A Conversation With Charles Emond, CDPQ's 'Virtual' Leader

Sean Franklin wrote a special for the Toronto Star discussing how Charles Emond took over as the new leader of Quebec’s pension fund, then the COVID-19 pandemic hit. A year later, he’s found a lot to be proud of:

“A lot of people talk about my impeccable timing,” laughs Charles Emond.

He became CEO of the Caisse de dépôt et placement du Québec (CDPQ)in February 2020, just one month before COVID-19 brought global commerce to a grinding halt.

After formally introducing himself to media, clients and employees as the head of Canada’s second largest pension fund, he spent the month pulling all-nighters to report the fund’s 2019 investment results and push through a transaction making CDPQ the largest shareholder in rail transport giant Alstom.

By the end of February he was receiving reports from CDPQ’s Singapore branch about the early stages of COVID-19 spread. And by the time he returned from a vacation in early March, Canada was heading into a lockdown that would all but completely shut down its economy.

“You go from looking five years ahead to five hours ahead. Some moments felt like sort of a science fiction movie. So you say, ‘OK, this won’t be going as anticipated.’ ”

And it didn’t, Emond says. But looking back at the year, he’s found a lot to be proud of.

As the head of one of Canada’s major institutional investors, Emond describes his business in terms of risks and opportunities. And steering CDPQ through 2020 brought tougher risks than he had ever experienced.

“If my chief risk officer had described a scenario where some of our companies’ revenue line will go to zero and the whole world will go into lockdown, I would have said, ‘Tone it down a little bit.’ ”

But the pandemic didn’t just bring risk. It also brought the opportunity for Emond to prove himself during a crisis. He did just that, turning CDPQ’s 2.3 per cent loss in the first half of 2020 into a 7.7 per cent return by the end. He created a $4-billion fund to shore up liquid assets for companies that had been profitable before the pandemic, whether they were part of CDPQ’s portfolio or not, and expanded CDPQ’s commitment to environmental, social and governance investing.

“Would I prefer not to have this crisis? Just asking the question is answering it,” he says, “But it’s a superb validation test. These crises act like an X-ray on an organization, what it stands for and what it can do better.”

When Emond took over as CEO, Emond inherited CDPQ’s legacy of climate-friendly investing from his predecessor, Michael Sabia.

In 2017, Sabia committed CDPQ to a series of goals designed to get the firm on track for a zero carbon emissions portfolio by the year 2050, in accordance with UN goals on climate change. Sabia planned to increase CDPQ’s investment in low-carbon assets 50 per cent by 2020, a target later raised to 80 per cent when they hit 50 ahead of schedule.

As of the 2019 end-of-year report, CDPQ had exceeded that goal with a boost of almost 90 per cent — from $18 billion in 2017 to $34 billion today. The firm has also implemented a system to track the greenhouse gas emissions for each dollar it invests and is now on track to reduce the carbon intensity per dollar by 25 per cent by 2025.

In a move that shows particular commitment, notes Sean Cleary, executive director of the Institute for Sustainable Finance, CDPQ tied a portion of their employees’ variable compensation to their success in meeting climate goals. By doing that, Sabia’s administration created a direct financial incentive to weigh climate outcomes just like any other part of their long-term returns.

“The thing to recognize is that (investment returns and sustainability) are not by any means mutually exclusive,” says Cleary. “Taking the fact that we’re dealing with climate change into account is just a smart thing to do when assessing the risk and the opportunity of an investment.”

“When we’re looking at who the investors are with an interest in clean technology, (CDPQ) are one of the big players,” says Rachel Samson, research director of clean growth for the Canadian Institute for Climate Choices. “One of the great things about institutional investors is that they’re not looking for a quick return, necessarily. They’re willing to think about where the economy is going, where policy is going and invest in something that’s going to pay off down the road.”

Still, she says, it’s important to keep the size of CDPQ’s sustainable assets in perspective with the rest of their holdings. Because while $34 billion is no small number, it only makes up about a tenth of a total portfolio of $340.1 billion.

And the rest of that portfolio includes some much higher-carbon assets, including the McInnis Cement plant in Gaspé, in which CDPQ retains a 17 per cent stake after selling their controlling interest this winter. McInnis has been the centre of frequent environmental controversies focused on its extensive greenhouse gas emissions — up to 2 per cent of emissions for the entire province of Quebec at peak production, according to a 2014 McInnis press release.

But Emond says holding onto some stakes in carbon-heavy companies is an intentional part of his plan.

“I can greenwash the whole portfolio. That would be good, directionally. But my depositors, Quebecers, would still live in a world with climate issues.” Instead, he says, keeping their stake gets them a seat at the table, and an opportunity to work on lowering the plant’s carbon footprint.

