Value Killers at the CPPIB

Commentary, Workplace, Frontier Centre

Do you think that the people who managed the Iraqi oil-for-food fiasco should have input into your pension? Do you believe that environmental radicals should have a say, too? The investment board that manages the Canada Pension Plan’s provident fund — which is meant to keep down contributions for the young and the unborn as the Baby Boomers strain the system — seems to think so.

This week, Don Raymond, senior vice-president, public market investments, for the Canada Pension Plan Investment Board (CPPIB), seemed to align it firmly with those who want to impose the tightening bonds of corporate social responsibility (CSR) on Big Business.

Critics of the CPPIB have always been concerned about the possibility of government looting. As Bill Robson, head of the C.D. Howe Institute, noted in a paper last summer, “protecting provident funds from political direction is a task that never ends.” But the threat goes beyond merely using investments for political objectives. It includes importing the political Trojan horse of CSR, which, as Milton Friedman pointed out long ago, is a thoroughly subversive doctrine.

The growing clout of CSR mirrors a shift of political power to unelected environmental non-governmental organizations, who draw much of their support from the multi-tentacled United Nations. It also reflects the craven performance of corporations that attempt either to appease their political enemies or to take advantage of the draconian regulations promoted by them.

Mr. Raymond — who is charged with managing most of the CPPIB’s $110-billion plus of assets — set off alarm bells on Wednesday by making a complimentary reference to Al Gore’s alleged role in raising awareness of “the climate crisis.” When senior executives of the CPPIB start using the same terminology as Elizabeth May, it’s time to get worried about your old-age income. But it got worse. Mr. Raymond pointed out that Mr. Gore’s Oscar wasn’t the most significant announcement on Feb. 25. More important — and apparently equally praiseworthy — was the US$45-billion deal to acquire Texas utility TXU Corp. That deal was indeed remarkable because the buyers — KKR, Texas Pacific and the private equity arm of Goldman Sachs — came up with an elaborate list of commitments to make the deal palatable to the environmental lobby. They cancelled coal-fired generating plants. They backed a cap-and-trade system for carbon emissions. They agreed to spend US$400-million on renewable power. They said they would tie executive pay to environmental metrics. They also agreed to continue to consult with radical environmentalists.

My colleague Terence Corcoran described the TXU deal as “a giant experiment in green corporatism that may well mark the beginning of a breakdown in U.S. electricity supply.” Mr. Raymond, by contrast, sees it as a straw in a benign wind.

Will Mr. Raymond start using his investment billions to pressure Canadian companies to undertake similarly burdensome commitments in order to assuage extremists?

The CPPIB has been cozying up to the forces of darkness for some time. Last April, its CEO, David Denison, joined Kofi Annan in ringing the opening bell of the New York Stock Exchange. This was to celebrate the CPPIB’s signing on to the UN-sponsored Principles on Responsible Investing. These relate to “environmental, social and corporate governance issues.” The principles are all about “transparency” and aligning investors with the “broader objectives of society.” But, as Mr. Robson noted in his paper, such alignment is far from “an unambiguous upholding of the principle that [pension funds’] participants’ interests come first.”

Also, when I called up the UN to discover the identities of those individuals and groups who had hatched the principles, I was told that it couldn’t reveal them. So much for transparency. The principles are tied closely to the UN’s other trapfor corporations, the Global Compact, a huge and unwieldy list of feel-good initiatives that take companies deep into the political jungle, where the biggest predator is climate change.

Mr. Raymond sounded very much on Wednesday like a climate-change True Believer. He declared that: “The global climate is in flux, and the potential consequences are massive.” But since we don’t know what those consequences are, it doesn’t make much sense to have corporations tie their hands when we may owe our future to their flexibility. Institutions such as the CPPIB have to make careful analysis of the possible impact of climate-change policy. However, the danger is that they will shade over into becoming instruments of political pressure.

The CPPIB wants companies to report on how they plan to deal with their “carbon impact,” a problematic notion since no company, even Exxon Mobil, has any measurable impact. Mr. Raymond also suggested on Wednesday that: “We need a GAAP for measuring a company’s carbon footprint.” This seems to be playing dangerously into the hands of the anti-carbonistas.

The latest AIDS-style ribbon that the CPPIB will attempt to force upon corporations is that they join the Extractive Industries Transparency Initiative, or EITI, a scheme to demand more details regarding oil and gas and mining-company operations in developing countries. EITI is intended to counter the “resource curse” by keeping an eye on mineral-rich, repressive governments. However, the CPPIB has no business promoting such initiatives, which are not so much about managing political risks as applying political pressure on — and via — companies.

This kind of pressure should be differentiated from so-called “catalyst investing,” in which investors work with managers to unlock value. The CPPIB wants to increase this type of “relationship” investing, but it should distinguish between unlocking value and promoting subversive political doctrines that destroy value.