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CPP Investment Board's Approach to Responsible Investing:


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CPP Investment Board's Approach to Responsible Investing:

  1. 1. CPP Investment Board’s Approach to Responsible Investing: ESG Matters! Babak Abbaszadeh Director, Stakeholder Relations June 26, 2007 – Charlottetown, PEI 2007 CAUBO CONFERENCE
  2. 2. <ul><li>Who we are </li></ul><ul><ul><li>Arm’s length Crown corporation created by federal and provincial governments as joint stewards of the CPP in 1997. </li></ul></ul><ul><ul><li>Accountable to federal and provincial Ministers of Finance and to Parliament through the federal Minister of Finance </li></ul></ul><ul><ul><li>A professional investment management organization operating in the private sector with public sector accountability </li></ul></ul><ul><ul><li>We manage the assets of the Canada Pension Plan not needed to pay current pension benefits </li></ul></ul>
  3. 3. <ul><li>Our Mandate </li></ul><ul><li>Under the Canada Pension Plan Investment Board Act, the objects of the CPP Investment Board are: </li></ul><ul><ul><li>To assist the CPP in meeting its obligations to contributors & beneficiaries under the Canada Pension Plan </li></ul></ul><ul><ul><li>To manage the assets transferred to it in the best interests of CPP contributors and beneficiaries </li></ul></ul><ul><ul><li>To invest its assets with a view to making a maximum rate of return without undue risk of loss , having regard to factors that may affect the funding of the Canada Pension Plan and its ability to meet its financial obligations on any given business day </li></ul></ul>
  4. 4. <ul><li>Our History – CPP Reforms </li></ul>Federal & Provincial Finance Ministers took Bold Action Crisis <ul><ul><li>$11 billion in and $17 billion out </li></ul></ul><ul><ul><li>Demographics: fewer workers to support pensioners </li></ul></ul><ul><ul><li>CPP was unsustainable </li></ul></ul>1996 Solution <ul><ul><li>Contribution rates were increased </li></ul></ul><ul><ul><li>Net cash inflows </li></ul></ul><ul><ul><li>CPP Investment Board formed to invest assets </li></ul></ul>1997
  5. 5. <ul><li>Our Governance Framework </li></ul>Independence Accountability
  6. 6. <ul><li>Our Governance Framework (con’t) </li></ul><ul><li>Independence </li></ul><ul><ul><li>Board selects CEO and management compensation </li></ul></ul><ul><ul><li>Investment decisions made by investment professionals </li></ul></ul><ul><ul><li>CPP Investment Board Act requires federal and provincial governments to amend </li></ul></ul>
  7. 7. <ul><li>Our Governance Framework (con’t) </li></ul><ul><ul><li>Accountability </li></ul></ul><ul><ul><li>Quarterly Financial Statements </li></ul></ul><ul><ul><li>Annual Report </li></ul></ul><ul><ul><li>Public meetings </li></ul></ul><ul><ul><li>Triennial review of CPP/CPPIB </li></ul></ul><ul><ul><li>Special exam every 6 years </li></ul></ul><ul><ul><li>Special audit provision </li></ul></ul><ul><ul><li>Extensive disclosure </li></ul></ul>
  8. 8. Financial Performance
  9. 9. <ul><li>Asset Mix </li></ul><ul><li>Financial Information – continued </li></ul>
  10. 10. <ul><li>About the CPP Fund </li></ul><ul><li>Financial Information - con’t </li></ul>13.1 13.1 6.3 10.3 -1.1 2.3 3.0 1.1 Investment Income ($ billions) 5.5 3.6 4.5 4.6 3.1 2.6 1.2 -1.3 CPP Contributions ($ billions) 15.5 35.0 16.7 98.0 2006 8.5 21.9 10.8 81.3 2005 17.6 15.6 14.9 70.5 2004 -1.5 5.3 2.0 55.6 2003 4.0 6.4 4.9 53.6 2002 7.0 4.1 4.2 48.7 2001 3.2 1.1 -0.2 44.5 2000 12.9 Rate of Return (annualized) (%) 48.1 Cumulative Investment Income ($ billion) 18.6 Asset Growth ($ billions) 116.6 Total Assets ($billions) 2007 CPP Fund (As at March 31)
  11. 11. <ul><li>Fund Growth Since 2000 </li></ul>
  12. 12. <ul><li>Projected Assets </li></ul>The Chief Actuary of Canada, in the 21 st Actuarial Report on the Canada Pension Plan , has projected that the CPP contributions will exceed annual benefits paid through 2021 providing 15 years in which excess CPP contributions will be available for investment.
