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View Peter Fonseca Profile
Lib. (ON)
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.
John Graham
View John Graham Profile
John Graham
2022-06-09 16:21
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.
Thank you.
View Peter Fonseca Profile
Lib. (ON)
Thank you, Mr. Graham and Mr. Leduc. Thank you for the work you do on behalf of Canadians' pensions. I know the members will have many questions for you.
We are going into our rounds of questions. In this first round, each party will have up to six minutes to ask questions.
We are starting with the Conservatives, and I have MP Chambers up for six minutes.
View Adam Chambers Profile
CPC (ON)
Thank you very much, Mr. Chair.
Welcome to both Mr. Graham and Mr. Leduc. It's a pleasure to have you with us.
Mr. Graham, since it's our first time meeting, congratulations on your appointment. Obviously, you should be very proud to lead this important organization on which many Canadians rely for retirement security, but also one that is looked very highly upon throughout the world with respect to pension plans.
In your opening statement, you mentioned a bit about structure and governance and a bit about independence. I wonder if you wouldn't expand a little about how important independence is with respect to investment decisions. In this political climate, there are often many calls for pension plans and others to change their investment decisions based on some political factors, as opposed to sound investment decisions or long-term horizons, as you've laid out.
John Graham
View John Graham Profile
John Graham
2022-06-09 16:30
I would describe the independence as essential. We have a single fiduciary duty, and that is to maximize return without undue risk of loss, taking into account the factors that impact the funding of the plan. We have 2,000 professionals in the organization who are focused on delivering investment returns and the best investment returns for the contributors and beneficiaries.
That independence allows us to be a global investment organization. We are a pension plan. We're an investment organization. We're not a sovereign wealth fund. We're able to make investment decisions that are in the sole best interests of the contributors and beneficiaries.
View Adam Chambers Profile
CPC (ON)
You just mentioned sovereign wealth funds. I understand that the CPPIB has an exemption in the U.S. from how it would look at sovereign wealth funds with respect to independence
Can you give us a brief discussion about why that distinction is important to maintain that exemption?
John Graham
View John Graham Profile
John Graham
2022-06-09 16:31
CPP Investments is an exempted investor in the U.S. under CFIUS. That allows us to be active in lots of different markets on the private and the public side, and in many ways be treated like a domestic investor in the U.S. without going through a national security review. The U.S. is our biggest market. It's the largest market in which we invest. It allows us to operate very much as a domestic investor.
View Adam Chambers Profile
CPC (ON)
A metric the government often likes to use—governments of all stripes, by the way, over the last number of years—is this notion of what it calls “net debt-to-GDP”. That measure includes the assets of the CPP.
Does that metric imply that there is a bit less independence between the CPP and government? Does that potentially pose a bit of a problem, as we talk about these ratios and how well Canada's doing, if we do get an exemption on the basis of the independence?
John Graham
View John Graham Profile
John Graham
2022-06-09 16:32
Our independence is pretty clear, and the funds are there for the sole purpose of paying out benefits. They are segregated funds.
With respect to some of the specific accounting rules on how they get accounted for, I'm actually not that familiar. The funds that CPP Investments manage are there solely to pay benefits.
View Adam Chambers Profile
CPC (ON)
Our position would be that those assets are not to be used or are available for government and for pensioners.
This may be a more of a general question. Large and passive ETFs now control a significant number of voting securities and publicly traded securities across the world, but in particular in North American markets.
Do you believe these ETFs should continue to have the ability to vote at shareholder meetings and exercise a significant amount of influence? I'm thinking about some of the political influence, or the political winds that sometimes blow, that these large ETFs can now implement on corporate entities across North America.
John Graham
View John Graham Profile
John Graham
2022-06-09 16:33
Maybe I'll share how we think about voting our proxies, and we actually publish on our website our principles for voting our proxies. As an active manager, which we are, we do think it is important as a fiduciary to vote the proxies.
We're very clear on what our policies and what our principles would be, and they're all grounded in value creation. They're all grounded across different metrics, different categories, but all really focused on areas where we feel it drives value and drives long-term value for companies.
I won't comment specifically on the ETFs, but for us as an active manager, we do think it is important that we vote our proxies, and we're very transparent on our website as to how we're going to vote.
View Adam Chambers Profile
CPC (ON)
Thank you very much.
I have one final question in my last 30 seconds. Obviously, there are lots of critics in this discussion between active and passive investment. There are some pension plans in the U.S. that primarily use a passive strategy. Can you just talk very briefly about how you manage personnel costs and maybe how you benchmark personnel costs to know that Canadians are receiving full value for active management?
John Graham
View John Graham Profile
John Graham
2022-06-09 16:35
Yes, it's an important question for sure as we think about active management. As I said in the opening remarks, active management is not the low-cost path. In our view, it is the path that drives the most value, and we're here to maximize return without undue risk of loss for the contributors and beneficiaries. We certainly take the perspective and really take the approach that every dollar that we spend on expenses is a dollar that's not in the fund to invest.
When the decision was made to pursue active management, there was a view that CPP Investments would have certain comparative advantages. We have scale. We have time horizon. We have certainty of assets, and these would allow the organization to compete in the global capital markets. To date that's been a successful strategy. Since the inception of active management, we delivered $41 billion of dollar value added, as we would call it, and those are funds that are in the portfolio now that wouldn't be there if we didn't pursue active management.
As we think about expenses, we think about it very much from a return on investment perspective, and we think about how we need to allocate our internal resources, allocate them towards value-added activities to maximize the value added and maximize the return.
View Adam Chambers Profile
CPC (ON)
Thank you, Mr. Graham.
View Peter Fonseca Profile
Lib. (ON)
Thank you, MP Chambers and Mr. Graham.
Now we go to the Liberals. We have MP Baker for six minutes.
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