Are CPP Investments' 'Ideological Goals' Costing Canadians Money?
According to a recent Wall Street Journal article by Marlo Oaks and Todd Russ (the state treasurers of Utah and Oklahoma respectively), “Firms whose job is to deliver investment returns” are using their investments in companies “in pursuit of nakedly ideological goals.” They’re talking about asset management firms, in which public pension funds often have investments, supporting shareholder proposals meant to achieve social justice or climate objectives yet of dubious financial value.
State financial officers are legal stewards of other people’s retirement assets, Oaks and Russ argue, and must ensure their investors’ proxy votes aren’t used to support “value-destroying political measures.” The duty of a public pension plan and of an asset management firm is to the people whose assets they are investing and managing. The trend of asset management firms pursuing ideological goals at the expense of financial returns, Oaks and Russ conclude, “is perhaps the most severe breach of the fiduciary standard in American history.”
In Canada, the pursuit of ideological goals by public pension plans (among others) charged with stewarding other people’s money is unfortunately widespread. For example, despite its clear mandate to earn the best financial return on the assets it manages, the Canada Pension Plan Investment Board (CPPIB) is firmly committed to leveraging those assets to pursue collateral objectives instead. CPPIB’s investment strategy involves pushing society towards “net-zero” carbon emissions by encouraging government regulation and imposing environmental obligations onto corporations of which it invests. Both are financially deleterious.
The Caisse de dépôt et placement, which manages the Quebec Pension Plan’s assets, is similarly committed to pursuing non-financial goals with its environmental and sustainable investing strategies. “The unelected managers of public pension plans,” as William Watson writes in the Financial Post, “should not use other people’s money to try to change the world. If they want to do that, they should get into politics.” (Most people who get into politics to use other people’s money to try to change the world end up wasting people’s money, too. But at least they were elected to do so.)
It would be different if by pursuing environmental or sustainability goals, pension plans increase their risk-adjusted returns. It does not seem logical, however, that reducing the focus on financial returns and instead pursuing collateral objectives is profitable. Nor is it supported by the empirical evidence. A broad literature review by Steven Globerman, a senior fellow at the Fraser Institute, last year found there was no conclusive evidence that investing in companies with higher ESG (environmental, social, and governance) scores increased investor returns.
Other reviews have come to similar conclusions. “It is a myth,” corporate governance experts David F. Larcker, Brian Tayan, and Edward M. Watts write in an essay for the Stanford Graduate School of Business, “that ESG improves outcomes for shareholders and stakeholders (so-called ‘doing well by doing good’). Despite widespread claims to this effect, the evidence is extremely mixed and very dependent on the setting.” And if investing to achieve environmental goals is really value-increasing, they note, there would be no need for people to specifically say they are investing to improve the environment. They could simply carry on trying to maximize returns.
While the empirical evidence on ESG investing on financial returns is mixed, one thing is for sure—when asset managers add non-financial objectives, management fees are higher. That is, even if incorporating non-financial criteria into investment decisions does not result in worse investments, Canadian workers paying into the Canada Pension Plan and Quebec Pension Plan must pay for additional CPPIB and Caisse staff and overhead to look into non-financial concerns. When it comes to their pension savings, this is clearly a value-reducing activity—as Oaks and Russ said, a breach of fiduciary duty.
It must be open season to criticize CPP Investments because I recently addressed why the Fund has a large allocation to private equity and now will address this shortsighted comment too.
Let me begin by stating the only thing I can't stand more than left-wing drivel is right-wing drivel.
That's because I'm a right of center type of guy in my economic views and so I'm even tougher on right-wing ideologues who post silly comments on Canada's large pension funds.
All I know about Matthew Lau is he's an adjunct scholar at the Fraser Institute, a right-wing think tank which calls itself "Canada's Top Think Tank."
Well, forgive me but there wasn't much "thinking" involved in writing up this comment.
First of all, there is no political interference whatsoever at CPP Investments precisely to make sure ideology or politics don't govern their investment process.
The governance at CPP Investments was set up in a way to make sure they operate at arm's length from the government and in the best interest of the Fund and its contributors and beneficiaries.