  13. 13. Policy on Responsible Investing
  14. 14. <ul><li>Our Policy on Responsible Investing </li></ul><ul><li>Our approach </li></ul><ul><ul><li>Consistent with our investment only mandate: </li></ul></ul><ul><ul><ul><li>We look at environmental, social and governance (ESG) factors only as they affect the potential risk and return of investments </li></ul></ul></ul><ul><ul><li>We believe ESG factors can generally have a positive influence on long-term shareholder value </li></ul></ul><ul><li>Core elements </li></ul><ul><ul><li>Engagement </li></ul></ul><ul><ul><li>Research on ESG factors </li></ul></ul><ul><ul><li>Integration into investment management </li></ul></ul>
  15. 15. <ul><li>Our Policy on Responsible Investing </li></ul><ul><li>The Principle Underlying the Policy: </li></ul><ul><ul><li>As an owner, we are committed to encouraging companies to adopt policies and practices that enhance long-term corporate financial performance. </li></ul></ul><ul><ul><ul><li>Extensive review of emerging trends, standards, and initiatives on responsible investing led to adoption of the Policy on Responsible Investing in Oct. 2005. </li></ul></ul></ul><ul><ul><ul><li>We participated in the development of and were among the first group of signatories to the UN Principles for Responsible Investing established in 2006. </li></ul></ul></ul>
  16. 16. <ul><li>Implementing the Policy </li></ul><ul><li>Direct engagement </li></ul><ul><ul><li>We seek dialogue with senior executives, board members, investor relations, and/or the sustainability manager </li></ul></ul><ul><ul><li>Focused on: </li></ul></ul><ul><ul><ul><li>transparency on relevant ESG factors </li></ul></ul></ul><ul><ul><ul><li>assurance that the company has a plan to manage ESG issues in the short and long term </li></ul></ul></ul>
  17. 17. <ul><li>Implementing the Policy </li></ul><ul><li>Collaborative engagement </li></ul><ul><ul><ul><li>UN Principles for Responsible Investment </li></ul></ul></ul><ul><ul><ul><li>Carbon Disclosure Project </li></ul></ul></ul><ul><ul><ul><li>Enhanced Analytics Initiative </li></ul></ul></ul><ul><ul><ul><li>Extractive Industries Transparency Initiative </li></ul></ul></ul><ul><ul><ul><li>Canadian Coalition for Good Governance </li></ul></ul></ul>
  18. 18. <ul><li>Implementing the Policy </li></ul><ul><li>Engagement strategy </li></ul><ul><ul><li>Dialogue with public companies to encourage improved performance on and disclosure of ESG factors </li></ul></ul><ul><ul><li>Own on average 2-3% of shares outstanding of Canadian companies (0.05% for international) </li></ul></ul><ul><li>How we approach engagement </li></ul><ul><ul><li>Identify focus areas for engagement </li></ul></ul><ul><ul><li>Use both direct and collaborative approaches </li></ul></ul><ul><ul><li>Importance of proxy voting </li></ul></ul>
  19. 19. <ul><li>Implementing the Policy </li></ul><ul><li>Our engagement focus areas </li></ul><ul><ul><li>Key goal of engagement is transparency </li></ul></ul><ul><ul><li>Our engagement activities currently focus on key ESG issues in the public equity portfolio </li></ul></ul><ul><ul><li>Our current areas of focus: </li></ul></ul><ul><ul><ul><li>climate change </li></ul></ul></ul><ul><ul><ul><li>extractive industries </li></ul></ul></ul><ul><ul><ul><li>executive compensation </li></ul></ul></ul>
