I call this meeting to order.
Welcome to meeting number 56 of the House of Commons Standing Committee on Finance. Pursuant to Standing Order 108(2), the committee is meeting to discuss the Canada Pension Plan Investment Board.
Today's meeting is taking place in a hybrid format pursuant to the House order of November 25, 2021. Members are attending in person in the room and remotely using the Zoom application. As per the directive of the Board of Internal Economy on March 10, 2022, all those attending the meeting in person must wear a mask, except for members who are at their place during proceedings.
I'd like to make a few comments for the benefit of the witnesses and members.
Please wait until I recognize you by name before speaking. For those participating by video conference, click on the microphone icon to activate your mike, and please mute yourself when you are not speaking. There is interpretation for those on Zoom. You have the choice, at the bottom of your screen, of floor, English or French. For those in the room, you can use the earpiece and select the desired channel.
I remind everyone that all comments should be addressed through the chair. For members in the room, if you wish to speak, please raise your hand. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as well as we can, and we appreciate your patience and understanding in this regard.
I would now like to welcome our witnesses for the first hour. From the Canada Pension Plan Investment Board, we have president and chief executive officer John Graham. With Mr. Graham is senior managing director and global head of public affairs and communications, Michel Leduc. Welcome.
Mr. Graham, you now have the opportunity to give your opening remarks to the members.
Good afternoon, Mr. Chair and committee members.
My name is John Graham, and I am the president and chief executive officer of CPP Investments. I am accompanied by my colleague Michel Leduc, who is our senior managing director and global head of public affairs and communications.
This is my first time appearing before the House of Commons Standing Committee on Finance. Thank you for the invitation and I look forward to our discussion today.
Transparency is the foundation of public trust. Although we are a commercial enterprise, our organization is defined by its public purpose, which is to help secure the retirement security of 21 million Canadian contributors and beneficiaries.
Public accountability is a central tenet of how we operate. We go beyond our legislated requirements to ensure federal and provincial governments, as well as Canadians, are well informed of our activities. The session today is an important example of that.
Before moving to questions, I will briefly touch on our organization, the Fund’s performance over the last fiscal year and share some operational highlights.
CPP Investments is a professional investment management organization that manages Canada pension plan assets. We invest around the world in public equities, private equities, real estate, infrastructure and fixed income. We are governed by federal legislation—the Canada Pension Plan Investment Board Act—which was passed by Parliament in 1997. The decisions made by policy-makers at that time set us on the path to become the organization we are today.
We operate under clear objectives to maximize returns without undue risk of loss, taking into account the factors that may affect the funding of the plan. Assets are strictly segregated from government funds and managed professionally and exclusively to pay benefits.
We operate at arm's length from federal and provincial governments under the oversight of an independent, highly qualified, professional board of directors. Any amendments to our act require the consent of at least two-thirds of the provinces that participate in the CPP, representing two-thirds of the population. Our governance structure and clarity of mandate are internationally recognized as a leading example of sound management of national retirement plans for other countries to emulate.
We create value for the fund through active management. Our investment strategy is structured to be resilient in the face of wide-ranging market and economic conditions. Diversification helps mitigate risks of the CPP's inherent exposure to Canada—the only country from which it draws contributions. We are nevertheless highly overweighted in Canada compared to its relative proportion of global GDP and capital markets. We will continue to be so, given our strong knowledge of the Canadian market.
We recognize that active management is not a simple, low-cost strategy. Each dollar used for expenses is a dollar not invested. Cost management and disclosure are key to our public accountability.
Nearly 25 years after receiving our first $12 million of contributions to invest, the fund has surpassed $500 billion. When we first began to operate in 1999, everything was passively concentrated in Canada and the fund was not expected to reach this milestone until 2028. Since that time, with investments in more than 50 countries, CPP Investments has contributed $378 billion in cumulative net income to the fund, after all costs.
Our most recent fiscal year, which ended March 31, was solid despite turbulent market conditions in the fourth quarter. We achieved a net nominal return of 6.8% and the fund grew from $497 billion to $539 billion. The volatility affecting public equities at levels not seen since the beginning of the pandemic muted returns achieved through the first nine months. Bond prices also declined at a pace unseen in more than 40 years.
On top of the ongoing pandemic, the war in Ukraine continues to send shock waves around the world. In Canada, many of us are deeply impacted by the tragedy and our hearts go out to the people of Ukraine.
Despite economic and geopolitical headwinds, our diversified portfolio demonstrates resilience as we outperformed our benchmark. That benchmark represents what could be achieved through a low-cost passive alternative.
Since 2006, we have generated $41 billion of additional income through active management. This fiscal year, our active programs, including private equity, infrastructure, real estate and credit, were the main contributors to the fund's overall performance.
Because the CPP is designed to serve multiple generations, long-term performance is what matters most. To that end, we achieved a 10-year nominal return of 10.8%, with a cumulative net income of $329 billion over the same time frame. All of our performance results are reported net of cost.
This year we appointed our first chief sustainability officer, who is now responsible for integrating an enterprise-wide approach to sustainable investing, with a focus on climate change. This follows on our commitment that our investment portfolio will be net zero for GHG emissions by 2050. As an initial step, we will boost our investment in green and transition assets to roughly twice their current level by 2030.
