Canada-China Relations Committee on May 8th, 2023

[Dr. Ari Van Assche]

Do consumers care? Absolutely. We are seeing with the emergence of ESG investments that consumers and investors care increasingly about these types of issues. I think also that pension funds, as we've been hearing from the different witnesses, are also taking these issues more into account. Of course, there is much more that can be done.

One important issue, of course, is that investing in China can also be very much related to sustainability and can be very much ESG-confined. A lot of investment that goes into China can actually help in addressing development issues as well, so that's certainly something important to note as well.

Concerning legislation, I think the trend that we are seeing is going in the right direction. I think it is good to see that in Canada, in the United States and in lots of European countries, there is a move to push companies to look beyond what is happening within their firm boundaries toward where they can have an influence. I think this is a positive trend.

I think we still need to be thinking a bit further about the implications. For example, if we went further into making countries liable for what is happening in a supplier three steps away, it would be very difficult for companies to address. This could lead to companies reacting in a way that we might not want to see.

For example, would we want to see companies just deciding that they're going to be cutting their supply chains completely out of the least developed countries, because it's just very difficult to understand what is going on there? This is probably not something we would like to do. There is an important role for Canada and other countries in ensuring that the least developed countries can get integrated into the global economy.

We need to be thinking very carefully about cost issues, coping mechanisms that countries might be adopting, but I do think the trend is going in the right direction.

[The Chair, Liberal, Ken Hardie]

Thank you, Mr. Van Assche.

We are now going into our second round. I think to wrap things up in time for our in camera session, we'll go to Mr. Hoback, Mr. Oliphant, Mr. Trudel and Ms. McPherson. That will round this off.

Mr. Hoback, you have five minutes or less.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Chair. Thank you to the witnesses for being here.

Ms. Glick, I want to go through a few questions in regard to ESG. In your fund, ESG is a major factor in your investment decisions. What's your return on investment in your fund compared to other funds that don't necessarily have a heavily weighted ESG factor?

[Paula Glick]

I can't answer that right now. I would say that we are very competitive. I think we do very well. I have no concerns about our performance relative to those that do not consider ESG.

[Randy Hoback, Conservative, Prince Albert, SK]

Would you have goals that go around 10%? Is that fair enough?

[Paula Glick]

That's not exactly how it works, but we definitely—

[Randy Hoback, Conservative, Prince Albert, SK]

I'll move on to the next question. In the panels we had before, they talked about ESG being a different lens in Canada or the western world versus Asia. Do you see that as being quite common in the industry? Is that opinion something that you share?

[Paula Glick]

There is a certain level of transparency that's easier to have over in this part of the world than it is over there. There are generally different kinds of expectations and also different governance structures. There are all sorts of differences in cultures and how businesses are run.

In my particular case, I can afford to be picky. I have a very specific approach that's very concentrated, and I don't have the same issues that very large pension plans with massive pools of capital have in terms of diversifying their assets.

I also believe that investing in dictatorships adds to risk. I'm looking at it the other way, not from the perspective that diversifying gives a better risk-adjusted return, but rather that—

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you. I have only five minutes and I want to get to Mr. McLennan with the same questions.

When you're looking at your fund and you're using your ESG criteria for Teachers', do the criteria change based on the country you're investing in?

[Stephen McLennan]

No, not generally. What we'll do is look at every investment that we're considering with the same ESG lens.

What we will do, though, is focus on areas by sector or on other considerations that we think might involve more material risks associated with the particular characteristic in a sector. For instance, if it's a heavy industrial sector, one would think that there would probably be more health and safety considerations that you would need to spend a bit more time on.

[Randy Hoback, Conservative, Prince Albert, SK]

In that sector, for example, it's not that you wouldn't invest in it; you just may want more of a premium or more of a return on investment in that sector, versus a sector that has a very simple and easy ESG risk to it.

[Stephen McLennan]

Potentially, I think it really comes down to the risks that have been identified and whether we think the company will be able to remediate those risks and/or incorporate that into their overall business plan.

