not taking everything CPP Investments and other large Canadian pensions are doing to address climate change as they continue delivering excellent returns.

Sam also shared this:

I would merely point out, when you say: "I hate cigarettes but as long as governments haven't made it illegal, why are we telling our public pensions struggling to find yield what they can and can't invest in?", you say that anything which is legal is legitimate. A rather strange concept, especially when you can float "ESG" off your tongue like caramel custard. 

What is legal depends very much - and I am talking as a former legislator - on social pressures put on the legislators. It is the role of all citizens and moral persons (corporations) to act to create a better world. The largest of pension investors are not exempt. 

The pension funds -and those who are their beneficiaries and those who are the "beneficiaries" of their corporate activities - should not exercise the lack of social responsibility of a three-year-old. "Maximize returns without taking undue risks", your mantra, should include both risks to the environment and to social cohesion.

First, it was my friend, not me, who made the point on cigarettes. I actually don't like the concept of divesting but agreed with Dr. Bronwyn King that it's futile engaging with Big Tobacco, it won't change the outcome. Still, others think that pensions are struggling with enough and they should be allowed to invest anywhere they see fit, as long as it's legal.

On Sam's second point, as I stated above and as Michel Leduc states very eloquently, pensions are very much acting like good citizens and are taking the lead to push on transformative changes in all their public and private companies because they realize ESG investing makes good long-term sense and adds to the bottom line.

However, pensions need to carefully evaluate each investment on its own merits and blindly divesting out of fossil fuel investments not only runs against their fiduciary responsibility, it's also counter-productive to the very cause environmental groups are advocating for,