Public pension plans need to refocus on returns
I recently attended a sold-out Canadian Club Toronto event at which John Graham, president and hief executive of Canada Pension Plan Investments, spoke about Canada’s “pension advantage.” In the Q&A, Graham quoted former prime minister Paul Martin, writing in 2017: “We were determined to serve one — and only one — policy objective” with the creation of the Canada Pension Plan Investment Board (CPPIB): “the health and sustainability of the CPP. For this reason, we gave the investment board a concise, uncluttered and very clear mandate and we prescribed it in legislation: ‘to maximize returns without undue risk of loss.’”
In Martin’s view, the “simplicity of this mandate” freed the CPPIB and its managers from giving any attention to “political considerations,” which can easily be bent to the concerns of activists, and allowed them to focus instead on pursuit of “the best possible financial strategies.” This has the effect of soothing markets. Most importantly, “pensioners can be reassured by the fact that the CPP will be used to benefit retirees — and only retirees.”
This argument that public pension plans should be value-neutral in their investing and focus only on bringing in the returns necessary to pay members’ pensions now and into the future is wholly persuasive. As fiduciaries, public pension plans have a duty to act impartially, focusing solely on the interests of their beneficiaries, who will one day become retirees and collect their pensions.
But, too often, this isn’t how such funds have been run. Over the past decade, maximizing financial return has increasingly taken a back seat to environmental and social goals. Along with other fiduciaries like banks, corporations and university endowment funds, public pension plans have pursued “political considerations” of the sort Martin warned against.
Their departure from the best possible risk-adjusted returns is the topic of a recently released report by InvestNow, the organization I lead. Titled Canadian Public Pension Plans: Putting Ideology Above Fiduciary Duty, the report looks at how two public pension plans — Alberta Investment Management Corporation (AIMCo) and Ontario Teachers’ Pension Plan (OTPP) — have prioritized “environmental, social and governance” (ESG) principles and ideological concerns more generally over and above returns and fiduciary duty.
The two plans studied are all-in on ESG, especially the “E” part of it. They have signed the UN Principles for Responsible Investment (PRI), linked staff compensation to climate performance and prioritized ESG considerations over traditional return metrics. Both organizations have reduced exposure to oil and gas. AIMCo models oil and gas as just five per cent of the global electricity energy mix by 2050, which is, to put it mildly, extremely unlikely, while OTPP has actively campaigned for decarbonization. Reducing carbon, whether through net-zero commitments or other investment strategies, is high on the ESG agendas of both plans.
To achieve decarbonization, Canada would need to drastically reduce its oil and gas production and consumption over a very short time, so financial institutions and investment funds that have made net-zero or decarbonization commitments have started restricting investment in and even divesting from oil and gas projects.
For an energy-producing country like Canada net-zero is a net-negative. Not to mention that the global economy the strategy envisions would be a catastrophe. Taking Canada out of the oil and gas equation would also be bad for the environment, since it would mean the oil and gas needs of an energy-hungry world would be met by petro-states that are much less environmentally responsible than we are.
CPPIB recently, if quietly, backed away from its net-zero commitments, perhaps signalling a return to the original vision Paul Martin described for it. All public pension plans in the “Maple 8” should change course, turn away from decarbonization and net-zero ideology, and get back to working towards the good of Canadian pensioners. Their failure to do so would be a disaster for all Canadians.
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