Again, I think that when we take a step back and think about ESG more broadly, we look at whether it is really a risk that will impact both the financial returns of the business and the overall risk profile of the business. We do think that with the long-term lens we need to apply to our investment approach, we need to be thoughtful around how those ESG risks are going to affect the overall risk-return profile of the business. It really depends on the circumstances.

[Randy Hoback, Conservative, Prince Albert, SK]

I get that.

You get two companies in the same sector in the same country, say, and one is good on ESG and one is not. What would be the difference, if you're invested in both of them, that you would offer those investments at? Would it be a premium of 4% or 5% for the company that is good on ESG versus the one that isn't? How do we get that value into the marketplace?

Also, as we look at investments in China, what type of premium would you need in a Chinese investment versus a similar investment in Canada?

[Stephen McLennan]

Yes, I think the interesting question.... I think that's a very difficult exercise to calibrate. I don't have a specific point estimate that says company X needs this type of return and company XYZ+ needs an extra return premium with a specific number. Directionally, though, I would agree that companies that have less risk, be that ESG or financial risk, would require a lower expected return.

[Randy Hoback, Conservative, Prince Albert, SK]

How do you do transparency if it's mandatory for you to make every investment outside of Canada transparent? If you had to identify and say, “This is where we put our money”, would you object to that or be opposed to that? Would transparency bother you?

[Stephen McLennan]

Well, look, we'll abide by all Canadian legislation related to reporting and we'll use that as our guiding light in terms of what we would look to disclose.

[Randy Hoback, Conservative, Prince Albert, SK]

Dr. Van Assche—if I mispronounce your name, I apologize—do you think transparency is a tool that's required in the Canadian sector? I know that we've talked about legislation, but one of the panellists from the last panel said that's too broad an instrument and thought that transparency and the social conscience that would come with that would be very adequate. Do you see that in the same lens?

[The Chair, Liberal, Ken Hardie]

Could we have a very brief answer please, Mr. Van Assche?

[Dr. Ari Van Assche]

Transparency of course is going to make it easier to find out what companies are doing, so we always have to be careful that we're not leading companies toward having to take coping mechanisms in a different way that has other implications. Transparency, generally speaking, can be very good.

[The Chair, Liberal, Ken Hardie]

Thank you very much, Mr. Hoback.

We'll now go to Mr. Oliphant for five minutes or less.

[Rob Oliphant, Liberal, Don Valley West, ON]

Thank you, Mr. Chair.

I have two sets of questions, with the first one really aiming probably towards the teachers' pension fund.

I want to dig a bit into the decision to pause direct investments in the businesses and private assets in the PRC. What was the process in reaching that decision, and what do you think the ramifications are? What does that mean? What is a “pause”?

[Stephen McLennan]

A pause is really us pausing future direct investment activity in that country as it relates to our private investing portfolio.

The reason for the pause was really driven by our assessment that the risk landscape in China has substantially changed over the last two to three years. In U.S.-China relations or Canada-China relations, the shifting economic trends in a post-COVID world as well as some of the domestic regulatory changes that were made in China all signalled to us that there was a change in risk profile. Our key mandate, frankly, is to deliver on our risk-adjusted return goals. As part of that, as risk increases, we need to evaluate how much exposure we want to have in China from a top-down perspective. That really led to the decision to pause that particular set of activities.

[Rob Oliphant, Liberal, Don Valley West, ON]

I'm just wondering whether Mr. Garant from BCI had the same analysis and whether or not they're considering a pause on direct investment.

[Daniel Garant]

Thank you.

We actually made the same decisions at BCI.

[Rob Oliphant, Liberal, Don Valley West, ON]

Thank you very much.

I want to shift a little bit. It's really just me trying to understand a little bit about the issue of indirect investments and index funds, how investment decisions are made there and what kind of lobbying activity goes on to encourage index funds to invest in certain areas.

We talked earlier about the U.S. entity list. We've talked about what companies may be on that in the U.S. It may be Ms. Glick whom I want to talk to because of her background.

How do index funds make decisions? What is the role of lobbying that could happen? How do we have transparency when it comes to indirect investments, particularly in index funds, which then may find their way into pension funds or other large public assets?