OTTAWA – The federal Liberals are going to bat for the Canada Pension Plan Investment Board (CPPIB) amid ethical concerns over its investment portfolio.
“We expect the CPPIB, like other Crown corporations, to live up to the highest standards of ethics and behaviour and that is, in fact, exactly what it is doing,” said Finance Minister Bill Morneau during question period Monday in the House of Commons.
The New Democrats challenged Morneau this week to weigh in on new ethical questions surrounding the investment portfolio of the arms-length CPPIB – which manages hundreds of billions of dollars worth of Canadians’ retirement savings.
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NDP MP Charlie Angus pressed Morneau for his opinion on CPPIB’s holdings in a tobacco company, a military weapons manufacturer and firms that run private American prisons. The prison operators and their facilities are seen as beneficiaries of the Trump administration’s controversial detention of asylum seekers and, in some cases, their children.
On Monday, Angus demanded Morneau explain whether he thought CPPIB’s investments in “cigarette companies and privatized prisons” met a “credible standard of corporate investment” for the CPP.
Morneau replied that the pension manager, which oversees more than $366 billion of CPP’s net assets, lives up to the “highest standards of ethics and behaviour.”
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Spoiler alert: The Canadian Press Baloney Meter is a dispassionate examination of political statements culminating in a ranking of accuracy on a scale of “no baloney” to “full of baloney” (complete methodology below).
Morneau’s statement on its own earns a rating of “some baloney” – it’s mostly accurate but more information is required. Here’s why.
CPPIB’s holdings in private U.S. prison operators CoreCivic Inc. and the GEO Group Inc. grew considerably between August 2017 and August 2018.
Over that period, the number of GEO Group shares held by CPPIB increased nearly 13-fold to a value of US$4.2 million, while its shares of CoreCivic more than doubled to a value of US$1.76 million, according to U.S. Securities and Exchange Commission filings. CPPIB’s holdings in the prison companies were made public in a report last week by the Guardian newspaper.
CoreCivic and GEO Group are expected to receive major business boosts because of the Trump administration’s approach to dealing with asylum seekers. The policy has led to the U.S. government’s highly contentious detention of parents and their children.
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Michel Leduc, CPPIB’s global head of public affairs and communications, said the shares in the two prison companies were acquired through an algorithm that captures more than 3,000 companies as a way to diversify the fund’s portfolio.
“I want to be crystal clear about this: no CPPIB employee made a decision … to invest in those two companies,” he said in an interview, before noting that many mutual funds and pension plans in Canada likely contain shares in the prison firms as well.
He added that CPPIB is an active manager in its major investments in areas like ports, electricity grids, toll roads and shopping centres. But the fund tends to be passive when it comes to its smaller holdings in publicly traded companies.
Due to CPPIB’s size – it’s one of the 10 largest retirement funds in the world – the value of the prison company shares make up only 0.001 per cent of its total investments, he said.
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The organization, Leduc argued, takes pride in its very high standards when it comes to ethical, environmental and social considerations. CPPIB also follows a strict policy of only investing in businesses that would be lawful if they operated in Canada.
“The CPP Investment Board is seen around the world as one of the most ethical institutional investors on the planet,” he said.
After Morneau defended the CPPIB on Monday in the House of Commons, Angus criticized him the following day: “Could the finance minister explain what is it about privatized American prison camps that he thinks represents any kind of ethical investment standard?”
In his response Tuesday, Morneau appeared to tone down his position on the matter.
“All Canadian Crown corporations, all Canadian government institutions are expected to live up to the highest standards of ethical behaviour and corporate governance. That includes the Canada Pension Plan Investment Board,” Morneau said.
“This is important. We monitor it. We stay on top of it.”
WHAT THE EXPERTS SAY
Many experts credit CPPIB for having a very strong model when it comes to responsible investing. But they argue it could go even further if it truly wanted to avoid making gains from certain types of businesses.
Tim Nash, a financial planner and founder of Good Investing, questions whether the for-profit U.S. prisons comply fully with Canadian laws because of the related concerns around human rights.
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He recognizes CPPIB is the Canadian leader on sustainable investment policies. But he also argues it’s not the highest ranked globally.
“In this specific case, I would argue there is a breach of those policies and that, in fact, they are not living up to those highest standards with the inclusion of these companies within the investment portfolio,” said Nash, who added the controversial nature of these prison operators – and the possibility of lawsuits – raises the risk level of the investment.
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“As far as I can tell when it comes to CPPIB’s specific investment policy, they should not be owning these companies.”
He said CPPIB could easily adjust its approach to omit some types of companies – without sacrificing financial returns.
Lisa Kramer, a University of Toronto finance professor, said so-called ESG investing principles, which are followed by CPPIB, are part of an emerging area that’s still not well defined. ESG stands for environmental, social and governance.
“Socially responsible investing is often in the eye of the beholder depending on what principles one holds dear to her own heart,” said Kramer, an expert on behavioural finance.
“It can be very difficult to adopt an investment strategy that makes everybody happy.”
Tessa Hebb, a Carleton University expert on responsible investment, credits CPPIB for having a very good model of responsible investing.
But Hebb stressed there’s a difference between responsible investing and ethical investing. Responsible investing makes a business case for investments and helps investors avoid riskier decisions.
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Ethical standards, on the other hand, are far more subjective, she said.
“It’s interesting that Minister Morneau would use the term ethics,” Hebb said. “If he had said that they were one of the top responsible investors – absolutely.”
In this case, Morneau said CPPIB is living up to the “highest standards of ethics and behaviour” as he responded to a question about its investments in U.S. prison companies.
But while experts say CPPIB is viewed in many ways as a leader in responsible investing, they argue determining ethical standards depends on an individual’s views and can vary greatly.
For that reason, Morneau’s statement rates “some” baloney.
The Baloney Meter is a project of The Canadian Press that examines the level of accuracy in statements made by politicians. Each claim is researched and assigned a rating based on the following scale:
No baloney – the statement is completely accurate
A little baloney – the statement is mostly accurate but more information is required
Some baloney – the statement is partly accurate but important details are missing
A lot of baloney – the statement is mostly inaccurate but contains elements of truth
Full of baloney – the statement is completely inaccurate