The ABCs of the CPP

The ABCs of the Canada Pension Plan and its
Contribution to Climate Change: A Primer

If you are working in Canada and eighteen or older, you are an investor in the Canada Pension Plan.  For every pay period, a deduction is made that is invested on your behalf by the Canada Pension Plan Investment Board (CPPIB). This primer is written to help you learn about how your money is invested.

Friends of the Earth thanks the Ken and Debbie Rubin Public Interest Advocacy Fund for their generous support of this project made through the Ottawa Community Foundation.

We acknowledge the dedication of Larry Meikle, John Bennett, and Morgan LaManna in creating this primer and especially thank Toby Heaps at Corporate Knights for his assistance.

Did you know that your Canada Pension Plan (CPP) contributions are, in part, invested in fossil fuels that are significantly contributing to global climate change? Some of these investments are in coal (a major contributor to global warming, when combusted), and the process of fracking for oil and gas (a process that consumes great quantities of water then pollutes it, and has been linked to an increase in the frequency of earthquakes where it’s practised).

Investments in fossil fuel-related entities that contribute to the devastating effects brought about by global warming and pollution can now be considered to be high risk investments. Some jurisdictions are now litigating against energy utilities in their midst who, through their combustion of fossil fuels, are emitting significant amounts of pollution and greenhouse gases (GHG) that increase the rate of global warming. The CPP is risking Canadians’ contributions when it invests in utilities that are becoming increasingly-subject to such litigation.

In another example, the CPP has significant investments of your money in major insurance companies–the same insurers who are having to pay out billions in dollars in claims to homeowners and business people who have suffered devastating losses due to severe weather effects–flooding, tornadoes, hurricanes–themselves the consequences of a warming planet. Again, your contributions are unnecessarily being subjected to risk.

If you are contributing to the CPP, you should be very concerned by the risky nature of many of the CPP’s investments–they are investing for your future. Bad investment decisions made by the CPP today will put your future pension benefits in jeopardy.

 

What is the Canada Pension Plan Investment Board (CPPIB), and how does it function? In their own words:

“ The Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits in the best interest of 20 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, Sao Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At June 30, 2018, the CPP Fund totalled C$366.6 billion.

For more information about CPPIB, visit: http://www.cppib.com

 

On October 15, 2018, Canada Pension Plan Investment Board (CPPIB) issued a press release entitled: “Canada Pension Plan Investment Board Sustainable Investing Report Highlights Push For Board Effectiveness.” This document is essentially a summary of the Board’s more lengthy “2018 Report on Sustainable Investing” issued earlier in 2018.

The 2018 Report, CPPIB’s 11th., lists five new focus areas they will now take into account when considering future investments. They are:

  • Investee Board Effectiveness, including corporate governance and an emphasis on improving the gender composition of investee companies’ boards.
  • Climate Change
  • Water
  • Human Rights
  • Executive Compensation

The Report signals the CPPIB’s intention to expand its portfolio of renewable energy assets. While this is encouraging, there is no mention of the CPPIB divesting from some of their ‘dirtier’, past-century assets such as coal and fracking for oil and gas. This is a huge disappointment, as coal (and, in fact, all fossil fuels) contribute significantly to global warming while adding to the burden of air pollution. Investments in them carry enormous potential risks for the investors (in this case the CPPIB, which in essence is us), in terms of their being held responsible for the devastation their polluting assets cause, by litigation or other means.

 


Were you aware there are no investment restraints placed on the Canada Pension Plan Investment Board (CPPIB), allowing it to invest your CPP contributions in any way it sees fit?

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We as Canadians are the beneficiaries of the Canada Pension Plan, yet we have no say in how the Canada Pension Plan Investment Board (CPPIB) invests our contributions.

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Carbon, as carbon dioxide, is a major greenhouse gas contributing significantly to global warming, and climate change, yet the Canada Pension Plan Insurance Board (CPPIB) has investments in at least 35 coal companies globally.

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The Canada Pension Board Investment Board (CPPIB) suggests it would be unreasonable to expect them to divest themselves of all investments in fossil fuel companies, yet Ireland has just chosen to take this measure, in July 2018.

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Investments in fossil fuels have traditionally been profitable and secure investments but many major pensions funds are now moving away from them due to their significant contributions to climate change–yet the Canada Pension Plan Investment Board (CPPIB) has recently invested invested at least $5 billion in the fossil fuel industry, and is more concentrated in this industry than are other leading pension funds.