With a strategy of engagement over divestment, he says CDPQ can make progress on reducing its portfolio’s carbon intensity in every sector, while still meeting their mandate to foster the economic development of Quebec.

“There are people whose job it is to work there. We owed it to them,” he says. “It’s easy to run away. But we won’t be far ahead in 10 years if we act like that each time.”

According to Maarika Paul, CDPQ’s executive vice-president and chief financial and operations officer, it’s that commitment to rigorously understanding all the needs and perspectives involved in a decision that makes Emond an effective leader. “I’ve worked for numerous CEOs. And very often CEOs are built for purpose,” she says. “In the time of a pandemic, he was an ideal candidate.”

To illustrate, she points to an operations project that overhauled CDPQ’s financial reporting systems. Emond insisted on taking the time to meet personally with the team in charge of the project, showing a commitment to deeply understanding the fund’s systems, she says.

“It was useful for him, but it had an enormous impact on the people involved. For the first time, a CEO was coming to see something that nobody pays a lot of attention to.”

Like Paul, Emond’s background is in accounting. That’s where he gets his instinct for rigorous analysis and clear communication, she says.

Emond agrees. “When you’ve been in customer service, covering clients all your time, you learn that you’re better off listening than speaking. I like it because it gives me a pulse of what’s happening in the trenches.”

That attitude of listening is one reason Emond says it’s time to expand CDPQ’s socially conscious investing beyond their leadership in sustainable finance. “Our stakeholders’ expectations are rising for what they expect nowadays from pension plans,” he says, “As successor to Michael, my job is to make sure this legacy is perpetuated, but is always at the forefront of the pack.”

Having met the 2020 goals, the overlapping crises of the past year have prompted him to add more social and governance goals to CDPQ’s existing environmental mandate. So far, he’s led CDPQ in signing a tobacco-free investing pledge and signing the BlackNorth pledge, a Toronto-based initiative to increase the proportion of Black Canadians represented in corporate leadership.

Under his leadership, CDPQ also launched Equity 25³, a $250-million-dollar fund that offers investments of $5 million to $30 million to small and medium Canadian businesses. To be selected, businesses must be willing to commit to the program’s diversity target: 25 per cent representation of people from diverse backgrounds — including in management and board of director positions — within five years of confirming their selection.

Combine those new commitments with CDPQ’s existing climate change obligations, co-ordinating a response to a global pandemic that included connecting portfolio companies with the funding, support and expertise, running a weekly video town hall for employees and planning a light rail transit system for east Montreal, and you’ve got a lot to tackle in your first year as CEO.

But Emond says he had a couple of key advantages: his background and his staff.

“My parents had always taught ‘give it all you’ve got.’ Perseverance was highly valued in my household. More perseverance than actual outcome,” he says, crediting that upbringing with his fast-paced work ethic. “I tell my executives to feel comfortable trying (new ideas). Failing fast is not that bad of an outcome. If you fail fast, it means you can try again. Not trying means falling behind.”

He says encouraging that attitude of openness is where some of CDPQ’s best ideas come from. “There’s a lot of grass- roots ideas that come out of our organization. That’s one of the things that satisfy me the most. (Equity 25³) was an initiative purely brought up by the employee base. That means we have a healthy organization.”

Kim Thomassin, CDPQ’s executive vice-president and head of investments in Quebec and stewardship investing, has known Emond for 30 years. She says he showed the same style of leadership when they were in school together at 18 and he was the captain of the basketball team at Quebec City’s CEGEP Champlain-Ste-Lawrence.

“He’s not the tallest, but he was a fierce competitor,” she says, thanks to communication skills that overcame a language barrier. “It was an English-speaking school. Charles being a Francophone gets there, makes it as captain. It’s just in his genes to lead.”

That love of sports has stuck with him, too, she says, providing a foundation for his time with his son, 14, and daughter, 10. “I wonder sometimes if he sleeps at night, because he always has time for family. He skis with his daughter, both his kids play hockey — goalie, so that’s special training. He finds the time.”

Charles laughs at that. “It’s nice of her to say that. My kids would tell you not enough. I call it the work/life imbalance.” Still, “I try to converge my interests with theirs and that gives us an efficient way to enjoy it and live something together.”

That dedication to his family means he always understands when his staff need to take time for their own, she says. It’s one of the key examples of an open, compassionate style of leadership that helps bring his team together.

“To do that in a pandemic, I think it takes a good dose of magic. I think my colleagues would all say that we’re willing to take a bullet for him.”

