This Week in Pensions & Investments: 27-10-2023

Here are the top stories covering pensions and investments this week:

1) Jason Markusoff of CBC News reports that  Ontario has concerns over Danielle Smith's CPP exit bid, but also a stark lesson for her:

It may seem like a pile-on by now to Premier Danielle Smith and the United Conservatives.

The Tory-run Ontario government came out Wednesday sounding the same alarm about Alberta's pension-plan flirtation as have (deep breath) Prime Minister Justin Trudeau, Conservative Leader Pierre Poilievre, the Alberta NDP, British Columbia's premierNewfoundland and Labrador's premier, the Calgary Chamber of Commerce, seniors' groups, organized labour, the Canadian Federation of Independent Businesses, and various economists and pension experts.

But that isn't to say one should dismiss the remarks of Ontario Finance Minister Peter Bethlenfalvy about a fractured Canada Pension Plan as just another voice in a growing chorus. His intention is to get all his provincial and territorial finance ministers together, plus federal Finance Minister Chrystia Freeland, for an "urgent meeting" to discuss Alberta's idea as a pan-Canadian crisis in the making — a meeting she's agreed to. 

"As co-stewards of the CPP, it is our shared responsibility to safeguard the financial sustainability of the plan on behalf of workers and retirees across Canada," Bethlenfalvy wrote Freeland in an open letter (that's how one communicates on pension policy these days, I suppose).

He also became the latest person to question Alberta's assertion they're entitled to more than half of CPP's asset fund, worth one-third of a trillion dollars — a pie grab that would force other Canadians to pay more in contributions or receive smaller benefits to restore the fund's long-term health.

Given that Québec isn't part of CPP, the two largest partners in the pension plan (B.C. and Ontario) are now opposed, and they constitute 65 per cent of the population of that nine-province coalition. (Alberta represents 17 per cent of it.)

The article adds:  

A little less than a decade ago, Kathleen Wynne was premier, and she worried publicly that Ontarians weren't saving enough for retirement. So her Liberal government proposed a supplementary contribution and benefits program, the Ontario Retirement Pension Plan (ORPP) — to serve in addition to CPP.

As the province began developing this program, it pursued a notion that has also occurred to both the Smith government and the authors of its Lifeworks report: that federal departments and the investment board that already manage the CPP could also run this provincial pension program.

Lifeworks set a huge range for setup costs for an Alberta Pension Plan, between $175 million and $2.2 billion, and the low end assumes Alberta could piggyback on what CPP and Ottawa already did in collecting contributions, dispersing benefits and managing the gargantuan fund.

Ontario had the same thought for its ORPP. But when it went pleading to the Canada Revenue Agency and other federal bodies, the answer every time came back: No. Do it yourself.

"They had absolutely no time whatsoever for Ontario to create a new thing for them to do," recalled Mahmood Nanji, who was the associate deputy minister for Ontario's Finance ministry and in charge of setting up ORPP. "We told them we would pay every cent of additional talent that they were going to use on this, and they refused."

Instead, Ontario had to establish its own pension administration corporation.

Part of the refusal may have been partisan; the Ontario Liberals were asking the Stephen Harper Conservatives in Ottawa, who had little interest in supporting an initiative that added to anybody's payroll taxes, and campaigned in 2015 against it.

After the Trudeau Liberals won that year, Ontario's problems were solved in a different way: the new federal government created an expanded, supplementary CPP along the lines of what Wynne was trying to do on her own.

In other news, Deputy Prime Minister and Finance Minister Chrystia Freeland says she will meet with her provincial and territorial counterparts to discuss Alberta's proposal to pull the province out of the Canada Pension Plan:

Ontario's Finance Minister Peter Bethlenfalvy wrote to her requesting an "urgent meeting" of finance ministers to address Alberta's proposal.

Freeland said she spoke with Nova Scotia's Finance Minister Allan MacMaster — whose province is currently chairing the Council of the Federation — and confirmed that a meeting will happen.

"We will be convening a special meeting of the provincial, territorial and federal finance ministers to talk about the Canada Pension Plan," she said. She didn't say when the meeting will take place.

For her part, Alberta premier Danielle Smith says Alberta will continue its $7.5-million pension-exit advertising and survey campaign, despite acknowledging the key dollar figure is disputed and likely headed to court.