As part of our announcement, we made it clear that we do not believe in blanket divestment. We went beyond that and announced a dedicated decarbonization strategy that will support and partner with companies that are innovating and developing new technologies to lower their emissions. If we lose our conviction that a particular company is achieving its decarbonization plan, we will not hesitate to sell. We believe our overall, constructive approach to contributing to the transition is more productive towards the global goal of net zero compared to divestment.
These steps build on work the organization has been doing for more than a decade to increasingly incorporate risks and opportunities associated with climate change into our decision-making. We developed a comprehensive program that ensures the assessment of climate change is embedded into our investment process. Our engagement and influence through proxy voting helps push our portfolio companies to improve their climate change practices. We are pressing the market for better standards and disclosure.
We believe that on the spectrum of perceived wrongdoings by corporations, a violation of human rights is one of the most severe and indefensible. A failure to address human rights issues is among the top reasons we will not invest in a company. We believe that companies that uphold human rights will perform better. We have been strengthening our systems and processes to capture not only direct but indirect exposure to companies that do not uphold human rights. This includes how those companies address potential issues in their supply chains.
It has been 25 years since parliamentarians decided to create our organization to serve as the investment manager of the CPP Fund. Our 2,000 world-class professionals, in nine global offices, are dedicated and purpose driven. They have a track record of investment performance and operational excellence. We are committed to growing the Fund and helping current and future beneficiaries achieve retirement security.
I am honoured to be in this position and excited about what the future has in store.
With that, we look forward to your questions.
Thanks very much, Chair.
Thank you both for being here today. Before I get into my questions, I'll just say, Mr. Graham, it's a pleasure to have a chance to ask you some questions. Thank you for being here. I had the pleasure of meeting with some of your representatives, who spoke a little bit about some of the topics you've already spoken to, and I look forward to having this conversation.
I will say I've had a number of former colleagues from one of my prior employers at the Boston Consulting Group join your company, join CPPIB, and I think you are fortunate to be benefiting from their expertise as well.
My first question is around the current context we find ourselves in globally. We've had the pandemic, we still have the pandemic, and we've had the war in Ukraine. Can you talk a little about how the pension plan has been affected by these macroeconomic forces and how you've had to adjust your management of the plan as a result?
Yes, I'll reinforce that we were very honoured, as one of only two pension plans that were invited to join the task force and be an architect of these disclosures.
The rationale for us wanting to be heavily engaged in being an architect is that the best interests of the contributors and beneficiaries are very well served by companies being increasingly more transparent. It's very difficult for us to undertake due diligence on the potential for 10,000 securities globally. Of course, we can do a lot of that hard work when we're making a direct investment and we're a significant investor in a company. Going into the due diligence process, we've developed a specialized tool kit for us to better understand the strategy of those companies and how they're moving forward to abate and decarbonize their operations.
If a significant component of the portfolio continues to be widely held across thousands of securities, we're dependent on disclosure and on that transparency, so it's an area where we've been actively involved. It's an area where we're continuing to be a thought leader and to push other organizations, particularly in areas that haven't necessarily been considered in the past.
We could talk about that a little later, if that question comes up around abatement. That means, basically, what the companies are doing that is very hard to decarbonize. There's cement and steel, for example. It's not just the quick wins. It's also those things that will be heavily dependent on innovation and technology.
As we talked about a little bit, we view the transition to net zero as an economy-wide transition. The whole economy has to move to net zero. It's not going to be a linear path. In industries like steel, aviation, transportation and concrete, barring really dramatic changes in consumer behaviour, there are opportunities to make these industries more green.
We've developed an internal framework called our abatement capacity framework to look at an opportunity, look at a company, and think about how much carbon we can take out of that company and how much can be removed with very little cost today, and then look at escalating prices of carbon and how much can be removed. Then there are often some that can't remove carbon without some technological innovation.
I think what's important here is that when we think about our investing in the companies—we call it our decarbonization strategy—we don't take a binary view that it's either all or nothing. Let's start going down the path and removing what we can, and what's economical today, and move as far as we can, but let's actually start going down the path.
We're looking at one investment recently where we could get 86% of the way there. We couldn't get the remaining 14% of the way there without some technological innovation, but the important thing is to actually start moving there today, as opposed to divesting because we can't get 100%.
Thank you very much, Mr. Chair.
Thank you, Mr. Graham and Mr. Leduc, for being here with us today, and congratulations, Mr. Graham, on the appointment. It's very important work, indeed, that you do.
I will continue with the line of questions that my colleague Mr. Blaikie had about your net-zero investment strategy. I'm very interested in green finance and very happy to hear that you were involved with the TCFD's work, so well done. It's very important work.
I want to talk about what we call the ISSB, the International Sustainability Standards Board. One branch will be in Montreal. That's very big news for Montreal and for Quebec. I'm very happy about that, but it's a game-changer—isn't it?—because for you and for the companies, this will allow companies to provide strategic information about their environmental impact and that's really what you're looking at to define what would be a green portfolio.
Could you tell us more about what the impact would be of having very good, robust standards on green finance?