Second, these anti-ESG articles miss the mark when it comes to Canada's large pension investment managers.
It was a year ago that I covered why Jack Mintz is wrong on ESG and Canada's pension plan woes.
I agree with Mintz and other critics that there is a lot of fluff in ESG claims in the public markets realm, but there is also a profound misunderstanding of the role responsible investing has at Canada's large pension investment managers.
Canada's large pension investment managers now all invest 40 to 50% of their assets in private markets and they take a much more holistic view on responsible investing to lower their carbon emissions across public and private markets.
For example, if they own a majority stake in a building, an airport or private company, they have a lot more say on setting ESG goals and following up on them.
In public markets, they have to vote along with other shareholders to make changes happen and that is always more challenging unless you get strong alignment of views.
However, I want to make something abundantly clear here: responsible investing at Canada's large pension investment managers is there to complement traditional investing methods, not supplant them.
It's always the investment groups that have the final say and the responsible investing group acts more like a consultant to inform them about trends, long-term risks and how they can add value to the asset.
In this way, responsible investing teams are embedded in the investment process but they do not get the final say on any investment.
It's a balancing act, and if there are ways to improve an asset and lower carbon emissions, it's a win-win for everyone.
The easiest example of this is in real estate.
We all know Offices have taken a hit after the pandemic but some offices have taken a bigger hit than others because they're not energy efficient and companies which want to lower their carbon footprint do not want to lease their space.
What else? Canada's large pension investment managers all invest heavily in renewable energy and these assets have performed extremely well over the last decade.
There's another angle Canada's large pension investment managers are playing, on energy transition.
Instead of outright divestment, most of them still invest in the oil & gas sector and are looking for projects to invest in high polluting sectors where they can lower emissions.
This is a form of "engagement" where they can benefit economically from their investments and lower carbon emissions in an industry.
And this is being played out across public and private markets.
For example, CPP Investments recently purchased a 49 per cent stake in Aera Energy LLC, the second-largest oil and gas producer in California, responsible for nearly 25 per cent of the state’s production.
I covered that deal here where Bruce Hogg, head of sustainable energies at CPP Investments discussed why it fits into their ESG plan:
“This is a really good fit for our strategy and portfolio,” said Bruce Hogg, head of sustainable energies at CPP Investments.
“It enables us to provide low-carbon oil to California to provide energy security and very naturally transition to renewable energy using this site and ultimately using carbon capture and sequestration sites.… So it’s squarely on strategy for us.”
The partners plan to make Aera carbon neutral in 10 years, continuing to meet California’s conventional energy demands while building up carbon capture and storage alongside a renewable energy portfolio including solar to power Aera’s existing operations.
Hogg said the oilfields in California are accessible and low cost but are also mature and will naturally start to run off.
“Over time, the oil and gas production will reduce, the solar power that’s currently on site can be expanded to provide power to the grid,” he said
“That runoff actually works quite well with increased steps to build that renewable power and decarbonization on site.”
Despite the Canadian pension fund’s minority stake, Hogg said the investment alongside IKAV will be run as a partnership.
“The governance is equal,” he said. “It’s being created as a partnership, and we both bring complementary things to the table.”
I can assure you Bruce Hogg and his Sustainable Energies team are not ideologues and doing these large investments for charity, they want to earn a nice risk-adjusted return over the long run.
The same goes for all of Canada's large pension investment managers, they're all looking to improve their long-term returns and lower their carbon footprint in the process.
The focus however is always on maximizing returns over the long run and this isn't being conveyed in comments I'm reading.
Maybe there's a communications problem here but some of the critical comments I'm reading from left-wing and right-wing critics are just terrible.
The most important point to keep in mind is there is no "breach of fiduciary duty" going on here, not at CPP Investments or CDPQ and other large Canadian pension investment managers.
They recognize that responsible investing is here to stay and can add value over the long run across public and private markets but they remain focused on delivering strong returns first and foremost.
And as far as "ideology", there's none of that, they focus on making sound investments and look at the risks and opportunities in the energy transition field which is huge.
Below, a year ago, CPP Investments'
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