Premier Smith also said she would not call a referendum on whether Alberta should quit the Canada Pension Plan until there is a firm, finalized number on how much the province would get should it decide to go it alone:

“We’re hearing from people. They want to know what the number will be,” Smith told reporters Wednesday after a speech to the Edmonton Chamber of Commerce.

"Albertans will have a hard number.

"I’m not going to go to a referendum if people don’t have the information that they need in order to make a decision."

Smith said the number may come by agreement with Prime Minister Justin Trudeau’s government and the Canada Pension Plan Investment Board or may have to be hashed out before a judge.

“It may have to be a court decision because this is legislated under the CPP Act,” said Smith.

"And if the federal government and the CPPIB will not come to the table and talk with us in a reasonable way to get us that number, then we’ll probably have to go to a court decision."

Opposition NDP house leader Christina Gray said Albertans deserve to know the firm numbers before casting a ballot. She said her caucus will hold Smith to her word.

“We need to continue to hold their feet to the fire because they are continuing to push an agenda that Albertans don’t support (on the CPP)," said Gray.

Gray pointed out her caucus has heard from 30,000 Albertans in their poll, with 90 per cent or more calling for Alberta to stay in the CPP.

Smith’s government has been consulting for more than a month with Albertans on the merits and drawbacks of leaving the CPP and creating an Alberta pension plan.

It has said Alberta is being shortchanged billions of dollars by contributing far more to the pension plan than it gets back and would fare better if it went its own way.

Smith launched the debate on Sept. 21 by releasing a government-commissioned report from consultant LifeWorks.

LifeWorks estimates Alberta is entitled to more than half of all CPP assets – about $334 billion – if it leaves, factoring in investment returns and compound interest.

With that figure, or with even less than that, LifeWorks says Alberta would be able to provide lower premiums and higher payouts.

Alberta seeks 53 per cent of the fund with 15 per cent of the CPP members.

Economists and analysts have delivered counter-figures. 

The CPP Investment Board says Alberta is in line for 16 per cent of the CPP fund while other economists put it at around 20 or 25 per cent.

The province has hired former provincial treasurer Jim Dinning to engage with Albertans to gauge their views on the topic and then make a recommendation to Smith next spring on whether there is an appetite for a referendum on leaving CPP. 

If there was to be a vote, the plan was for it to happen in 2025 and then, should there be a yes vote, Alberta giving the required three years’ notice to leave CPP some time after that.

My take: It would be wise for Premier Danielle Smith to backtrack on the Alberta Pension Plan, she will be met with fierce opposition and lose any court case in terms of getting the inflated figure Lifeworks was paid millions to come up with. More importantly, it's in the best interest of all Albertans, especially younger ones, to stay in the CPP. Period.

2) Jeffery Jones of the Globe and Mail reports that the Canada Growth Fund has made its first investment in a Calgary-based geothermal energy company

A new federal financing agency set up to attract private-sector capital to fund commercial-scale, climate-related projects is making its first investment, plowing $90-million into an Alberta-based geothermal energy developer.

The contribution from the Canada Growth Fund (CGF) represents nearly half of a $182-million series B funding round for Eavor Technologies Inc., which generates baseload heat and power using a closed-loop geothermal system that it invented.

The CGF, which is managed by PSP Investments, a public-sector pension-fund manager, said Eavor’s technology has the potential to cut greenhouse-gas emissions globally, and its expansion will boost employment in Canada.

The other investors include Austria’s OMV AG, Japan Energy Fund, Monaco Asset Management and Microsoft’s Climate Innovation Fund. The company’s existing investors, BDC, bp Ventures, Eversource Energy, Temasek and Vickers Venture Partners, also contributed.

One part of the CGF’s mandate is to invest in Canadian clean-tech companies that are in the process of scaling up projects that have entered the commercial stage, and Eavor’s technology, called Eavor-Loop, fits that bill.

The investment will help the company create new jobs and keep its work force in Canada, the fund said in a statement. Eavor conducts its engineering and design work at its Calgary headquarters, and will use the funding to expand while retaining its intellectual property.

