I call the meeting to order.
Today, pursuant to Standing Order 108(2), we are studying the Canada Pension Plan Investment Board, which we do at least annually.
With us from the Canada Pension Plan Investment Board is Mr. Mark Machin, President and Chief Executive Officer, and Mr. Michel Leduc, Senior Managing Director.
I believe, Mark, you have an opening statement. Go ahead. The floor is yours.
Welcome, and thank you. I hope we didn't upset your schedule too much by moving you up a little earlier.
Thank you, and good afternoon, Mr. Chair and members of the committee.
Thank you for having me here today to discuss and answer your questions.
It is an honour to appear on behalf of the Canada Pension Plan Investment Board, or CPPIB. How we are helping ensure that the CPP remains sustainable for future generations of Canadians is an important issue to this committee.
With me is Michel Leduc, Senior Managing Director and Global Head of Public Affairs and Communications for the Canada Pension Plan Investment Board.
We welcome the opportunity to discuss CPPIB and how we are investing the funds that have been entrusted to us.
We're strong believers in the value of transparency and open dialogue as one element of public accountability, especially through Parliament. I know your schedule is quite busy, so I'm not certain whether you've had a chance to read our submission and annual report, but regardless, I look forward to the committee's questions. I'll keep my opening remarks brief with that in mind.
I'll start by sharing a few observations on the global investment climate and trends that are affecting how we operate. I'll then touch on our recent financial performance and some strategic considerations for the years ahead, including preparations to receive, invest, and manage additional CPP.
Beginning with the investment climate, competition for investments continues to be strong. There is a glut of capital with, in essence, more money chasing fewer opportunities. There are signs of this across various asset classes. The lengthy bull market in stocks, growing demand for private assets, low yields on income-oriented investments, and high valuations on infrastructure are some examples.
In this type of environment, CPPIB's advantages are even more important. These include our exceptionally long investment horizon, our size, the certainty or predictability of our assets, our people, our expert partners, our unique approach to managing our portfolio, and increasingly, our corporate brand and reputation in the world's most hotly contested investment markets.
It's equally important that we remain patient and disciplined. We must continue to be highly selective about what investments we will make. The businesses we buy need to be able to preserve their value through cycles and achieve growth in the longer term.
The businesses we are buying should also be able to withstand or benefit from disruption, but this does not mean rushing to invest in the latest innovations; rather, it means thoughtfully studying how disruptors might affect the assets we like today in the decades to come. For example, what will autonomous vehicles mean for toll roads that we own, or for parking lots? These are the types of questions we continue to examine.
When we're considering trends like the heightened competition for assets and new disruptive forces, we look well beyond the immediate horizon. We're not trying to beat the market each and every year; we're looking to add value over decades. Our strategy aims to deliver steady, absolute, long-term returns over time through significant upswings and corrections.
I continually remind our stakeholders that we fully expect that one year in 10, the fund will drop by at least 12.5%. This is planned for. We design our strategy and actions to deliver strong performance measured over multiple generations of contributors and beneficiaries.
Amidst this backdrop, our return for fiscal 2018 was 11.6%, after all of our expenses. This was driven by strong public equity markets through the first nine months of the fiscal year, and when market volatility picked up during the fourth quarter of our year, the diversification of the portfolio provided resilience.
Investment income was $36.7 billion after all of our costs, and when combined with net inflows from CPP contributions of $2.7 billion, this brought the CPP fund to $356.1 billion as of March 31. When I last appeared before you about 18 months ago, the fund stood at about $300 billion. The 10-year return on the investment portfolio is 8% and the five-year is 12.1%. After inflation, these figures were at 6.2% and 10.4% respectively, well above the office of the chief actuary's assumption of an average 3.9% return to keep the fund sustainable over the 75-year projection period in their report.
Before concluding, I'll briefly touch on a few operational and strategic considerations for the years ahead.
As you know, in January 2019 CPPIB will receive and invest its first cash flows from the CPP enhancement that the federal and provincial governments have collectively put in place. Our preparations to manage additional CPP contributions are well under way and firmly on track. Our teams are diligently working to receive these new funds. We will structure the fund going forward in a way that will respect the funding differences between the base and additional CPP, while also ensuring that we make full and efficient use of our existing platform and global investment capabilities.
You will have gathered from our remarks that given our investment horizon, we are continually looking ahead into the future. As we do this and assess the various trends that I've discussed, we know that we can't rest on our laurels. The asset management industry is changing, and we must continually adapt. Our investing strategy will become more agile so we can seize opportunities and continue to be resilient as we face a number of forces whose precise outcomes remain uncertain, whether it's global growth trajectories, technological disruption, geopolitical forces, or climate change.
To position our international competitiveness, we will invest responsibly in new technology and data capabilities. This will augment our investment talent and skills, and we'll focus on improving operational efficiencies and increasing collaboration and knowledge-sharing across our diverse investment teams and corporate functions.
Our culture will be even more innovative and ambitious, while firmly rooted in our compelling public purpose.
That concludes my formal remarks, and on behalf of my colleagues, we thank the Standing Committee on Finance again for inviting us here today. I look forward to our discussion and I'm pleased to answer any questions you may have.
That's a terrific question.
As you pointed out, our board is 50% women, and we have a policy that there should be no greater difference than 60:40. Our senior management team today is just over 30% women, and overall we're at about 44% women.
