PSP Investments Investing in US Private Prisons?

Richard Warnica of the Toronto Star reports Canada’s largest public sector pension recently invested millions in two US private prison giants — less than two years after CPP got out of the sector:

A Canadian Crown corporation has invested millions of dollars in two U.S. private prison giants, financial filings reveal, a move one federal union decried as “abhorrent.”

In the last half of 2020, the Public Sector Pension Investment Board (PSP) bought a total of more than 600,000 shares of CoreCivic and the Geo Group, two of the largest providers of private prisons, jails and immigration detention centres in the United States, according to documents filed with the U.S Securities and Exchange Commission.

The moves came even as other large pension funds around the world — including the Canada Pension Plan — have sought to sell off their shares in the private prison sector in recent years amid an escalating backlash from activists and plan members.

CoreCivic, Geo and other private prison companies were harshly criticized during the Trump administration for jailing migrants and would-be refugees, including some parents who had been separated from their children while crossing the border from Mexico.

“The idea that Canada would want to be associated with these terrible practices I would hope would be an absolute outrage for the average Canadian citizen who was part of this pension fund,” said Morgan Simon, a managing partner at Candide Group, a socially responsible investment group in California. “You have a country that is kind of known globally, I think, for having high moral standards … And from that perspective, I would think that it would be pretty shocking that a Canadian pension fund would choose to invest in American private prisons.”

PSP, a federal body that operates at arm’s length from the government, manages the pension investments of federal employees, members of the RCMP and the Canadian military. The fund has been criticized over the past year for its investments, including its sole ownership of Revera, one of Canada’s largest providers of for-profit long-term care.

The fund also recently entered into a $700-million (U.S.) joint investment with Pretium Partners, a Wall Street private equity firm, to purchase and develop single-family rental (SFR) housing in the American Sun Belt. The American SFR industry, which grew out of the ashes of the foreclosure crisis, has been linked by researchers to a host of bad outcomes for tenants. 

The decision to invest in the American private prison sector, though, may prove to be PSP’s most controversial. Over the last four years, activists have aggressively pushed banks and institutional investors to exit the industry, with considerable success.

Since 2017, some of the largest pension funds in the United States have sold off their shares in CoreCivic and Geo Group. Pension funds representing public employees and teachers in California, New York and New Mexico have all divested from the sector, which New York City’s comptroller called “financially risky and morally bankrupt” in an interview with the Financial Times.

“This industry’s business model is fundamentally premised on taking criminal justice backwards, and their reported human rights abuses pose enormous long-term financial and reputational risks to our pension fund portfolio,” Scott Stringer said.

Pension funds from Denmark and Canada have also recently fled the industry. The Canada Pension Plan Investment Board sold off its stakes in Geo and CoreCivic in 2019, after a series unflattering stories about its ties to the industry.

PSP, though, is moving in the opposite direction. According to SEC filings, the fund owned no shares in Geo Group or CoreCivic as of May 14, 2020. Over the next three months, the fund acquired about 43,000 CoreCivic shares, worth about $410,000 (U.S.) and then another 272,000 shares of CoreCivic and 307,000 shares of the Geo Group.

Combined, the fund owned about $4.8 million (U.S.) worth of the two companies as of Feb. 12, according to a 13F holding report filed with the SEC.

In a statement, a spokesperson for PSP said the fund “has a significant allocation to public markets which we manage internally and externally, using a combination of actively-managed and index-replication strategies. Our CoreCivic investment is held in our passive index replication portfolio which follows the S&P 600 index.”

(PSP did not reply to a request for comment on the GEO Group before deadline.)

In a statement, a spokesperson for CoreCivic said in part that the company “plays a valued but limited role in America’s immigration system, which we have done for every administration — Democrat and Republican — for nearly 40 years. While we know this is a highly charged, emotional issue for many people, much of the information about our company being shared by special interest groups is wrong and politically motivated, resulting in some people reaching misguided conclusions about what we do. The fact is our sole job is to help the government solve problems in ways it could not do alone — to help manage unprecedented humanitarian crises, dramatically improve the standard of care for vulnerable people, and meet other critical needs efficiently and innovatively.”

Amanda Gilchrist, CoreCivic’s director of public affairs, added that none of the company’s facilities provide “housing for children who aren’t under the supervision of a parent.”

“Lastly, the false narrative out there is being spread by special interests with a political, not problem-solving agenda. We’ve stepped up our leadership to solve problems — to align with and respond to the needs of our government partners and to find ways to get better at our profession and offer even more innovative solutions,” Gilchrist said.

For the union that represents many federal employees, though, PSP’s decision to invest in the private prison industry is an outrage. In a statement, the Public Service Alliance of Canada called on PSP to sell off the investment.

“Our members are telling us that they do not want to be involved in investments of this nature,” said James Infantino, a PSAC pensions and disability insurance officer. “There’s a moral aspect to it, but there’s also an issue about whether, from a pension perspective, these are actually good, long-term investments for our pension funds. And our answer is no, they’re not.”

Over the last 12 months, CoreCivic’s stock has fallen from a high of more than $16 (U.S) per share to less than $8.

I was waiting for this article for a couple of weeks, it's more nonsense about how PSP Investments is putting profits over people.

What is this all about? It's about indexing activity which PSP and all of Canada's large pensions do internally.

This is similar to if you or I bought the SPDR Portfolio S&P 600 Small Cap ETF (SPSM) which is very diverse and equal weighted (or close to it) and full of good and more questionable small cap stocks.

You and I are not going to look at all 600 constituent companies.

PSP Investments can do this because they do their indexing in-house to save on fees and I'm a little surprised they kept these private prison stocks which don't conform to their ESG standards (or maybe they do and they engage with them).