The CGF said it is structured to act as a liquidity bridge to deal with chronic underfunding in the Canadian market when clean-technology companies hit the commercialization and scale-up stages.

Despite having raised more than $500-million in previous rounds, Eavor had struggled to find the next stage of financial support from companies in Canada’s oil patch, despite offering a renewable technology that is compatible with oil and gas drilling.

The absence of local energy-industry support has left the company, and others like it, overly dependent on foreign investors, chief executive officer John Redfern said at a ceremony with federal and provincial officials on Wednesday to mark the completion of the investment.

“They are great partners and everything else, but they have differing objectives,” he said. “In fact, without the CGF, we were already discussing acquisition by a foreign multinational via a very compelling offer from this strategic [investor] to solve all our funding needs forever.”

Eavor made headlines in August when it launched its first commercial Eavor-Loop geothermal project, in Germany. The event included German Chancellor Olaf Scholz and Bavarian Premier Markus Söder.

The company developed its first full-scale demonstration project in 2019, near Rocky Mountain House, Alta. German officials were impressed, offering Eavor access to financial incentives to inject more geothermal power into the country’s grid as it moves away from nuclear energy.

CGF, unveiled in the 2022 federal budget as an arm’s-length public investment fund, is set up to deploy a combination of financial instruments – including equity, debt, contracts for difference and offtake agreements. The idea is to reduce investment risks for the private sector and help achieve the country’s climate targets. But it must also earn enough returns to remain capitalized at around $15-billion.

Finance Minister Chrystia Freeland said Eavor exemplifies the type of investment the CGF was created for as it seeks to direct capital to renewable technology.

“The Canada Growth fund is led by some of Canada’s top investors and it is going to invest in Canadian businesses to help them scale and support Canadians in attracting our share of the trillions of dollars in private capital that are waiting to be invested in the global clean economy,” Ms. Freeland said at the event.

Geothermal technology has the potential to contribute to large reductions in greenhouse-gas emissions in Canada, Jonathan Arnold, acting director, clean growth, at the Canadian Climate Institute think tank, said in a statement. But it remains a “wild-card” technology that is unlikely to get all its expansion funding from private investors. As a result, the investment in Eavor is “a smart use” of the fund, he said.

In a recent interview with The Globe and Mail, Patrick Charbonneau, CGF’s chief executive, said more than 60 potential investments are in the fund’s pipeline, and about 20 have been given priority. More announcements will be made soon, he said.

You can read the Canada Growth Fund's press release for more details on this investment in Eavor Technologies.

My take: Patrick Charboneau and his team are ramping up fast and as he stated, there are already 20 projects receiving priority review and 40 more being reviewed. The quick, professional ramp-up was a driving factor in giving PSP the responsibility for the Canada Growth Fund.

Also worth noting the investment is made in a Calgary-based company, something premier Danielle Smith should note and commend (just pointing out the obvious here).

3) While on subject of PSP, I note the organization published its annual Sustainable Investment Report last month which outlines how it is striving to embed sustainable investing into its culture, operations and investment activities to continue to advance capabilities and address emerging risks and opportunities. Here are the highlights:

  • Achieved target to increase investments in transition assets to $7.5 billion ahead of 2026 schedule.
  • Reported Scope 1 and Scope 2 GHG data for assets in-scope climbed from 47% in fiscal year 2022 to approximatively 54% in fiscal year 2023.
  • Further embedded our understanding of sustainability-related risks and opportunities into our culture, operations and investment practices to enhance our long-term sustainable investment approach.
  • Strengthened our approach to sustainability and climate by updating our Sustainable Investment Policy and Corporate Governance and Proxy Voting Principles.
  • Increased partnerships with institutional investors, industry associations and NGOs highlight our focus on engagement and collaboration.

Take the time to read the full press release here and download the report here.

Also, PSP Investments is proud to have contributed to the recent Investor Leadership Network white paper “Transition and the Enabling Role of Taxonomies and Frameworks”. This comprehensive resource provides insights into the development and application of transition finance frameworks that support decarbonisation goals.

For more information click here.

4) VCCircle reports OTPP is investing in an Indian Logistics Company. BQPrime also reports anti-trust watchdog Competition Commission of India (CCI) on Thursday cleared Ontario Teachers' Pension Plan board's acquisition of stake in BusyBees Logistics Solutions.Read more here.

