News Analysis

Canada’s pension fund will punish ESG failings

by Dan Byrne on Nov 18, 2022

Canada’s pension fund showcases the strong relationship the country has with ESG. And when we contrast that relationship with its nearest neighbour, it seems even stronger again.

This week, the head of Canada’s biggest pension fund expressed a steadfast commitment to ESG investing and threatened to cut ties with any firms unwilling to jump on that wagon. 

This is good news for the leaders of any Canadian company with an established commitment to ESG and not-so-good news for the rest. 

It starkly contrasts with the United States, where ESG has been swept into polarised politics, and fiscal conservatives have outright rejected the concept.

What’s going on?

In Canada, as in the rest of the world, companies will publicly commit to specific ESG-related goals, and pension funds will often invest based on those goals

John Graham, CEO of Canada’s national pension fund (Canada Pension Plan Investment Board – CPPIB), has emphasised a no-nonsense approach to this kind of investing. 

If firms fall short or eliminate their ESG commitments, “then you have to use what governance tools you have to either seek change or we will sell at that point if we just don’t think it’s being taken seriously.”

His comments came at Bloomberg’s New Economy Forum in Singapore and carried heavy weight – considering he’s in charge of over CA$520 billion in investments made on behalf of around 20 million Canadians.

Were the comments expected?

Mostly, yes. There is significant political weight behind ESG in Canada

Last year, for example, the Canadian Net-Zero Emissions Accountability Act was passed. It codified the promise of “net zero by 2050” into Canadian law, meaning all parts of society now have a role to play, including investors and the boards of the businesses they support. 

CPPIB has already stated that it has no problem voting against any director with a questionable record in ESG. This doesn’t just mean individuals who openly reject the concept; it also means directors who simply failed to act in supporting it.

Two schools of thought

When it comes to this kind of aggressive, pro-ESG approach, there are usually two options: 

  1. Pension funds can divest from companies with a poor ESG record, or…
  2. Pension funds can retain their stake in these companies and try to bring about change using their position of influence. 

CPPIB remains committed to option 1 for the time being, which could earn it criticism. 

Experts, politicians and business leaders often consider option 2 to be easier on stakeholders. Funds can keep their investments and reap profits, businesses don’t have to change beyond their means, and they keep their pro-ESG influence at the shareholder level. 

Critics, however, will argue that option 2 is a pro-ESG stance in name only and ultimately achieves little.

What’s the broader context?

After Graham’s comments, the US-Canada border has never been such a clear dividing line regarding ESG. 

It separates a nation behind the concept from one that can’t make up its mind.

How the US compares to Canada

It’s important to note that ESG is a more de-centralised issue in the United States, so the feelings towards it can vary from state to state. 

Nevertheless, the loudest opinions currently come from right-wing politicians, who maintain they have no time for ESG if it threatens profits. 

Texas and Florida are two fine examples. Pension funds in both states have been directed away from ESG investments because those in charge believe it to be “woke capitalism.”

The phrase enjoys particular popularity with Ron DeSantis, the Florida governor, re-elected by a landslide this month and who may one day announce a candidacy for the presidency, giving him a chance to spread his message further. 

In summary

Canada’s national pension fund is steadfastly committed to upholding ESG values and will not hesitate to pull the investment plug on companies when necessary. 

It’s different from the United States, where fiscal conservatives have directed many pension funds to do the exact opposite.

ESG investing

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