National Post (Latest Edition)

The Caisse should focus on Quebecers’ pensions, not ESG

- Jack M. Mintz

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.

 ?? CHRISTINNE MUSCHI FOR NATIONAL POST / FILES ?? A key issue facing the Caisse is its uneven applicatio­n of environmen­t, social and governance criteria, which could undermine the profitabil­ity needed to pay
Quebecer pensions, writes Jack M. Mintz.
CHRISTINNE MUSCHI FOR NATIONAL POST / FILES A key issue facing the Caisse is its uneven applicatio­n of environmen­t, social and governance criteria, which could undermine the profitabil­ity needed to pay Quebecer pensions, writes Jack M. Mintz.

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