In related news, Anna Murray, Global Head of Sustainable Investing at OTPP, offered her insights on “Navigating ESG Headwinds” during her panel at Responsible Investor Canada 2023. 

Here are four key takeaways from her discussion: 

  • On Net Zero: “As an active, global investor, we believe we can play a critical role in helping accelerate the net zero transition, which is why we set a north star for ourselves of achieving net zero emissions by 2050 - enabling us to make strong investment returns over the long term.” 
  • On Sustainable investing: “ESG integration and stewardship play a critical role in fulfilling our pension promise while also making a positive impact on our members, partners and communities.”
  • On DEI: “Our focus on DEI is based on our belief that an equitable workplace benefits everyone. In 2022, we increased representation within Ontario Teachers’. While there is more work to be done, we remain committed to advancing our DEI strategy.” 
  •  On what’s next: “With increasing macroeconomic headwinds, ESG will remain top of mind while investors turn to navigate impacts from climate change and biodiversity loss.”

5) CDPQ's President and CEO Charles Emond visited their office in Australia to promote CDPQ in this exciting market in Asia Pacific. 

In addition to meeting with their colleagues in Sydney, he met with business partners and gave an interview to James Thomson, a columnist for The Australian Financial Review.

 “What will I remember from this week? A dynamic country with many opportunities for long-term investments. A solid business network in the region. And most of all, a cohesive team with extensive transactional and operational expertise.” Thank you to everyone who made this busy trip such a success!

6) Nienke Hinto of Wealth Planner reports CPP Investments is making progress towards net-zero goal:

The Canada Pension Plan Investment Board (CPP Investments) says it continues to make progress on its commitment to have its portfolio and operations be net zero of greenhouse gas (GHG) emissions across all scopes by 2050, it says in its ‘2023 Report on Sustainable Investing.’

The pension fund’s investment in green and transition assets rose to $79 billion as of March 31, 2023, advancing toward its goal to invest at least $130 billion by 2030. CPP Investments is confident it will reach this target, even as progress may not be linear year-over-year.

In addition, it has achieved carbon neutrality for internal operations across Scope 1, 2, and 3 (business travel) emissions sources for fiscal 2023. The pension fund applied the Abatement Capacity Assessment Framework to inform its plans to decarbonize operations.

Finally, the fund applied its decarbonization investment approach on more than 10 existing and new assets spanning the real estate, infrastructure, agriculture, energy, and tourism sectors. These initiatives helped develop transition plans that increase value in those companies and provide the fund with key learnings for other parts of its investment portfolio.

"At CPP Investments, we believe the value of companies integrating sustainability effectively into their strategy, operations and financial disclosures is increasing,” says Richard Manley, chief sustainability officer, CPP Investments. So is our ambition to integrate sustainability into the life cycle of our investment process to drive value creation."

Increasing the number of factors

The report says successful capital deployment requires investors to consider an increasing number of factors related to business opportunities and risks, including sustainability, and CPP Investments continues to advance the integration of such factors in its investment decisions. This year, the fund updated its definitions of sustainability-related factors where they are material to the long-term success of companies.

"Sustainable investing means anticipating and managing sustainability-related material business risks and opportunities, including climate change," says Manley. "We believe that these factors are dynamic, and we consider them through the investment life cycle when they are material to the investment."

CPP Investments also has an active ownership model which involves engagement with its portfolio companies to create better long-term outcomes on sustainability-related matters and, in turn, generate more value for the CPP Fund. For example, the fund uses shareholder voting rights to ensure alignment between the expectations of directors and their actions. 

“Despite many positives, approaches to environmental, social, and governance (ESG) integration have elicited fierce scrutiny and polarizing public debate. While that happens, GHG emissions continue to rise. However, the more nuanced debate of how to decarbonize the energy system – acknowledging the need for low-carbon, secure, affordable energy sources – is welcome progress,” says Manley.

Visit CPP Investments to read the ‘2023 Report on Sustainable Investing.’

And here are some investments articles worth reading:

1) The Bank of Canada held its benchmark interest rate at five per cent on Oct. 25, its second consecutive pause, meeting economist expectations amid a slowdown in the economy. Here is what economists think.

