Good morning, Mr. Chair and members of the committee.
This is now my third time appearing before this committee since assuming the role of President and Chief Executive Officer at the Canada Pension Plan Investment Board. This meeting has become an important milestone on the CPPIB's calendar. It furthers the CPPIB's public accountability through Parliament along with the tabling of the organization's annual report.
I am accompanied by my colleague Michel Leduc, who is our Senior Managing Director and Global Head of Public Affairs and Communications.
CPPIB is a strong believer in the value of our public accountability and transparency. While we operate at arm's length from government, CPPIB is subject to rigorous accountability requirements, which are laid out in the CPPIB Act.
We go beyond our legislated requirements and make every effort to ensure federal and provincial stewards, as well as Canadians, are kept informed of our activities. As you know, we released our 2019 annual report earlier this month. It contains a wealth of information about our organization's activities over the course of the last year and key data related to our performance.
Both Michel and I welcome the opportunity to discuss with parliamentarians how CPPIB invests the funds entrusted to it and our role in helping ensure the Canada Pension Plan remains sustainable for future generations.
CPPIB invests in a well-diversified global portfolio composed of multiple asset classes with different sources of returns and different risk levels. This approach clearly comes through as our investment teams take advantage of our international reach and competitive strengths.
Our fiscal year began on a positive note, with global equity markets rising broadly. We then faced a public equity market downturn in our third quarter, followed by a sharp rebound in our fourth quarter of this fiscal year.
Geopolitical risks are more acute, with unpredictable potential outcomes witnessed around the world. Uncertainty caused by the U.S.-China tensions and Brexit are putting a drag on global economic growth. Against these difficult market conditions, our investment departments worked creatively to find, assess and execute on new investment opportunities.
Another factor reshaping the global investment environment is climate change. As a long-term investor, we seek to be a leader in understanding the risks and opportunities stemming from climate change. We've developed a comprehensive climate change program to ensure those risks are effectively considered throughout our portfolio, consistent with our investment objectives.
We launched our inaugural green bond, becoming the first pension fund to do so globally.
CPPIB maintains its focus on our long-term investment strategy and objectives. We've gradually built a diversified, global investment platform and are focused on executing a multi-year strategy. These are key drivers of our financial performance and our future success.
CPPIB has a critical public purpose: to help Canadians build financial security in retirement. To achieve that objective, our mandate is clear: to invest the assets of the CPP fund with a view to achieving a maximum rate of return without undue risk of loss, having regard to the factors that may affect the funding of the plan.
I'm pleased to report that in fiscal 2019, CPPIB achieved a net nominal return of 8.9% as the fund grew to $392 billion. This represents an increase of $35.9 billion compared to last year, $32 billion of which were gains due to investment income, with $3.9 billion from net CPP contributions.
While these are strong annual results, our focus is on contributing to the long-term sustainability of the fund. The fund achieved 10-year and five-year annualized net nominal returns of 11.1% and 10.7% respectively. All of our performance results are reported net of all costs.
In 2006, CPPIB made a strategic decision to move away from largely passive investments toward an active management strategy. The purpose was to capitalize on our inherent comparative advantages of scale, certainty of assets and long-term investment horizon.
CPPIB measures the performance of its active management strategy against rigorous market-based benchmarks. These reference portfolios represent passive portfolios of public market indices.
CPPIB has generated $29.2 billion of compounded dollar value added since we started to build and operate our active programs. In fiscal 2019, active management produced returns that were $6.4 billion higher than the passive alternative.
We believe actively managing the fund is prudent, responsible and consistent with our statutory objectives. We remain confident that this approach will continue to generate value-building growth for generations to come.
However, in some periods we anticipate the fund will experience negative performance, and periodic drops in value are consistent with the deliberate balancing of risk and returns in the portfolio. We need to take a prudent amount of risk in order to deliver strong long-term performance over multiple generations.
Finally, I'll update the standing committee on the additional CPP.
After extensive preparation over the last two years, our new investment framework for the additional CPP was successfully launched, with the first transfer received and invested in January.