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Fracking to obtain oil and gas has become a contentious procedure due to the vast amount of fresh water the process uses, then leaves behind polluted. It’s also been linked to a rise in the frequency of earthquakes, yet in 2016 the Canada Pension Plan Investment Board (CPPIB) created a new fracking venture named Crestone Peak Resources, in which it holds a 97% interest. Why?

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The Canada Pension Plan Investment Board (CPPIB) announced on June 11, 2018 that it plans to issue Green Bonds, (also known as climate bonds), becoming the first pension plan in the world to do so. These designated bonds are intended to encourage sustainability, and to support climate-related or other types of special environmental projects.

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The Canada Pension Plan Investment Board (CPPIB)’s financing of fossil fuels, in particular coal and “dirty oil” such as that extracted from the tar sands, can lead to serious health problems. Asthma sufferers and other with lung issues are particularly vulnerable to the particulates released into the air when coal is burned, and dangerous hydrogen sulphide gas from oil and gas wells is released and inhaled.

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Property insurers are finding it increasingly difficult to provide property owners with affordable insurance in some locations due to the increased severity and frequency of severe weather events in recent years–everything from flooding to hurricanes, tornadoes and tsunamis. Given the risks insurance companies are exposed-to they are being viewed as a less-attractive and a higher risk investment than before, yet the Canada Pension Plan Investment Board (CPPIB) recently purchased part of the ailing U.S.-based giant AIG Canada, for $1.1 billion (U.S.).

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It will be challenging, but not impossible, to effect a change in the judicial mandate of the Canada Pension Plan Investment Board (CPPIB) that will mandate them to consider climate risk in their investment decisions. A change in the mandate of the CPPIB can only be made with the approval of the federal finance minister, and approvals from at least seven of the ten provincial finance ministers.

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The Canada Pension Plan Investment Board (CPPIB) has billions of dollars invested in real estate, financial institutions that lend to home builders and home buyers, and the insurance companies that insure these buyers. Two U.S. lenders went bankrupt in 2009 and 2010 leaving the CPPIB with a loss of over $2 billion and many more are likely to follow, given the recent increase in the frequency and severity of extreme weather events.

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While the Canada Pension Plan (CPP) may be pretty much immune from direct litigation, some energy companies are facing litigation over environmental degradation; cities are now holding fossil fuel companies accountable for impacts within their jurisdiction, and some citizens in the U.S. have joined class-action lawsuits against local polluters all greatly increasing the risk involved in investing in such companies, as the Canada Pension Plan Investment Board (CPPIB) routinely does.

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The Montreal Pledge was launched in September 2014; pension and investments fund managers from around the world who are signatories to the Pledge, including Canada, have agreed to measure, disclose, and reduce the carbon footprint of their investments, yet the Canada Pension Plan Investment Board (CPPIB) has failed to disclose to the public if they are meeting their commitment to the Pledge.

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Severe weather events are being noted with increasing frequency around the globe, with some areas being particularly vulnerable–the Texas Gulf Coast is one such area.The one-two punch of Hurricanes Harvey and Irma in Texas during the summer of 2017 caused damage of about $354 billion (CDN) to the hardest hit districts, West Houston And Galleria. The Canada Pension Plan Investment Board (CPPIB) is the pending owner of 2.8 million square feet of office space in these districts.

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World oil reserves will be depleted in a few decades, if oil demand continues its steady increase. Alternatives are available and the time to think about what we’ll use to replace oil is now, while there’s still time to phase-in alternative green energy sources such as wind, solar, geothermal, and more.

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In April 2016, a majority of the world’s countries, including Canada, met in Paris where they pledged to reduce their greenhouse gas emissions, with a goal of keeping the rise in global temperature below 2° Celsius compared with preindustrial times–and an aspirational goal of limiting the increase to only 1.5°. Canada and the UK are leading the way in encouraging other countries to phase-out or eliminate their coal-fired power plants, yet the Canada Pension Plan Investment Board (CPPIB) currently has $12 billion in coal assets, and is bidding on more!

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Quebec has been the leader in Canada, for recognizing the risks posed by climate change and including these risks in their investment decisions. The Caisse de Depots Quebec is the second largest pension plan in Canada, after the Canada Pension Plan (CPP). It has reduced the carbon footprint of its investment portfolio by 25%.