In terms of targets for other aspects of diversity, we're very focused on that at both the board level and at the management level. We have put in place targets, and we're a meritocracy. We have to be a meritocracy to compete internationally, but we do think there is a value in having some targets in the future, so we aim in particular to increase the representation of visible minorities at the more senior levels of the organization.
Today in Canada, visible minorities are about 41% of our employees, but it's a lower percentage at the more senior level, and we want to increase that significantly. It is the same with the LGBT community. We also have a target to increase representation there. For the senior levels of women, we also have a target to increase that over time as well.
Thank you for your question.
I think there were two parts to the question, if I understood correctly. The first part was on the areas that we look at for our ESG areas. There are four, and we're introducing a fifth area this year, so you're correct to cite climate change, which we've been focused on for about 10 years. As well, there are water and water conservation, human rights, and executive compensation. This year, we're also introducing board effectiveness.
The second part of your question was related to taxes and how we comply with tax around the world.
We comply with all of the tax requirements in the jurisdictions that we invest in. We are focused on doing that. Obviously, in Canada, we have a tax-exempt status, and that applies in several other countries around the world where there are tax exemption agreements in place or the country applies a specific exemption on organizations like ours, like CPPIB. They are often available to public pensions in countries around the world, and it protects the pensions from double taxation.
It's our fiduciary duty to the beneficiaries and contributors to build a diversified portfolio with minimal transaction costs, including taxes on investment returns. For sound public policy purposes, the investment income earned on behalf of beneficiaries by pension funds, such as CPPIB, is exempt from Canadian tax to ensure that CPP beneficiaries are not double-taxed, which is what would happen if the investment income were taxed when it was earned and then again as income in the hands of the beneficiaries.
Mr. Dusseault, I'd like to jump in, if I may.
On some of the transactions that you've indicated, we'd be more than happy, through the office of the clerk and the office of the chair, to share more specificity around those investments.
To answer your question specifically around representing Canadians, one thing to consider is that as we compete around the world for these assets, in many of those instances—and we'll get those specifics—when we invest in those transactions, a lot of the structures are already in place. For CPPIB to unwind them it could lead to a much higher cost of capital for the organization, and therefore we would be hampering and injuring the best interests of the CPP fund.
In a lot of the instances when we're investing and where we're competing against a lot of other institutional investors, we want to make sure that we have the same even, equal cost of capital as other institutional investors; otherwise, as we look to deploy capital internationally, we would be doing so with part of our hands tied behind our back. I think most Canadians would expect us to structure things in such a way that we would not be embarrassed, and at a minimum follow all of the laws and rules.
Thank you both for being here again.
I want to touch more on sustainable finance. Obviously Canada recently announced moving forward with the Expert Panel on Sustainable Finance. As well, I notice that Ontario moved forward in terms of signing on to disclosures of investments.
In terms of the CPP and CPPIB specifically, I'm curious about what you're doing in that regard.
I was part of Chatham House's Waddeson Club, and it really focused on sustainable finance. Europe is light years ahead of us in this area, and their investment boards are moving ahead significantly to ensure that investors, and in this case Canadians, know that their funds are being invested in sustainable finance and that it's being disclosed in that fashion.
Can you elaborate on what specifically you're doing to move ahead in this area?
Certainly. It's a terrific question.
I'll address some aspects, and Mr. Leduc may want to add.
With respect to what we call “sustainable investing”, I referenced that we have four, and now five, areas we're particularly focused on. Climate change has been one that we've been focused on for the last 10 years.
Most recently our head of sustainable investment was a member of the FSB's task force on climate-related financial disclosures. That work was completed last summer and announced at the G20 last summer by Governor Carney. We have committed to implementing that ourselves by fiscal 2021. One of the reasons is that we need sufficient disclosure from all of our portfolio companies to build up so that we understand what we have and the risks we have. We need more and more of those companies to adopt those disclosure mechanisms.
In the meantime we're very focused on continuing to implement stronger understanding of the risks that we're taking on in climate change, first from the bottom up, so we're developing a tool kit. We go into a lot of detail on it in the annual report. There is a tool kit that we're developing for each investment team so that they can address and understand the risk they're taking on in the investments they're making.
We're also doing a top-down assessment of all the risks we're taking on. We have a carbon footprinting tool that we're developing. There is no perfect tool in the world to do that today, but we are working with best practices around the world to develop our own proprietary tool. We're developing our own model for energy transition and the speed of that transition, which is critical to understanding the risks we're taking on, and beyond I would highlight that we now have a dedicated team investing in renewable energy. We have made a number of renewable investments here in Canada, in Europe, in India, and in Brazil in the last year, and we continue to commit to growing that investment. We mentioned a $3-billion number for where we expect that portfolio to grow.
Today we announced that we're issuing a green bond. I think we're the first pension fund in the world to issue a green bond, which we'll use to partially finance those investments.
Thank you, Mr. Chair, and good afternoon, gentlemen.
To elaborate a little bit more, it's great to see my colleagues on the other side asking about pipelines. We're going to build that Trans Mountain pipeline from Alberta to B.C. and make sure that we diversify our export markets for Canadian resources. That $12 billion to $15 billion we're not getting for those Canadian resources needs to be captured. That will pay for more schools, more hospitals, more services for Canadians, and we'll get to narrow the discount between WTI and WCS, which will be great.
I take it once there is a data room set up for the Kinder Morgan pipeline, whenever that may happen, most likely there will be a number of institutional buyers that, I can conjecture, would be ready to take a look at such a great asset and something of significant value.
Am I off on that, or am I on the right track?