Magic or not, Emond is quick to say that neither he nor CDPQ can afford to take their leadership for granted. They have to earn it by providing social good. “That’s our licence to operate,” he says. “We are our constituents. We manage their money. Without it, we have no business. Their trust is at the core of what we do.”

According to a 2019 report from the Responsible Investing Association, the amount of Canadian assets invested using socially conscious methods has grown by more than $1 trillion since 2017, following a trend of exponential increase since 2006. The same report showed that about 62 per cent of asset holders surveyed were factoring responsible investment practices into their portfolio. As Emond puts it, environmental and social change are “no longer a nice-to-have” in any major investor’s portfolio, “they’re a need-to-have.”

Still, he says, the pace of change will need to accelerate. He describes the pandemic as a moment of awakening to the need for faster change on climate and social issues. As Rachel Samson pointed out, those assets remain a relatively small piece of many investors’ portfolios at a time when scientific messaging on climate change is getting increasingly bleak.

“Is this fast enough? Obviously not,” says Emond. “We’ve all agreed on the necessity but we’re still arguing on the how and at what pace. We can’t afford that debate for too long.”

“At the same time, I’m an optimist by nature. Who would have thought we’d develop a vaccine in a matter of a year? It’s never been done before. That gives me comfort without trying to understate the challenges we’re faced with. (Climate change) is an issue of such importance that the exponential line will pick up. It’s already beginning to.”

This is an excellent interview and very well written article, one that gives you a glimpse of Charles Emond's first year as CEO of CDPQ. 

And what a year it's been, one he and none of us will ever forget!

Late today, I had a chance to talk to Charles Emond, President and CEO of CDPQ.

I reached out to him on Saturday morning after this article appeared and he was kind enough to open a slot for me at the end of his long day today, so I thank him and his executive assistant Jo-Anne Hébert for coming back to me so fast to accommodate me.

Anyway, my virtual introductory meeting with Charles Emond was much longer than we both planed for but it was a fascinating conversation, at least for me, as I really got to know and appreciate CDPQ's 'virtual' leader as he calls himself (more on that below).

My first impressions were he's authentic, super nice and engaging, extremely intelligent but down to earth and very approachable, he really knows his subject matter and organization extremely well and is very appreciative of what he inherited from his predecessors but also knows where he is headed in this next chapter for CDPQ.

Also, his leadership style is more transparent and engaging than his predecessors, which is a welcome change from within and outside the organization (more on this below).

We talked a lot so I took a moment to eat dinner, reflect on our conversation and focus on the important stuff. 

I began by telling him the pandemic was "a curse and a blessing" for him and Nathalie Palladitcheff, the CEO of Ivanhoé Cambridge, CDPQ's massive real estate subsidiary.

He agreed, stating he "fully supports Nathalie" and that they're doing some major repositioning in that portfolio.

The way he explained it to me is when Ivanhoé Cambridge was first created, it was an operator of malls mostly, not a powerhouse global investor, so some legacy issues persisted for years and needed to be addressed. "The pandemic only accelerated changes that were already taking place."

"We unloaded 20-25%" of the retail portfolio but in a disciplined and measured way, "not a fire sale," and are moving aggressively into logistics and multi-family. 

He says they have already done a lot and more is being done to reposition and strengthen that portfolio.

Interestingly, he told me without Real Estate, CDPQ would have earned a 10.9% net return last year but instead it gained 7.7% (Real Estate plunged 15.6% last year as it took some heavy writedowns in Retail and Offices).

As I stated when I covered the annual results, these drastic writedowns in Real Estate at Ivanhoé Cambridge and Oxford Properties (OMERS) are rare once in a lifetime events that were a direct consequence of the pandemic and how certain assets got hit hard.

Charles is very cognizant of this, he told me last year was a year of "wide distributions of returns between and within assets."

"From retail real estate to logistics, from transportation infrastructure to renewables and communications, from public to private markets, it was a year of wide dispersion."

Overall, he told me they derisked $30 B in the total portfolio, referring to assets across all assets classes (not just real estate). 

"This relates to divestments, restructurings, reducing exposures, refinancings, re-investments in Real Estate, Infra, Private Equity, etc. So it relates to roughly 10% of our total fund where we took measures to reduce the risk specific to certain files and exacerbated by the pandemic" (shopping malls, offices, transportation infrastructure assets, etc)

In fact, he told me they systematically reviewed each and every portfolio. 

Our conversation on Equities, both public and private was equally interesting.

Charles told me like other Canadian pensions, their Public Equities portfolio is more defensive in nature so they lagged the market where a handful of tech stocks really outperformed.