  20. 20. <ul><li>Implementing the Policy </li></ul><ul><li>Proxy voting </li></ul><ul><ul><li>Review and vote on proxies for all public equity holdings (over 2000 companies) </li></ul></ul><ul><ul><li>In the 12 months ended June 30, 2006, we voted at 2,366 meetings on 12,393 agenda items </li></ul></ul><ul><li>– 17.5% of votes were not in support of management’s recommendation </li></ul>
  21. 21. <ul><li>Implementing the Policy </li></ul><ul><li>Proxy voting - examples </li></ul>Blockbuster (first to receive majority support) , Verizon Communications, Occidental Petroleum, Coca-Cola, Yum! Brands, Time Warner Say on Pay Ford Motor Company, General Motors, Exxon Mobil, Wells Fargo & Company, Allegheny Energy, Dominion Resources Report/Adopt Greenhouse Gas Emissions Goals Wal-Mart, Wendy's Int’l, Kellogg Co., Allegheny Technologies, Amgen, CVS/Caremark, Comerica, Safeway, Dillard’s, Comcast, R. R. Donnelley & Sons, Loblaws Prepare a Sustainability Report
  22. 22. <ul><li>Implementing the Policy </li></ul><ul><li>Integration of ESG factors </li></ul><ul><ul><li>Passive equity: Review the portfolio and consider materiality to identify engagement focus areas </li></ul></ul><ul><ul><li>Active equity: Integration of ESG factors into quantitative and fundamental research </li></ul></ul><ul><ul><li>Private Market Investments (incl. infrastructure & real estate): Address ESG factors in due diligence </li></ul></ul><ul><ul><ul><li>For example, climate change considerations with AWG plc, a UK water utilities company </li></ul></ul></ul>
  23. 23. <ul><li>Summarizing Key PRI Activities in 2006-2007 </li></ul><ul><ul><li>Completed the first UN PRI benchmarking survey </li></ul></ul><ul><ul><li>Joined Extractive Industries Transparency Initiative </li></ul></ul><ul><ul><li>Announced engagement focus areas </li></ul></ul><ul><ul><li>Met with several Canadian mining companies regarding human rights concerns abroad </li></ul></ul><ul><ul><li>Sponsored the Carbon Disclosure Project in Canada </li></ul></ul><ul><ul><li>Recognized by the Social Investment Organization </li></ul></ul><ul><ul><li>Review of public equity portfolio with regard to Sudan </li></ul></ul><ul><ul><li>Letter to tobacco companies regarding WHO Convention on Tobacco Control </li></ul></ul>
  24. 24. <ul><li>Conclusion </li></ul><ul><li>How we define success? </li></ul><ul><ul><li>We believe active ownership through engagement and integration leads to lower risk and/or higher returns over the long-term </li></ul></ul><ul><ul><li>Short-term milestones include: </li></ul></ul><ul><ul><ul><li>increased research on ESG factors raising understanding of risks and opportunities </li></ul></ul></ul><ul><ul><ul><li>increased company transparency on ESG factors </li></ul></ul></ul><ul><ul><ul><li>adoption of standards and practices by companies likely to lead to improved performance </li></ul></ul></ul>
  25. 25. <ul><li>Conclusion </li></ul><ul><li>Future direction of responsible investing </li></ul><ul><ul><li>Collaborative initiatives facilitate institutional investor action </li></ul></ul><ul><ul><li>Transparency on ESG factors, such as climate change risk, will lead to improved analysis and integration into investment management </li></ul></ul><ul><ul><li>For our part, we have a commitment to engagement to encourage leading companies and work with laggards to improve performance </li></ul></ul>