The centrepiece of our preparatory work was the careful design of an investment structure that allows CPPIB to meet its statutory objectives, while taking into account the unique features of additional CPP.
As the base and additional CPP have different actuarial funding requirements, they therefore have different risk profiles. There are no changes to the risk-return profile of the base CPP, while the additional CPP will have a more conservative risk target due to its fully funded nature. Most importantly, our structure ensures both portions efficiently draw on the proven global investment platform that we already had in place.
It has now been 20 years since we received the first $12 million to invest on behalf of Canadian contributors and beneficiaries. To achieve our public purpose and help ensure that the CPP remains sustainable, CPPIB must continue to perform as an organization. We have a strategy in place to ensure that we're prepared for the range of possible investment environments in the future.
On behalf of my colleagues, I again thank the House of Commons Standing Committee on Finance for inviting us today. I look forward to our discussion, and we're pleased to answer any questions.
We like investing in infrastructure. It is aligned with competitive advantages and the characteristics of what we're trying to achieve with the investment, which is long-term investment.
We like the long-term stability of infrastructure investments. In particular, we like places where there are highly predictable regulatory regimes, highly predictable tax regimes, a highly predictable long-term framework around those assets, and we like long-term concessions.
Most importantly, though, we like scale investments, because in order to manage the cost of running the fund, we can't have enormous teams on standby in many different countries around the world. We have to focus the attention where the big opportunities are. Generally, in infrastructure we're looking for investment opportunities of over $500 million in size. We tend to focus time and attention where there's a consistent pipeline of opportunities of $500 million or more, where we can see what's coming this year, next year and the next few years, and be prepared to assess those opportunities.
We like the infrastructure investments that we have in Canada today. Highway 407 around Toronto is our largest investment in infrastructure globally. It's one of our largest investments in any asset class globally. We also have renewable power assets in Ontario, the joint venture with Enbridge, and energy-related infrastructure assets in Alberta.
We have a range of infrastructure investments in Canada, which we like, and we'd love to see more scale opportunities in Canada, as elsewhere.
Can I just interrupt you, sir? I'm sorry, but I got the two-minute warning I had asked for.
I'll switch subjects. The CPPIB—and Mr. Leduc, I think you were quoted on this—has started a human rights review specifically on China, and this is what I want to ask you a question on now.
The Chinese government has interned between 800,000 and 1.2 million Uighurs, Muslim Uighurs, in its westernmost province. I have constituents who've come to see me over the past few weeks because they have family members who've been interned. The CPPIB has invested in the Hangzhou Hikvision Digital Technology Company and the Zhejiang Dahua Technology Company. One of those companies is owned directly by the Chinese military, China Electronics Technology Group. Why is the CPPIB still investing? If you have divested yourselves, please let me know. This is a major human rights violation against the Uighur population, the Muslim Uighur population, in China.
These two companies I mentioned, which you have invested in, are also heavily involved in the manufacture of camera equipment, combining video surveillance and advanced computer recognition technology involving gait, which is the speed of your walk, and facial recognition. They are directly involved in the repression of Muslim Uighurs in western China.
If you are not involved anymore, please put it on the record that you've divested yourselves. If you're still involved in this, why are you?
That's a very important question. Thank you for that.
If you think of CPPIB, we have more than two dozen investment programs. In the way they are classified, there are those that fall into the broad category of fundamental investments. For those, we look at the details of a specific company, asset or stock, and that's really taking a larger position in fewer companies.
Then there are the broad quantitative ones, and quantitative means taking relatively tiny positions across the potential 10,000 companies of securities around the world. Two of our programs fall into this quantitative category, and for those our investment programs look at factors, as generated by computers and algorithms, that may or may not read what the particular operations of a particular company are. The two assets or companies that you've cited fall into that category. That just gives you context in terms of how they end up in our portfolio.
That being said, we're responsible for anything that's in our portfolio. With regard to human rights, it's not only recently that we have factored in human rights. We've been factoring in human rights for more than a decade and integrating them into our investment decision-making. We've been able to do that in a very deliberate way, fundamentally because those human rights factors and our ESG factors as well, our reputation factors, and our political risks are part of due diligence in that fundamental analysis.