But they really outperformed in Private Equity (20.7% vs 9.9% for the benchmark) because of their exposure to healthcare, services and technology.

"We prefer having tech exposure in Private Equity as opposed to chasing the FAANG names higher and higher (they invest in them) because we have a seat at the table and are able to have more control over our investment."

He added: "I tell my depositors, don't look at it as Public and Private Equities, look at it as Equities and when you do this, you'll see it in a more comprehensive way and that we delivered great results."

I agree, it's a well known fact that it's impossible to beat public equities benchmarks on any given year and over a  long period, pensions need to have a wiser approach across public and private equities to deliver solid returns over the long run.

Besides, there are so many shenanigans going in public markets, secret derivatives which allow obscure hedge funds to synthetically lever their portfolio, good luck trying to win at that game (don't get me started).

On technology, Charles told me they see it as "playing defense and offense".

They are digitizing some of their decision making to "remove biases" and "better filter" opportunities to make better investment decisions. 

One of the really interesting parts of our conversation was when we discussed breaking down the silos and how to have more collaboration amongst groups to make better decisions at a Fund level.

Here, he broke it down to two levels, top down and bottom up.

"At a top down level, we are setting asset allocation but we strive to do more from a bottom up portfolio construction level" (I wonder if he saw the Total Portfolio Management series Mihail Garchev and I put together on this blog last year).

He stated: "The way I see it, it's a $366 billion pension fund with many angles, technology, sustainability, and more and we need to be paying attention to all the moving parts."

He told me he took over some responsibilities after Macky Tall departed and now sits on CDPQ Infra's newly created board (see the full board here).

On strategy, he echoed what CPPIB's new CEO John Graham told me last week, "it's nice to strategize but for me, it's all about execution." 

Don't get me wrong, Charles believes in strategy but he's more a man of actions and doesn't like being bogged down in analysis/ paralysis.

Still, he did share three important strategies with me:

  1. Transform and innovate: "This is what we are doing in Real Estate by repositioning the portfolio to diversify it by sectors and geography."
  2. Strengthen: "We want to strengthen our portfolio construction and strengthen CDPQ Infra to make sure we can design, operate and commercialize its model for future growth."
  3. Accelerate: "Like in our infrastructure investments where we want to increase it to $60 billion and private credit too."

He told me every week, he meets with Maxime Aucoin, Helen Beck, Claude Bergeron and a couple of others EVPs whose names escape me now to discuss strategy and filter it down.

"I have a great team, both men and women and feel lucky to work with them," he told me. 

I agree and told him one of the many good things Michael Sabia did was promote women to top spots at CDPQ.

He agreed and told me he firmly believes in diversity and inclusion at all levels of the organization and wants to hire more people from different backgrounds, "not just finance people."

In terms of the pandemic, he called himself the "virtual CEO" jokingly as he's been meeting people virtually but he also sounded a serious note.

"I want all our employees to feel engaged, so every week, I do a virtual meeting with everyone to inform them of what we are doing and I welcome questions from everyone. This way, they can relate and see where they fit into the bigger picture."

He added: "It takes a lot of preparation but I've gotten so much from it that even when we resume going back to the office, I plan on continuing it once a month."

Also, because he used to work a Scotia Bank's international offices, he empathizes with employees at CDPQ's international offices who are not at the head office.

"I was one of them, I totally relate to how they feel and can't wait to meet them in person."

He has big plans for CDPQ's international offices, wants them to get the recognition they deserve and he also shared a message for the folks on Bay Street.

"Tell them we are here and hungry for deals, especially if it's in our own backyard but also if it's elsewhere in Canada."

Bay Street people tend to shy away from CDPQ at times or they get lazy and just hit up the pensions in Toronto, but Charles wants to change some long standing perceptions on Bay Street.

And he's the perfect person to do it, fluently bilingual, very approachable and engaging and sharp as hell. 

I thoroughly enjoyed my conversation with Charles Emond and after speaking with him, I feel very reassured that CDPQ has a solid leader on many fronts, one who will listen and engage with everyone and knows where he's headed, always focused on execution first and foremost.

But also a leader who is humble enough not to take himself too seriously: "I'm far from perfect, have made and will make mistakes but we are focused on the long term. Like Mark Wiseman says, our quarter is measured over 25 years."

Anyway, I thank Charles again for a very engaging conversation. I also hope we see him in interviews across English media outlets as he's very engaging and communicates very well in both languages. 

Below, a great clip from the movie Margin Call. Don't ask me why I'm embedding it below, it has nothing to do with Charles Emond and CDPQ, it's just on my mind lately and I love this clip and movie.