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Unlike Norway and Holland, there are no regulations in Canada to ensure that the Canada Pension Plan Investment Board (CPPIB) considers the risks due to climate change and global warming in making their investment decisions. The only influence the federal government has is through the appointment of Board members. Any changes to the CPPIB requires the consent of the federal government and seven of the provinces, a standard similar to amending the Constitution.

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A stress test is a way of assessing man’s impact on climate. What will happen if the global temperature increases by 1.5° C. ? By 2° C. ? More ? An increased average global temperature will hasten the melting of the polar ice caps and mountain glaciers, leading to a rise in sea levels that will inundate low-lying coastal areas and a number of South Pacific islands. No responsible investor, including the Canada Pension Plan Investment Board (CPPIB), should be investing in any commodity that, when used, will contribute to global temperature increase.

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According to the Carbon Tracker Initiative (CTI), “Stranded assets are now generally accepted to be fossil fuel supply and generation resources which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (ie., meet the company’s internal rate of return), as a result of changes associated with the transition to a low-carbon economy.”

We must discourage the Canada Pension Plan Investment Board (CPPIB) from investing in any assets that have the potential to become stranded.

 


The chief executive of the Canada Pension Plan Investment Board (CPPIB), Mark Machin, appeared before the House of Commons finance committee on June 11, 2018, informing the committee that the Board has been consulted by the federal government’s financial advisor about the possibility of the CPPIB investing in the Trans Mountain Pipeline. He told the committee, “There’s been no political pressure applied.”

It’s safe to assume that whenever the federal government goes to the CPPIB with a ‘request’ the ‘pressure’ is implied, as the government appoints the members of the CPPIB board.

Mr. Machin has said he thinks it ‘likely’ that he and his fellow board members will ‘take a look’ at the stalled pipeline project, because, “…there are a limited number of investment opportunities of its [the pipeline’s] magnitude.” Machin went on to tell the finance committee that, “…the Canada Pension Plan Investment Board has had both good and bad experiences with pipelines and will use its usual approach [editor’s emphasis] when deciding whether to put money into Trans Mountain.”

It’s time to tell Mr. Machin that the Board’s ‘usual approach’ (looking only at the financial quality of the asset) is insufficient.

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Pension funds in Europe that are heavily invested in utilities have been losing money, because many utilities have lagged-behind and have failed to adapt to renewable energy technologies fast enough. Some fossil fuel-burning power utilities in the U.S. have come under litigation from local municipalities, due to their toxic emissions. The Canada Pension Plan Investment Board (CPPIB) needs to assess these risks, and take them into account when considering investments in utilities.  

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What would a ‘victory’, for Canadians, our country and our planet look like? In part, it would see a Canada where Canada Pension Plan (CPP) assets are not exposed to unnecessary climate-related risks, as they are now. The CPP would be financially stable, and its investment arm, the Canada Pension Plan Investment Board (CPPIB) would be investing in a positive, sustainable, green future.

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Evidence of the impact of climate risk can be found across all sectors of the economy, geographies, and seasons. In June 2018, a Standard & Poors Global Ratings report stated, in part:

“…The effect [of severe weather events] on corporate earnings is becoming more visible. There is growing demand among both equity and fixed-income investors for better reporting and disclosure of climate-related risks. As such, we expect that investors will focus even more on determining which companies, sectors, and geographies are most exposed to climate risks, and how management teams plan to manage such risks.”

The Canada Pension Plan Investment Board (CPPIB) needs to be among those investors planning for how they will manage these risks.  

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Exxon -Mobil is the world’s largest oil company, based in the U.S. In 2015, former Canada Pension Plan Investment Board (CPPIB) CEO Mark Wiseman was quoted as saying: “I don’t think we’d go buy Exxon, but we might buy a piece of it if it were for sale.” Exxon-Mobil is a company that not only contributes to climate change directly–it has paid for research to be performed by climate deniers.

 


The next generation–those who are not yet contributing to the Canada Pension Plan (CPP)–have no say in the CPP’s value system. They will certainly have to pay more in contributions than the current generation is, and for that they will likely receive fewer benefits.

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To ensure the increase in global temperature remains below 2° C. and Canada meets its Paris Accord commitments, the Canada Pension Plan Investment Board (CPPIB) will need its portfolio to have a net zero carbon footprint.

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