Until recently, it hasn't been practical and it has been very cost-prohibitive to apply that type of assessment across a potential 10,000 holdings. Recently—and this predated the coming to light of those two assets—we found a tool that will allow us to identify red flags, including human rights. We've just recently put in that tool, and it allows us to continue with our integrity of risk-adjusted return. What I can tell you is that we are looking at those specific positions today related to the issues that you've identified in terms of human rights.
We disclose our investments on the fundamental side, or dispositions, in the same way that a publicly listed company would do, in a timely and continuous manner. Because of the nature of potentially 10,000 holdings, we disclose the holdings annually, so we will be updating those lists at year-end once we've made the investment decisions.
I can tell you that those two assets have been red-flagged, and we're applying our ESG, reputation, human rights and political risk associated with that.
Mr. Leduc and Mr. Machin, thank you for being here today.
We're discussing an extremely important subject. This committee has an important role to play, since it reviews your results each year in order to be accountable to Canadians. Basically, you're taking Canadians' savings and investing them. Hopefully, you're getting a return that will satisfy the investors, meaning Canadians. This discussion must take place.
I was wondering about the board's investments in agricultural land in Saskatchewan, a subject that attracted attention from 2013 to 2015. I know that the matter has sparked some discussion and that, in your organization, you've started to review the whole issue of the purchase of agricultural land.
In Quebec, foreigners are purchasing huge amounts of agricultural land, which is driving up prices and raising serious concerns. It's becoming extremely difficult for local farmers and family farms to grow in this ecosystem.
However, you seem to be involved in this in Canada, but even more so abroad. I'd like an update on the practices used to take control of huge amounts of agricultural land in Canada and abroad and the factors that you consider in your assessment of these practices.
Let me address that question. It's a good question.
When I sat in the seat and took over as CEO, we reviewed again the programs that we had, the different investment strategies we had. We looked at that particular strategy of acquiring agricultural land around the world, which seemed theoretically to be a very good idea for a long-term investor. It's one that's aligned with population growth and people's improving wealth and ability to buy food around the world. It seemed something that would be aligned with a long-term investor and less subject to sort of short-term market movement. It seemed like a good strategy.
The challenge was exactly as you've identified, which was that the local challenges of buying farmland were really challenging, not just in Canada but around the world. We'd identified several different markets where we thought we could buy a significant scale of agricultural land.
Everything we do has to be scalable; otherwise the costs we have don't make sense. We need to keep our costs under control and have programs in which we can have a few people and do very scalable investments. The challenge was that when we actually tried to come and accumulate a significant amount of land, there was a lot of resistance and different challenges in different markets, whether it was in Canada, Australia or Brazil.
In the U.S. we had managed to accumulate one very significant platform. At one point we were the largest owner of standing irrigated row crop land in the U.S. We owned a company called Agriculture Company of America. Given the challenges we had in the rest of the programming, and also where pricing had gone, we decided to divest that, so we sold that land program in the U.S. and we have scaled back. We no longer have that program of trying to buy and accumulate agricultural land around the world.
You've put a stop to these practices for the moment, and even disinvested in this area. That's good. Thank you for your answer.
This doesn't resolve the broader issue of other foreign funds in Canada. Small farmers are finding it increasingly difficult to access land to produce quality food grown in Canada. I'm more familiar with the situation in Quebec. However, I'm sure that the same thing is happening in the other provinces.
My other question is about ethical investments, monitoring and the practices of the companies in which you've invested. You spoke to my colleague about two systems. In the first system, which is more automated, it's harder to predict issues. In the second system, you make larger investments, so you have more influence.
How are you reassuring Canadians that their money isn't being invested in tax havens or in companies with questionable tax practices that aim to pay as little tax as possible in all countries? We all know about this issue. I'd like to know how you influence these companies to change their practices, either by sitting on their boards of directors or by other means.
