The canada pension Plan Investment Board believes it is doing the right thing by introducing a new responsible investing policy that emphasizes “engaging” companies. What the board is actually doing, charges the Canadian Taxpayers Federation, is opening up the pension fund to political interference.

The controversy started with a relatively quiet announcement from the CPPIB that it had developed a new policy, the Policy on Responsible Investing. The CPPIB says the policy “reflects the next step in the continuing evolution of our commitment to disclosure and the manner in which we invest the CPP funds entrusted to our care.”

That next step includes using its ownership position in more than 1,800 companies to encourage improved performance on and disclosure of environmental, social and governance factors. The ultimate step is improved investment, says Ian Dale, vice president of communications at the CPPIB. “We are a long-term, buy-and-hold investor. Given that, engagement makes sense totally from an investment point of view. It’s a broadening of risk factors.”

Communications manager John Cappellitti adds: “The new policy looks at social, environmental and governance [factors] and the impact on investment. It is implied that if [one of these factors] has an impact on society, it will have an impact on investment.”

What it will have an impact on, the CTF contends, is the arm’s-length relationship the fund has with government. In a presentation to the Canadian Pension and Benefits Institute in Toronto last month, CTF federal director John Williamson said: “This is not a role our pension funds should take. If we go down this path, federal and provincial politicians could use these funds to help their economies develop. We need to put our savings in a box that can’t be touched.”

Quite simply, he says, the Policy on Responsible Investing is “bad policy.”

Nothing could be further from the truth, maintains Dale. The governance model put in place by the federal government and the provinces calls for professional money managers to operate outside of political reach. “The model,” he says, “is a balance between accountability and independence.”

Not surprising, Ethical Funds Co. and the Social Investment Organization concur. Indeed, Ethical Funds, Canada’s original and largest manager of socially responsible mutual funds, was quick off the mark to condemn the CTF for its short-sightedness and praise the investment board for its vision. “The CPP should be lauded for embracing sustainable investing and taking reasonable steps to ensure that the companies it invests in are responding to key environmental, social and governance challenges,” says Bob Walker, vice president of sustainability for Ethical Funds.

Eugene Ellmen, executive director of the SIO, whose members serve more than half a million depositors and investors in Canada, says his organization welcomes the investment board’s new policy. “Investment analysis should incorporate environmental, social and governance factors to the extent that they affect long-term risk and return,” he says.

Impact on decisions

It’s unclear how those considerations are factored into investment decisions. The investment board’s policy, which follows on the heels of two previous policies, the Social Investing Policy and the Proxy Voting Principles and Guidelines, continues a tradition established with the earlier policies. The bottom line is the CPPIB will not screen out particular sectors such as tobacco, alcohol, military production nor companies with poor human rights records.

So, what will it do? As a passive investor — managing a fund of almost $92 billion — the CPPIB is not actively picking stocks. But it is looking to the future, a future that includes a doubling of the fund in less than 10 years. To ensure the brightest possible investment future, says Cappellitti, the policy outlines how companies can be engaged to do better in three critical areas. Engagement could involve proxy voting, working with other like-minded groups to effect change over time and promoting disclosure.

Exactly how this will be done is unclear. It would seem that the investment board itself isn’t certain what it means by “responsible investing” and is looking to others outside Canada for help.

“We are participating in a group of institutional investors from around the world who are examining, among other things, environmental, social and governance factors, and they, too, are using the ‘responsible investing’ label. The objective of the group is to define a common understanding and a set of principles for responsible investing that fiduciaries can support,” the investment board states in material developed to explain the new policy.

@page_break@In the meantime, the CPPIB’s Policy on Responsible Investing remains in effect. IE