I remember there was a similar uproar three years ago when CPP Investments invested in detention centers

Back then, Michel Leduc, CPPIB's Senior Managing Director & Global Head of Public Affairs and Communications, put it all into proper context:

  • Out of CPPIB's 26 investment programs, only 2 are on cruise control, the passive balancing (index) portfolio and the systematic quantitative portfolio which invests in stocks all over the world based on quantitative factors. The problem lies with the latter portfolio.
  • Michel told me other large US and Canadian pensions also invested in these stocks, some like CalSTRS, divested from private prisons, others didn't. CPPIB was like 20th down the list but given its size and status, it got called out in the press. 
  • He reiterated that CPPIB does not divest from stocks because of some outside interest group. "We have a mandate to maximize returns without taking undue risks."
  • However, he also stated that "perception matters to the extent it hurts the brand and reputation of the organization" so while it doesn't drive the investment process, it must be taken into consideration.
  • Also, CPPIB adheres to certain ESG factors when making an investment and "human rights is one of them" so this "crisis" represents an opportunity to address certain deficiencies in the passive and systematic quant portfolios.
  • Basically, what he means is CPPIB is exploring a way to add an important qualitative filter to all its investments to make sure certain ESG principles are being adhered to. 
  • It's important to note even though CPPIB doesn't divest, it does routinely look at its investment process and makes changes as needed like protecting the organization from brand and reputation risk and making sure it adheres to its ESG principles across all portfolios. 
  • I raised the issue of tobacco and how pensions should follow Dr. King's advice and divest from it, and he told me "it's an issue for our passive portfolio and we are carefully weighing the pros and cons of maintaining tobacco investments but again, we must respect our mandate and our process."
  • Lastly, he told me he had spoken with a large US asset manager who manages trillions (hmm, I wonder who that can be...) and he told him "for ten years, we didn't have an issue with these investments and then all of a sudden, they got flagged."

Now, we are reliving the same thing with PSP Investments. 

I firmly believe this is a nothing burger, one that PSP Investments can easily fix by adding a qualitative ESG filter to remove some of the more questionable investments in their passive and active portfolios.

Yes, it's a bit of a pain in the butt, but you know what, better this than having the unions huffing and puffing and making a mountain out of a molehill. 

PSP Investments has to start rethinking its entire communications strategy. I understand, they rightfully feel that these are distractions and choose to ignore or dismiss them, but like Michel Leduc told me back then, "perception matters" to the extent it hurts the brand and reputation of the organization.

The other thing we need to keep in mind is these investments literally represent peanuts in PSP Investments portfolio, they can easily remove them and it wouldn't impact their performance in the least.

My problem with private prisons is what they represent in the larger societal context.

The US has an incarceration problem, one that disproportionately impacts blacks and Latinos.

Why invest in businesses that are part of a much bigger problem? It's just not worth it and not aligned with PSP's ESG policies and values.

For all those reasons, I believe PSP will follow CPP Investments and CalPERS which got out of private prisons back in 2019

It's just not worth the headache and is nothing but a huge distraction.

Having said all this, let's not make a big issue out of this, it wasn't part of some evil plot, these are negligible investments that should have been filtered out and for whatever reason, they weren't.

As I discussed on Monday when I went over Mark Wiseman's comment on how the world can learn from the Canadian pension model, I'm getting increasingly irritated and very concerned by what I see as blatant incrementalism and encroachment on our large public pensions and how they conduct their affairs.

In fact, nobody has spoken to me off or on the record but you can just feel the enormous pressure they are under to make the ESG crowd happy, taking their demands seriously even if they don't make sense for the beneficiaries and stakeholders of these pensions.

As I keep stating, ESG is an important and critical element and all of Canada's large pensions take it very seriously but the focus must always remain on maximizing returns without taking undue risks to balance assets with long term liabilities. Period. Everything else is secondary or complementary to that overriding mission.

There's way too much moralizing going on out there and quite frankly, some of these environmental and activist groups are just plain wrong and spreading misinformation and/ or recommending things that are counterproductive to their goals and ideals.

Below, private prisons were established during the war on drug and tough on crimes era when the US was incarcerating more people than ever. Since their establishment, activists and politicians have debated whether they should exist to begin with. Some argued they didn’t save the government the projected 20% nor were they of better quality. But they continued to grow into a billion dollar industry. Today the industry is largely dominated by two companies,Geo group and CoreCivic. But in 2019, the two companies have had a tough year. From Families Belong Together protests that lead to Wall Street divesting to Democratic candidates saying that they will abolish the industry, if elected. After three decades of arguing it is morally wrong to profit from incarceration and detention, activists say this could be the beginning of the end for these companies. 

CORRECTION (Dec. 29, 2019): At 2:30 we misstated the operating costs of state and federal prisons. The costs (as shown on screen) are billions, not millions of dollars.

Update: On March 15th, the Toronto Star reports that Canada’s largest public sector pension sells off stakes in two US private prison giants. I note this part of the article:

On March 12, Cunningham replied explaining that the purchases were the product of quantitative investment strategies that either mirror the S&P 600 index or use algorithms to predict profitable trades. That said, Cunningham wrote, PSP had already by that date begun the process of amending its investment procedures to better integrate Environmental, Social and Governance (ESG) factors into its decisions.

“As a first step, we took actions to sell all of our positions in CoreCivic and Geo Group beginning in late February,” Cunningham wrote.

On Monday, a PSP spokesperson confirmed that the fund had fully divested of the two companies.

As I suspected, this was part of their quant strategy and they are already working on implementing an ESG overlay on it to make sure they don't invest in stocks that violate their ESG approach.