You mentioned the trouble the CPP was in 20 years ago. That trouble resulted from the fact that the CPP was then heavily influenced by politics. Politicians believed they could direct the CPP to lend to or buy assets that were politically convenient for the politicians. In the mid-1990s, the then Liberal government made an extremely wise decision, and that was to depoliticize the CPP and turn it into a true investment fund. They put professionals with real private sector track records in charge of the portfolio and let them invest it with a simple and clear mandate: maximize returns without undue risk.
The government, to its credit, has appointed you to this important task. You have an exceptional reputation and track record, so I commend them on that appointment. I am worried, however, that slowly but surely this government is trying to re-politicize the CPP to encourage, through public declarations by ministers, trendy investments that make for good headlines and talking points, to have you fund advertising in favour of political decisions, and to direct your investments based on the latest trendy causes that have captivated the present government's imagination.
As I see it, CPP exists for the sole purpose of the 20 million Canadians who are part of the fund. You have really only two stakeholders: workers and retirees. That's it. If you want to improve social justice, get a better return, as you have been, to your credit. That minimizes the cost to the worker and maximizes the benefit to the retiree. If you want to advance the cause of women and indigenous people, there are millions of them who are counting on you to turn their contribution into a secure and prosperous retirement. Stick to that basic mandate, and you will advance all the great social causes that politicians love to drone on about.
I want to get very specific here. In the most recent reporting period, in dollar value, how much bond issuance did the CPPIB perform?
Thank you for being here.
One of the things that I think you, as an organization, are doing well is you're helping to educate people about what it is that you do. I think that up until fairly recently, the Canada pension plan was this thing that was over there, kind of behind a door, and we really weren't sure what it was all about. I think that Canadians have had an opportunity to sort of peek behind the curtain to ask for a list of what the investments are, to talk about returns and to talk about the 75-year horizon—not necessarily the methodology that will get us there, but the confidence that we'll get there.
That goes back to the public confidence piece, and I absolutely agree with you on that, Michel.
I have a couple of things. My colleague suggested that you were looking at things that were trendy. I hope that he's not suggesting that climate change is trendy, because it is one of the emerging themes that we're hearing from investment around the world, and you mentioned it in your remarks.
You also talk about the inaugural green bond. Can you tell us a little bit about what that green bond is, why you did it and what the results of implementing it have been?
That's very impressive, unlike CMHC.
I'm going to go back to my human rights question one more time on these “concentration camps”, I'm going to call them, because that's what the Uighurs, Canadians of Uighur heritage, have called them. That's basically what they are.
Euphemistically, the Chinese government calls them “re-education schools” where they do training and education, but let's be serious: They're internment camps. Over half the population has been interned in the province of Xinjiang. The Chinese official who runs that province is the same one who ran the Tibetan province and ran the mechanisms of the Communist Party of of China's system of oppression against Tibetans.
I'm going to ask you again. You gave me a very cold answer earlier that these two organizations, these two companies, were red-flagged. Will you commit to divesting CPPIB funds, the funds that Canadians are paying?
Each of us here, every single Canadian, is basically paying into these companies in equity stakes to facilitate the oppression and repression of Muslim Uighurs in western China for nothing more than their ethnicity and their religion.
Mr. Leduc, I want to put something on the record so you have the information. Jim Millward, a professor of history at Georgetown University, has done ample research on this case. If you need to find more details about it, I suggest a Sinica podcast, the two hosts of which speak immaculate Mandarin as well. It is a wealth of information on this particular subject. They spent an hour with experts discussing it.
This issue has been covered by the BBC and other international organizations. In fact, Human Rights Watch has written “China's Algorithms of Repression”, which identified Hikvision, one of these companies—the Hangzhou Hikvision Digital Technology Company—as the winner of a contract to supply China's integrated joint operations platform. That is the platform being used to oppress not just Muslim Uighurs in the province, but also dissidents, democracy activists, human rights activists and lawyers across the People's Republic of China.
Again, I know you're saying you can't say right now, but this is both an operational and a board-level decision that needs to be made much more quickly than an end-of-year type of thing. These camps are expanding day to day, week to week, month to month, and there are more Muslim Uighurs who are being oppressed in this way.
Therefore, on behalf of my constituents, I'm pressing the point that you need to make a decision much more quickly than in the next five or six months.