2) Bloomberg reports there’s a good reason why investors are amazed that something hasn’t broken in the economy yet: The last time US government bond yields climbed so far, so fast, the nation plunged into back-to-back recessions. Read more here.

3) Bloomberg reports KKR is seeing more opportunities in high-yield bonds and is selling some floating-rate debt as the Federal Reserve pauses interest rate hikes. Read more here.

4) Bill Ackman isn’t the only boldfaced Wall Street name who believes the U.S. economy is in worse shape than the official data suggest.

Bill Gross, a co-founder of fixed-income investing giant Pacific Investment Management Co., said Monday in a post on social-media platform X that the U.S. economy is likely headed for a recession by year’s end.

“Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate U.S. economy slowing significantly. Recession in 4th quarter,” Gross said.

Read more here.

5) Bloomberg reports a growing number of asset managers is reassessing bond values tied to real assets, as a spike in the frequency of flash floods, fires and storms hits conventional pricing models:

Mitch Reznick, head of sustainable fixed income at Federated Hermes, says climate risk is a key reason why the investment manager is now underweight real estate credit. Jonathan Bailey, global head of ESG and impact investing at Neuberger Berman Group LLC, says he’s increasingly looking at whether issuers have enough capital to deal with the fallout of climate change. And analysts at Barclays Plc say nature-related risks are being mispriced across sovereign bond markets, and will ultimately trigger downgrades.

“There are often times where two otherwise very similar looking investment opportunities have very different physical risk profiles from a climate perspective,” Bailey said in an interview. A bond issuer that’s been able to protect itself from physical climate risk is likely to be the better investment over time, he said.

The credit ratings industry has yet to figure out how best to incorporate climate risk in its models, so fixed-income investors are largely having to rely on their own assessments to navigate the new landscape they face. According to the Institute for Energy Economics and Financial Analysis, bond investors can’t turn to credit ratings for a useful evaluation of environmental risks.

In a recent report, the IEEFA said that inside the biggest ratings firms, “alarm bells have been sounding for months.” But those internal warnings have gone largely unheeded, which is concerning, according to Hazel Ilango, an energy finance analyst focused on debt markets at IEEFA.

As large swaths of the planet get battered by extreme floods, droughts, storms and wildfires, failure to gradually reflect such risks in credit ratings is exposing issuers to bigger, sudden losses further down the road, the IEEFA said.

Read more here

6) Revenge of the baby boomers? Bloomberg reports baby boomers are flush, with high interest rates fattening their savings accounts. Young Americans, they’re struggling with debts, sky-high rents and mortgage rates that are putting home ownership further out of reach:

That’s driving a new trade recommendation from Bank of America Corp., one aimed at exploiting the widening generational wealth gap: Go long on old-people stocks. Avoid those whose fortunes ride on cash-strapped millennials.

So American Express Co. and cruise-ship lines are in. Out is Revolve Group Inc., a self-styled “next-generation fashion retailer” for the twenty-somethings.

“Millennials are really feeling the impact of the hiking cycle. Boomers, not so much,” BofA quantitative strategist Ohsung Kwon, himself a millennial, said in an interview. “We’re starting to see a big diversion between the two.”

That fault line is growing beneath an economy that’s on the surface remained surprisingly strong, largely due to a steady consumer-spending splurge since the pandemic lockdowns ended.

True, the Federal Reserve’s aggressive interest-rate hikes have slowed pockets of the economy. But they’ve also delivered what’s effectively been a steady supply of stimulus checks to older Americans, who went from receiving virtually nothing on their savings to pocketing the highest interest payouts in two decades.

Read more here

For the latest market news, best to follow me on X (I still call it Twitter) here as there's way too much to cover here.

Alright, let me wrap it up there and get back to feeding my little bundle of joy (he was a bit cranky this morning as he didn't sleep well and neither did mommy and daddy).

Below, Jon Gray, president and COO of Blackstone, joins BNN Bloomberg's Jon Erlichman to talk about building the company's presence in Canada and where he sees the most opportunity here. He also talks about challenges for the Canadian housing market.

Lastly, remembering Blackstone's Byron Wien. The famed investor died at the age of 90 on Wednesday. RIP Byron, you truly were a great economist/ financial analyst.