National Post (Latest Edition)
The Caisse should focus on Quebecers’ pensions, not ESG
Eyebrows went up in the oil-producing provinces when Quebec’s pension fund, the Caisse des dépôt et placement, recently announced that after 2022 it will no longer hold oil and gas company shares. At year’s end 2020 its investments included $550.6 million in Canadian Natural Resources and $447.9 million in Suncor (and a quite small one of $5 million in Imperial Oil, of which I am a director).
Leave aside Alberta and Saskatchewan’s resentment that the much-maligned petroleum industry’s taxes help fund equalization payments going to Quebec: Westerners know they have been treated as a cash cow. And, in this case, it’s nothing personal: the Caisse is dropping all fossil-fuel investments, not just in Canada.
A more important issue is the Caisse’s uneven application of environment, social and governance (ESG) criteria, which could undermine the profitability needed to pay Quebecers’ pensions. Like other funds, the Caisse is pulling the rug out from under profitable fossil-fuel companies yet ignoring other ESG issues, such as human rights, corruption and other reputational issues that could easily lead to portfolio losses.
For the first six months of this year, the Caisse’s investment in equities has yielded an unremarkable 12.1 per cent return (including dividends), substantially worse than the TSX composite return of 18 per cent. While it earns good returns on private equity, the Caisse’s average annual return on its public equity portfolio was 9.5 per cent for the years 20162020, a half percentage point below its benchmark. And, as reported recently in the Logic, between June 30 and Sept. 23 of this year it lost over a third of its US$480 million investment in Chinese companies listed in the United States.
While evidently very concerned about fossil-fuel investments, the Esg-conscious Caisse takes a more carefree attitude to some murky Chinese companies.
Based on its annual report, I estimate that it held roughly $3.5 billion in publicly traded securities issued by Chinese companies at the end of last year. Many of these Chinese companies, though listed in New York, Shanghai or Hong Kong as mixed public-private enterprises, are closely aligned with the Chinese government. A case in point are the subsidiaries controlled by Huijin Investments, which is closely related to the State Council. At the end of 2020, the Caisse was knee-deep in Huijin, with $90 million held in eight companies, including the Industrial and Commercial Bank of China (down 10 per cent so far in 2021), Agriculture Bank of China (down five per cent), Bank of China (almost flat), and China Construction Bank (down five per cent).
Pension funds should be careful with their investments in state-owned enterprises (SOES), which may work mainly to further the aims of the government controlling them. With hefty state support, many of these SOES have become some of the largest companies in the world. Some are playing a major role in China’s beltand-road initiative in Asia, which strategically broadens China’s power but may not be the best available investment for Quebec’s pensioners. Does the Caisse really want to partner in companies like the China Construction Bank with its US$33 billion in funding for belt-androad development?
Of even greater concern are companies tagged as security, human rights and corruption risks. In 2020, the Caisse held $250 million in China Mobile, which has been blacklisted by both the Trump and Biden administrations. China Railway Construction (a Caisse investment of $11 million) has been sanctioned by the World Bank for corruption. CNOOC (with $10 million of Caisse money) has been blacklisted by the Biden administration for its close ties to the Chinese military. Investments in some Chinese companies, like property developer Evergrande and China Education Group, have also become risky as China’s leader, Xi Jinping, ties Chinese companies closer to the Communist Party.
How do these Chinese investments compare to Caisse investments in Canada’s oil and gas sector? This year to Oct. 1, CNRL shares had risen 52 per cent, Suncor’s 24 per cent. Had the Caisse sold these investments at the end of 2020, it would have lost out on a good profit. Luckily, it held on to them. But it will soon sell them off anyway for ESG reasons — even though many analysts believe that oil and gas shares will continue to provide healthy returns in the near term as energy shortages grow due to a lack of oil and gas investment.
Some argue that fossil fuels are not sustainable in the long run and so should be divested today — even though they are very sustainable in the short run. As late as 2040, the International Energy Agency predicts, fully 73 per cent of energy demand will continue to be for coal, oil and gas. If North American resource development grinds to a halt, other countries will fill the market need, including many with very questionable human rights records.
Investors should certainly reward companies with realistic plans to achieve what they consider important ESG goals. Between 2011 and 2019 Canada’s oilsands sector reduced the carbon intensity of its output by 22 per cent. Its five largest oil companies have committed to net-zero emissions objectives for 2050 that will require big investments in biofuels, hydrogen and carbon, capture in storage. Despite activist rhetoric, such investments could end up paying well.
Institutional investors like the Caisse need to rethink their investing strategies. Applying ESG in an erratic manner that weakens investment performance does their pension plan members no favours. In fact, if the best interests of members are paramount, ESG investing aimed at long-run sustainability is far too arbitrary anyway.